Apple charts the future of banking

The story isn't over yet

However, we mustn't forget that banks survive on the money of their creditors — whether they are depositors, investors, or lenders. As the rise in credit interest is matched by a similar rise in debit interest — especially after the collapse of Silicon Valley Bank and the flight of depositors to banks they consider safer — the value of funds held by these banks has reached unprecedented levels.

If interest rates reach a level beyond the capacity of borrowers to pay, banks can fall into a financial deficit that would make them unable to meet their debt payments, which can sully their reputation for decades to come.

The support received from deposit insurance funds is unlikely enough to offset the damage. The US Federal Deposit Insurance Corporation, for example, saved $10.4tn in deposits by the end of March – the highest coverage ever.

Yet, this didn't deter deposits from exiting banks toward safer havens; losses of about $60bn were recorded in the first quarter of this year.

Perhaps this justifies the IMF's concern, expressed by its chief economist, Pierre-Olivier Gourinchas, who said in early May that "the story isn't over yet," in light of the failure to complete the mechanisms that have long been discussed in the European Union, for example, to deal with troubled banks, which remain unimmune to the potential challenges ahead. 

JP Morgan Chase's veteran head, Jamie Dimon, also warned that the impact of the banking crisis will continue "for years to come," adding that the crisis isn't yet over – the last chapter was the collapse of First Republic Bank, which was taken over by JP Morgan, the largest bank in the United States which has assets estimated at $3.7tn and hires 250,000 employees.

Fintech's golden age?

The biggest losers are the depositors, whether individuals or companies. All they had aspired to was to have their money deposited with credible bodies committed to the preservation and good management of their assets.

These same depositors, especially younger ones, are becoming more open to other mediums or means that allow them to make dealings quickly, reliably, and cheaply without having to risk bank accounts or rely on bank volatility.

This trend isn't new, as non-banking financial mediums have invaded commercial transactions for several decades, and are in continuous development. Technological leaps have made their services more seamless and essential.

Most importantly, they're safer, more transparent, and less expensive. They also lack restrictions, barriers, or intermediaries, especially as banks tighten credit conditions.

Only five years ago, the sharing of customer data by banks, especially bank account data, was very difficult, especially in the face of their competitors – online banks and financial services companies – on the one hand, and because of competitive and security considerations on the other.

However, the popularity of the so-called open banking services may change the equation; they depend on the availability of banking data to third parties, where customers can access their accounts and easily execute transactions from anywhere and at any time without the need to check back with the banks.

The number of beneficiaries of these services is estimated at hundreds of millions worldwide, constituting about 10% of digitally-savvy individuals. The number is expected to grow at an average annual rate of about 50% between 2020 and 2024, while the value of payments through these mediums is due to exceed $116bn in 2026 – this is up from $4bn in 2021, according to Juniper Research.

The banking industry is likely to be intricately intertwined with cutting-edge technologies to make financial resource management services available to all through the application of artificial intelligence and machine learning via data.

Are we currently living in a fintech golden age?

Anyone watching what Apple has finally achieved in its challenge to the traditional banking system may agree with this.

Dimon once again warned investors of the looming threat, noting that big tech companies have "enormous data resources that give them an extraordinary competitive advantage."

On his part, American Express CEO Stephen Squeri, also said that he is "paranoid" over the deep links enjoyed by Apple and Amazon with their customers – as well as by fintech companies in general.  The interaction-based infrastructure of these platforms makes it easy for such companies to exploit customer data.

From Apple iPhone to Apple Bank

Apple enjoys a huge and extremely loyal customer base of more than a billion iPhone users. This confidence is further buoyed by the company's financial performance that some traditional banks struggle to maintain.

Recently, in cooperation with Goldman Sachs, Apple launched a savings account on its platform directly for holders of Apple Cards, whose insured deposits don't exceed $250,000 (exactly similar to the case of US banks).

The account is managed over the phone and promises high returns, up to 4.15%, or 10 times the average domestic return of US banks. The new Apple service attracted deposits of $1bn in the first five days of its launching around the middle of April.

This is due to the account's ease of use. (It can be opened in less than one minute.) Ironically, it's the same amount that the company lost in 1997 when it was on the verge of bankruptcy at the time.

By comparison, what Apple achieved during this record period equals the size of deposits of medium-sized banks in the United States. It took the British digital Zopa Bank two years to collect deposits of £2bn.

In a more comprehensive comparison, Apple even surpasses the largest banks in the world in terms of its business breadth and profit size.

The service department alone, which depends on permanent subscribers and App Store revenues, achieved profits of $55bn in the past year – this is higher than the net profits of JP Morgan Chase and City Bank combined and makes up only one-fifth of the company's total revenues, according to The Financial Times.

