Why Apple’s partnership with Goldman is the future of banking
As trust in traditional banks falters, two of the most iconic names in technology and finance are coming together to create what could be America’s most powerful FinTech.
Llast week Apple effectively dropped the microphone on the country’s banking industry. While the average bank pays less than half a percent on savings accounts, the $2.6 trillion tech company announced it would offer 4.15% annual returns to savers — no minimums, no locks and FDIC insured. The new product rollout comes at a time when regional banks are struggling in the wake of the Silicon Valley Bank crisis to maintain their deposit bases, and cash-starved fintech startups are also struggling.
Technically, Apple does not have a banking license. It is a front for Goldman Sachs Bank USA, otherwise known as Marcus, which has a government charter and is FDIC insured. In Fintech parlance, Apple is a neobank like Chime, Revolut and Monzo – except its brand power is second to none given that there are more than two billion iPhones globally, which now serve as Goldman’s branch network.
According to polling company Gallup’s annual “Confidence in Institutions” survey, last year, before SVB, only 27% of Americans reported having “a lot or quite a lot” of trust in their banks. This number is down from a peak of 60% in 1979. In contrast, Apple landed in first place for the tenth consecutive year in 2022 according to Interbrand’s annual Global Best Brands ranking. The only bank to make the top 25 was JPMorgan, ranked 24, just ahead of YouTube.
“Apple is going at warp speed and a lot of banks are going 45 mph in the right lane,” says Wedbush Securities analyst Dan Ives.
The new high-yield savings account is only available to customers with Apple’s credit card, Apple Card. These users can create an account in minutes and their spending rewards, called Daily Cash, are automatically transferred to the High Yield Account. The account will appear on a dashboard in Apple’s digital wallet where users can track balances and interest earned. The product allows Apple to offer yet another sticky iPhone benefit by bolstering its built-in digital wallet.
“It’s really a flywheel to keep everything in the ecosystem,” says David Donovon, executive vice president of financial services for consulting firm Publicis Sapient.
Goldman’s deposit “Run”
Deposits become a larger source of funding for the bank as it increases its consumer and transaction banking business. Apple’s 4.15% savings account should turbocharge this trend.
The new savings account is just the latest in a series of high-profile financial offerings from the Cupertino technology blue chip. Last month, the company began offering its own buy-now, pay-later product that gave consumers the option to split payments into four installments with no interest or fees. In July, Apple launched tap-to-pay, which allows merchants to accept card payments directly from their iPhones. By offering financial products like these to consumers and merchants, Apple integrates itself into every aspect of its customers’ lives, while collecting swipe fees and cross-selling its own products.
In all of its financial products, Goldman Sachs operates in the background, despite its own formidable reputation, suggesting that it is betting that customers no longer value the marble pillars and venerable histories that thousands of redundant FDIC-insured financial institutions continue to rely on. One hundred and fifty-four-year-old Goldman Sachs is essentially an infrastructure player not unlike Evolve and Cross River, unbranded banking-as-a-service providers that service other fintechs.
“It’s partnerships like these that can basically make banking invisible,” says Chris Nichols, director of capital markets at SouthState Bank.
This is not the first time a trusted company far outside of banking attempted to insinuate itself into consumers’ financial lives. In the 1970s, Sears Roebuck, at one time the largest retailer in the United States with a brand as powerful as Apple’s, whose catalogs and credit cards were ubiquitous, owned a string of savings and loan branches across California. In the 1980s, Sears acquired the retail broker Dean Witter Reynolds and the real estate agent Coldwell, Baker & Co. However, Sears failed in its core business as tech-savvy disruptors like Walmart and Target stole market share. The rise of Amazon catalyzed Sears’ downfall, and in 2018 the company filed for bankruptcy.
Before Apple’s new Goldman Sachs-powered savings account, daily cash rewards from spending on Apple credit cards were automatically deposited into Apple Cash, a prepaid digital card held in the iPhone’s digital wallet and issued by Green Dot Bank. Apple’s ambition was for Apple Cash to become a way for its customers to send money through iMessage in the same way that consumers use PayPal’s Venmo or Block’s CashApp.
The company is positioning its digital wallet to be the complete dashboard for consumers’ financial lives by combining savings, peer-to-peer transfers and payments with in-store tap-to-pay and the Apple Pay button at the electronic checkout. The roadmap could end with a so-called super app like China’s AliPay, which started as a digital wallet offering peer-to-peer payments in 2004. Today, AliPay has 1.3 billion users and a range of extensive features, including bill payment, food delivery and ticket purchasing . In the second half of 2021, the app’s retail business brought in $41 million in revenue. While Apple sprints to build a financial dashboard for its customers integrated with the iPhone, traditional banks are still struggling to create a compelling user experience.
“A bank has to either compete with Apple, which would be difficult to do with a wallet, or create microservices within different types of wallets,” says Nichols. “Apple articulated it well with the colorful, easy-to-read dashboard that many banks have struggled with.”
