Why Apple’s Partnership With Goldman Is The Future Of Banking
ILLUSTRATION BY ANGELICA ALZONA FOR FORBES
I cover fintech for Forbes’ money team.
Apr 24, 2023,06:30am EDT
As trust in traditional banks falters, the two most iconic names in tech and finance are joining together to create what might become America’s mightiest FinTech.
Last week Apple effectively dropped the mic on the nation’s banking industry. While the average bank is paying less than a half a percent on savings accounts, the $2.6 trillion technology company announced it would be offering 4.15% annual returns to savers – no minimums, no lockups and FDIC-insured. The new product rollout comes at a time when regional banks are scrambling in the wake of the Silicon Valley Bank crisis to maintain their deposit bases, and cash-starved fintech startups are likewise struggling.
Technically Apple doesn’t have a banking license. It is fronting for Goldman Sachs Bank USA, otherwise known as Marcus, which has a state charter and is FDIC-insured. In fintech parlance, Apple is a neobank like Chime, Revolut and Monzo – except its brand strength is unparalleled given that there are more than two billion iPhones globally, now serving as Goldman’s branch network.
According to polling company Gallup’s annual “Confidence in Institutions” survey, last year, prior to SVB, only 27% of Americans reported to have a “great deal or quite a lot” of confidence in their banks. That number is down from its peak of 60% in 1979. By contrast, Apple landed in the top spot 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 at 24, just ahead of YouTube.
“Apple goes at warp speed and a lot of banks are driving 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 have an account set-up in minutes and their spend rewards, called daily cash, are automatically funneled into the high yield account. The account will be displayed on a dashboard in Apple’s digital wallet where users can track their balance and interest earned. The product allows Apple to offer yet another sticky iPhone benefit by strengthening its built-in digital wallet.
“It’s really a flywheel of keeping everything in the ecosystem,” says David Donovon, executive vice president of financial services for consulting firm Publicis Sapient.
Goldman’s Deposit “Run”
Deposits are becoming a larger source of funding for the bank as it grows the consumer and transaction banking business. Apple’s 4.15% savings account should turbocharge this trend.
The new savings account is only 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 giving consumers the option to split payments into four installments with zero interest or fees. In July, Apple launched tap-to-pay allowing merchants to accept card payments directly from their iPhones. By offering financial products like these to consumers and merchants, Apple is integrating 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 they are betting that customers no longer value the marble columns and venerable histories that thousands of redundant FDIC-insured financial institutions continue to bank on. One hundred and fifty four year old Goldman Sachs is essentially an infrastructure player not unlike Evolve and Cross River, brandless banking-as-a-service providers serving other fintechs.
“It’s partnerships like these that could basically make banking become invisible,” Chris Nichols, director of capital markets at SouthState Bank, says.
his is not the first time a trusted company far outside of banking tried to forge a trail into consumers’ financial lives. In the 1970s, Sears Roebuck, at one point the largest retailer in the United States with a brand as mighty as Apple’s whose catalogs and credit cards were ubiquitous, owned numerous savings and loan branches across California. In the 1980s Sears went on to acquire retail broker Dean Witter Reynolds and real estate broker Coldwell, Baker & Co. However, Sear’s failed at its core retailing business as technology savvy disruptors like Walmart and Target stole market share. The rise of Amazon catalyzed Sear’s downfall and in 2018 the company filed for bankruptcy.
Prior to Apple’s new Goldman Sachs powered savings account, daily cash rewards from spending on Apple’s credit card 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 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 tap-to-pay in store and the Apple Pay button at online checkouts. 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 host of wide-ranging features including bill pay, food delivery and ticket purchasing. In the second half of 2021, the app’s retail business brought in $41 billion in revenue. While Apple is sprinting 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 will either have to compete with Apple, which would be hard to do with a wallet, or create microservices within different types of wallets,” Nichols says. “Apple articulated that well with their colorful, easy to read dashboard that many banks have struggled with.”
One reason it’s difficult to compete with Apple’s digital wallet is that the tech firm does not provide third parties access to the iPhone’s near-field communication chip, the device enabling tap-to-pay at in 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, accounting for most of the digital wallet revenue, The Wall Street Journal reported.
Apple’s reign over tap-to-pay is a particular headache for competing digital wallets including Google Pay on Android. Google reportedly does not get transaction fees from bank issuers. Unlike Apple, Google allows other companies to enable tap-to-pay on Android phones.
In 2021, Google canceled plans to launch a checking account connected to its 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 the 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 of paying directly from the apps. Both apps have launched QR code checkout options for in store payments, a move designed to circumvent Apple’s chokehold on contactless payments. CashApp has an advantage since its parent company can display the QR codes prominently on Square point-of-sale terminals.
Scottsdale, AZ-based Early Warning Services, the company behind Zelle which is backed by the seven of the largest retail banks including JPMorgan Chase, Bank of America and Capital One, chose not to compete in store with its up-and-coming digital wallet, Paze. Paze is designed specifically for e-commerce transactions. Clients are directed to ‘claim’ their wallets through their bank app which should be preloaded with all the individual’s cards from participating banks. After a customer claims their digital wallet, they can use it at online checkouts 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 enable the option.
Apple’s tap-to-pay lockout hasn’t gone unnoticed by financial institutions or regulators. In July, Apple was sued in a class-action antitrust lawsuit alleging that its monopoly on iPhone tap-to-pay allows it to charge card issuers, banks, exorbitant fees. Last year, European Union antitrust regulators sent Apple objections to its exclusive hold over the iPhone’s payment technology.
pple’s new high yield savings account is likely less about profits than it is about bringing more iPhone owners into Apple and Goldman’s financial wheelhouse. 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 the priority for Goldman either.
“They’re attracting deposits at a higher rate than they really have to offer trying to compete more with online banks than they are traditional banks,” says Stephen Biggar, director of financial services research at Argus. “They’re squeezing their own margins by having this kind of product.”
On Goldman Sachs’ earnings call last week CEO David M. Solomon was crowing about his new Apple deal. “It enables us to deepen our relationship with Apple, tap into their ecosystem and the clients that 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 everyday people. Marcus savings accounts pay 3.9%, a quarter of a percentage point less than Apple’s.
“We’ve obviously looked very closely at the overlap between who holds credit cards and who has a Marcus deposit and that overlap is small,” Solomon said. “We’ll watch closely to see whether or not there’s any cannibalization.”
Since 2020, Goldman’s Platform Solutions branch, which includes consumer lending and its transaction banking business, has cost the bank $3 billion. On its earnings call, the bank revealed it had sold $1 billion of its $4.5 billion unsecured consumer loans under the Marcus brand. It is still shopping for a buyer for the remaining balance. The bank also disclosed that it is exploring the sale of a one time high flier GreenSky, a fintech company offering home improvement loans to retail customers. Goldman acquired GreenSky in 2021 when it was valued at $2.24 billion. “We also continue to explore strategic alternatives within our consumer platform businesses,” Solomon said.
Says consultant Donovon, “[Goldman] got smart and said instead of us spending all this money on customer acquisition, let’s just partner with a massive ecosystem like Apple.”
Yet even the two powerhouse brands will need to tread carefully when it comes to regulators. The Office of the Comptroller of 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 a loss of confidence, bank culture is defined by stability, prudence, and governance,” Michael J. Hsu, Acting Comptroller of the Currency, said on Wednesday. “By contrast, the culture of the tech industry believes in disruption, “moving fast and breaking things,” and the superiority of code. How these cultures coexist to promote open banking matters immensely.”