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Can Apple really help fix banking?

Apple has considerably more global reach and consumer trust than most banks. Is it any wonder, then, that it is slowly but surely turning into a financial institution? Even before it co-launched, with Goldman Sachs, a market-leading savings account that pays 415 times the lowest rate at old line institutions such as Chase or Bank of America, it already had its own credit card, peer-to-peer lending capacity, Wallet app and a “buy now, pay later” service that allows customers using their digital wallets to pay off their purchases — interest free — in instalments.

Meanwhile, banks last week announced a loss of $60bn in deposit outflows in the first quarter, just as Apple announced its new savings account.

One can argue about whether a marriage between Big Tech and big banks is a good thing for competition. But Apple does appear well placed to solve some of the problems that have plagued traditional banking for years. Take the BNPL programme, for example. The company actually funds the loans largely from its own balance sheet, which had a hefty $165bn in cash and marketable securities as of the first quarter of 2023, with total debt of $111bn.

This ratio sits in contrast with most banks, which do their daily business with 90 per cent or more borrowed money. Much of that debt consists of deposits and short-term loans that can be withdrawn quickly. This is exactly what we witnessed during the Silicon Valley Bank meltdown, which saw investors try to take $42bn out of the stricken lender in a single day.

Being so cash rich could, in theory, allow Apple to sidestep a common problem in the financial industry — by using so much more equity funding, Apple is much less fragile.

Stanford professor Anat Admati, who has long called for higher levels of equity funding of banks, says: “Bank CEOs sometimes forget that depositors are creditors because depositors don’t behave like normal creditors, instead trusting deposit insurance, and maybe regulators, to make sure they will be paid. Non-banks wouldn’t dream of, and wouldn’t even be able to, fund their business with so much debt and so little equity.”

Another advantage Apple has over many traditional banks is its brand. The company frequently tops corporate “most admired” lists, while you’d be hard pressed to find a bank (with the possible exception of JP Morgan) that does the same.

Consumer love of Apple is partly down to the intimacy of our relationship with the company. Studies show people are likely to touch their smartphone more than 2,600 times a day. That’s not a connection you get walking into a bank branch (if in fact you can find one).

Trust, or at least the perception of it, is something that Apple has actively marketed in an effort to distinguish itself from companies such as Google or Meta, which depend largely on targeted advertising, or so-called surveillance capitalism, for their wealth.

Apple still makes most of its money selling devices. But as it gets deeper into the digital services business, it will have to walk a finer line between exploiting its ecosystem for profit and exploiting its consumers in ways that will raise regulatory concerns.

Consider that in order to get an Apple savings account, you need an Apple credit card, which means you need an Apple iPhone. The system is undoubtedly user-friendly — the savings account has no fees or minimum deposits or balance requirements. All of the offerings amplify the others, in a classic example of the network effect. But that means that once in the ecosystem, users might find it hard to leave.

Would you switch to an Android phone if you banked with Apple, for example? Would you be less likely to look elsewhere for a loan? These questions tiptoe into territory that antitrust regulators at the Federal Trade Commission are interested in. At what point does an incredibly seductive consumer offering become a monopoly issue?

Apple isn’t trying to become a bank in any official sense, with a charter and all the bailout perks that go with it. That’s probably wise, given how other technology companies have fared when trying to enter traditional financial businesses. (Meta, for example, spent years trying to build a dollar-backed stablecoin, Diem, before eventually scrapping the project).

But the fact that Apple looks, smells and acts like a bank raises questions about the disruptive effects of fintech, and of Big Tech in general. Silicon Valley loves regulatory arbitrage — move fast and break things in whatever sector you want to disrupt (retail, healthcare, banking, transportation, to name a few) before policymakers realise that you aren’t actually playing by the same rules as other industry participants. It’s how start-ups in healthcare get round HIPAA rules and crypto companies continue to dupe investors.

Should Apple hasten the exodus of deposits from the traditional banking sector in ways that start to undermine already beleaguered financial institutions, I suspect that regulators will take a closer look at the business model. The company will also have to be careful to avoid compromising consumer data in ways that trigger antitrust issues.

But until then, I suspect we will see more banking done via iPhone.

rana.foroohar@ft.com

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