Why the Apple savings account should worry banks
Recently we learned that Apple’s new savings account drew 240,000 customers and almost $1bn in deposits within only four days. The tech giant had launched a high-yield account in partnership with Goldman Sachs. Commentators have been fixated on its market-beating 4.15% interest rate, which is ten times the amount many other American banks are currently willing to fork out. But this is not the real story. Banks are standing to lose far more than customer deposits.
The Colossus from Cupertino has been upending the payment market ever since mobile wallets started proliferating. After it got customers hooked to its Apple Pay feature it added a credit card to its portfolio. And only a couple of weeks ago it released Apple Pay Later. This functionality lets iPhone users split an invoice into four installments rather than footing a bill at once.
Of course, Apple’s foray into financial services is a platform strategy, a way of tightening the grip on its phone users. Each financial service leaves them more firmly bolted to the ecosystem and less likely to switch to the rival Android. To achieve that, Apple is bundling its financial products in a way banks or credit card companies do not: Users can only qualify for the savings account if they have the Apple credit card. To have the credit card they must have Apple Pay, which only runs on an iPhone. You get the point.
This golden handcuff-approach has always been part of Apple’s DNA and as such would be no newsworthy story. What should bother incumbents, however, is that Apple’s step into the savings business is a harbinger of further financial products. The tech giant’s approach is to grow its clout within financial services horizontally as well as vertically. The savings account perfectly illustrates both directions.
Is the credit business next?
Customer savings accounts supply Apple with two major resources: Data and cash. Both of them point towards Apple entering the credit business, i.e. an additional financial services segment. Horizontal expansion. But they also hint that Apple will muscle its way onto more levels of the supply chain. Vertical expansion.
If you collect cash, obviously the goal is to lend it out for a higher interest rate. And to do that efficiently, you need to be able to accurately forecast whether borrowers will pay back the money. This is where the data collection comes in. How much money do people keep on their accounts, how regularly do they squirrel away something, how much do they take out – these are all valuable data points that make it easier to score somebody’s default risk. Apple has recently acquired the AI-startup Credit Kudos, an expert in calculating credit default risks. The troves of data generated through savings accounts will enhance its algorithms significantly. Apple is thus venturing deep into classic banking turf. It has already started to do so with Apple Pay Later, in which the tech giant is performing the risk assessment completely by itself.
Apple will continue to capture further parts of the banking value chain
This vertical expansion is part of a larger, underlying strategy: Capture everything along the value chain but the banking license itself. Behind closed doors Apple employees refer to this mission as ‘Breakout.’
Savings accounts are amongst the oldest financial instruments in history, so can such an offering really be a game-changer? Admittedly, Apple has probably been the least innovative Big Tech company when it comes to next generation financial technology. It has overslept the blockchain revolution and kept a safe distance to everything that even faintly smacks of decentralized finance. Amazon has ventured deep into the lending business, while at the same time running vast parts of major cryptocurrencies on its servers. Google is a major cloud computing partner for banks and the second largest investor in blockchain technology. Facebook tried to launch a global digital currency to rival the US Dollar. Yet sometimes a market can be turned upside down without groundbreaking innovation. Apple has a unique skill to monetize existing technologies through clever setups. And unlike Facebook, for example, it enjoys a good standing among lawmakers and regulators. This allows it to continue hollowing out the banking business, only leaving the regulatory shell to licensed entities.
Combined with Apple’s immense brand power, a duopolistic market position on mobile platforms, and the unparalleled budgets the tech giant commands, it might become a serious challenger to large retail banks almost overnight. The problem for banks is not simply that they will face a powerful opponent that has captured multiple levels of the value chain and branched out into different segments of financial services. The tricky thing is that Big Tech does not compete on the same lines as traditional players. Tech titans’ revenue drivers are different and hence they can cross-subsidize financial services with their core business. It is a synergy banks do not have.
Apple’s savings account shouldn’t be shrugged off as simply another competing product; it is a vital cog in Big Tech’s play for the finance industry.
Learn more about Big Tech’s move into finance
For readers of The New Frontier it will come as no surprise that I see Big Tech’s entry into finance as the most transformative trend in decades. Nor will they be surprised to hear that I consider blockchain the most disruptive technology of the day, even more impactful than Artificial Intelligence. This is why I have dedicated the past one and a half years to intense research and analysis on what tech titans are doing with blockchain and how they will shape the future of money. Last month my new book Big Tech in Finance: How to Prevail in the Age of Blockchain, Digital Currencies and Web3 hit the shelves of major book stores across the world.
Can the Big Five – Google, Apple, Facebook, Microsoft, and Amazon – succeed in capturing the global financial system now that blockchain and decentralized finance are radically changing the way money works? Get a copy of Big Tech in Finance and find out!
