https://www.forbes.

com/sites/emilymason/2023/04/24/why-apples-partnership-with-
goldman-is-the-future-of-banking/?sh=190da8881304

Why Apple’s Partnership With Goldman Is The Future Of Banking

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.
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.”