One reason it’s hard to compete with Apple’s digital wallet is that the tech firm doesn’t give third parties access to the iPhone’s near-field communication chip, the device that enables tap-to-pay at the store checkout. Apple’s exclusive hold on tap-to-pay with an iPhone gives the company outsized leverage when negotiating with card-issuing banks. When Apple Pay launched in 2014, banks agreed to pay Apple 0.15% on credit card transactions, which accounted for most of the digital wallet’s revenue, The The Wall Street Journal reported.
Apple’s rule over tap-to-pay is a particular headache for competing digital wallets, including Google Pay on Android. Google reportedly does not receive transaction fees from bank issuers. Unlike Apple, Google allows other companies to enable touch payment on Android phones.
In 2021, Google canceled plans to launch a current account linked to the digital wallet. The proposed offering, called Plex, was billed as a dashboard to help users keep track of their finances and was developed with Citigroup as a partner.
Peer-to-peer payment apps Venmo and CashApp are also prevented from offering tap-to-pay on iPhone, meaning users must add a Venmo or CashApp card to their Apple Wallet to use them in-store instead to pay directly from the apps. Both apps have launched QR code payment options for in-store payments, a move designed to circumvent Apple’s stranglehold on contactless payments. CashApp has an advantage since its parent company can display the QR codes prominently on Square terminals.
Scottsdale, AZ-based Early Warning Services, the company behind Zelle that is backed by the seven largest retail banks including JPMorgan Chase, Bank of America and Capital One, chose not to compete in the store with its upcoming digital wallet, Paze. Paze is designed specifically for e-commerce transactions. Customers are directed to “claim” the wallet through their banking app, which should be pre-loaded with all of the individual’s cards from participating banks. After a customer claims their digital wallet, they can use it at the online checkout in the same way shoppers use the PayPal or Apple Pay buttons. Its success will depend on how quickly EWS is able to create a network of merchants willing to activate the option.
Apple’s tap-to-pay lockout has not gone unnoticed by financial institutions or regulators. In July, Apple was sued in a class-action antitrust lawsuit alleging its iPhone tap-to-pay monopoly allows it to charge card issuers, banks, exorbitant fees. Last year, EU antitrust regulators sent Apple objections to its exclusive control over the iPhone’s payment technology.
ONEpple’s new high yield savings account is probably less about profit than it is about bringing more iPhone owners into Apple and Goldman’s financial boardroom. While two billion people around the world own Apple devices, fewer than 10% are Apple card users, according to Ives. Net interest margins may not be a priority for Goldman either.
“They are attracting deposits at a higher rate than they actually have to offer and are trying to compete more with online banks than they are traditional banks,” says Stephen Biggar, director of financial services research at Argus. “They are pushing their own margins by having these types of products.”
On Goldman Sachs’ earnings call last week, CEO David M. Solomon cried about his new Apple deal. “It enables us to deepen our relationship with Apple, leverage their ecosystem and the customers we serve together, who are cardholders and want to take advantage of the ease of moving into a deposit account.” He was less enthusiastic about Marcus, its homegrown consumer banking franchise, which is seven years old and offers personal loans and savings accounts to ordinary people. Marcus savings accounts pay 3.9%, a quarter of a percentage point less than Apple’s.
“Obviously, we’ve looked very carefully at the overlap between who has a credit card and who has a Marcus deposit, and that overlap is small,” Solomon said. “We will be watching closely to see if there is any cannibalization or not.”
As of 2020, Goldman’s Platform Solutions arm, which includes its consumer lending and transaction banking businesses, cost the bank $3 billion. On the earnings call, the bank disclosed that it had sold $1 billion of its $4.5 billion in unsecured consumer loans under the Marcus brand. It is still trading for a buyer for the remaining balance. The bank also revealed that it is investigating the sale of GreenSky, a fintech company that offers residential mortgages. Goldman bought GreenSky in 2021 when it was valued at $2.24 billion. “We also continue to explore strategic options within our consumer platform businesses,” Solomon said.
Says consultant Donovon, “[Goldman] got smart and said instead of spending all this money on customer acquisition, let’s just partner with a massive ecosystem like Apple.”
But even the two powerful brands have to tread carefully when it comes to regulators. The Office of the Comptroller of the Currency is keeping a close eye on bank partnerships with tech companies, and the Consumer Financial Protection Bureau is already investigating Goldman Sachs’ credit card practices. It should be noted that Apple High Yield Savings accounts cannot exceed the $250,000 FDIC insurance limit.
“A bank’s greatest vulnerability is loss of trust, banking culture is defined by stability, prudence and governance,” Michael J. Hsu, acting comptroller of the currency, said Wednesday. “In contrast, the culture of the tech industry believes in disruption, ‘moving fast and breaking things,’ and the supremacy of code. How these cultures co-exist to promote open banking matters enormously.”
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