Apple's previous landmarks in the world of finance – in cooperation with Goldman Sachs – include its own credit card in 2019, Apple Cash in 2017, Apple Pay in 2014, the provision of peer-to-peer lending through its subsidiary Apple Finance, the application Wallet, and the service Apple Pay Later (i.e. buy now, pay later), it which allows customers to use their digital wallets to pay for their purchases, without interest, in instalments, and in infinite smoothness, perhaps due to Apple's financial strategy.

Traditional banks run their day-to-day business with borrowed funds at a rate of 90% or more (a large part of these funds consists of short-term deposits and loans that can be withdrawn abruptly and quickly in any emergency, as witnessed in Silicon Valley's case).

Conversely, Apple largely funds the loans it provides from its own budget, which was made up of cash and tradable securities worth $165bn and a total debt of $111bn in the first quarter of 2023. There's no doubt that Apple's adoption of this policy in finance strengthens its financial position and makes it less fragile than traditional banks.

Also, Apple's brand managed to top the list of favourite companies in the world in 2022 for the 10th year in a row, according to Interbrand's classification. This gives the company a competitive advantage that encompasses all its services and products, an advantage difficult to find in traditional banks, which struggle to maintain their position in the face of economic headwinds.

Furthermore, Apple enjoys unparalleled popularity, partly due to the close relationship that connects its users to their phone screens throughout the day and their dependence on a wide range of applications and services that instantly cater to their needs. 

The speed of managing finances on the phone cannot be matched by traditional banks — even banks that have integrated electronic services due to application limitations.

It's not yet clear how successful the new digital wallet, Pays, which is similar to Apple Pay and was co-launched by a number of US banks, including JP Morgan Chase, Wells Fargo, and Bank of America, will be. 

Transparency concerns

The deeper Apple becomes entrenched in digital banking services, the greater its ability will be to exploit the data of its users to maximise profits. As its phones and devices sell themselves due to its loyal customer base, the company can now turn its focus on other revenue streams.

Getting a savings account through Apple requires an Apple credit card that can only be used through iPhones also produced by Apple.

In other words, through its highly attractive offerings, Apple seeks to entrap its users which one could argue constitutes a kind of technological and financial monopoly.

Apple's pursuit to develop a system to not only send payments but also to receive them gives it the ability to create a "closed circuit" that can shut out banking partners and networks managed by Visa, MasterCard, or PayPal, altogether.

As this trend continues, regulators will need to redefine the boundaries between competition and monopoly.

When the percentage of Apple Pay users jumped from 10% of the company's total customers in 2016 to 75% in 2022, according to Deepwater Asset Management, this prompted the European Commission to open an antitrust investigation into the matter.

It is not enough to impose controls and regulations on Apple or other fintech companies because the speed with which these companies launch their continuous innovations constantly imposes new requirements that are unknown or uncovered by applicable laws in the technological and financial sectors, such as the General Data Protection Regulation (GDPR) and the Electronic Identification, Authentication, and Trust Services (EIDAS), which are necessary to ensure banking's safe operation.

This may cause disruption in the two sectors stemming from the breaking of market traditions in favour of fintech companies, and policymakers may be slow to come up with mechanisms to regulate these companies.

This is not to mention the risks associated with cybersecurity and financial crimes that must be addressed to protect customers and ensure the security of their data.

A bank without the title

Apple doesn't currently seek to become a bank in the official sense of the word, unlike its British counterpart in the world of fintech, Revolut, whose value equals $33bn – a record for a private British technology group.

Revolut requested a banking license in January 2021 (still refused so far) to allow it to provide loans and other services to more than 5.8 million customers in the country.

But with its advanced features, Apple is essentially already a bank — but without the privileges of traditional banks related to bailout in the event of failure.

According to Dimon, "if you move money, hold money, manage money, lend money — that's a bank."

It may be wise for Apple to abstain from asking for a bank license, so as not to be stigmatised by the current "reputation shame" rocking the banking sector. It also seems that Apple is able to sidestep the regulatory obstacles that control the sector's work.

It learned a lesson in this regard when it sought to launch its credit card in 2019 and was unable to pursue its inflated "self-important" promotional style that claimed that the card was the "safest of all" for fear of prosecution if that claim was proven wrong.

Apple has clearly succeeded in penetrating traditional banking services, forging a new future for banking.

In the face of this reality, it is time for banks and other financial service providers to pay close attention to this technology company with more than a billion iPhone users, a market value of $2.6tn, and a glorious history of revolutionary innovation.