Apple’s massive entry into retail banking has finally arrived, at least in the US. Some takeaways...

The launch of Apple's partnership with Goldman Sachs to offer a 4,25% savings account in the US has spread shockwaves throughout the banking industry worldwide. Has Apple finally become a Bank and a daunting rival for retail banks? My take is: yes, Apple is becoming increasingly a nightmare challenger for banks and other financial players, especially in the U.S., not because it will be a Bank (it may never become a properly regulated one), but because it is now radically and undeniably redefining retail banking as we know it, and possibly evolving its own banking interface for customers into the main gateway for retail banking services. Other material implications: expect Google (Android) to consider moving along. Consumers are clearly the short term winners. Regulators and Governments however need to take note, monitor and if necessary react since the risks for competition in retail banking services and excessive concentration of power deriving from the "share of total data" of the customer are self-evident. Incumbent banks reaction will require material changes in the business models and in the technology architecture. Fintechs need also to adjust to the new environment, possibly repositioning or partnering with other actors in this new ecosystem.

• It all started with the launch of  Applepay in 2014 in partnership with several banks, as a payment instrument embedded in the Apple device, that has recently reached 50% penetration among European Apple users. Later in 2019, Apple has quietly moved to launch Apple Card in partnership with Goldman Sachs. In 2022 and 2023 there have been 3 new releases with different partners: Apple Pay Later a Buy Now Pay Later service in partnership with MasterCard, the 4,25% sight deposit Apple Savings with Goldman Sachs and Apple Tap to Pay (a new POS service manageable thru the Apple handset) with Square, a fintech. All but Applepay, are currenty available only in the US. In UK, Apple has acquired Kudo an individual credit scoring system, that may be the first foray into the broad European consumer lending ecosystem.
• Apple used to claim that they were only offering financial services to make the Apple handset indispensable for users, but this is no longer believable. Apple can provide a service as good as the best fintechs and adds the unique advantage unlike fintechs of having endless customers in-house with zero origination costs. Some might argue that Apple is moving into banking slowly, like a glacier, but now it looks more like an impetuous waterfall (at least in US).
• These steps represent a major disruption of retail banking that had been predicted for a long time. Now is becoming reality and is based on Apple's easy access to over 1 billion customers, on a superior and smooth user experience (UX) that is transparent and secure, on Apple's long earned trust of the clients, massive availability of resources, and well targetted choice of smart partners for various initiatives.
• What else could be brewing at Apple’s? Following their acquisition of Kudo, they may be refining plans to offer consumer loan products or contiguous services in the UK and European banking markets. Apple could easily access an unrivalled pot of data by adding financial to their already massive information set on the customer, and in this way develop the most sophisticated credit scoring one can think of. Lending portfolio originated by Apple could then be securitised and sold to institutional investors. A next big challenge could be offering current accounts, where Apple has already made a first step with Apple Wallet. However, a real and full checking account could be still several moves away, and it's unclear whether they would be better off partnering with a banking player (Tide or Qonto model) or seeking a banking license directly.
• Requesting or not a banking license may well be a dilemma for Apple, for sure it would make both lending and current account much more effective, but becoming a fully regulated entity would be an unnatural discontinuity for their business trajectory. So far they have avoided getting "too regulated" by playing in segments where licensing is not required or by teaming up with banks who play the front role, comply with the banking and capitalization rules, while sharing the value with Apple. In the case of Apple Pay Later, Apple started to use their own balance sheet to lend directly, Regardless, Apple is likely to have various new ideas cooking in their kitchen, always aiming to cherry pick attractive products and segments of retail banking, leaving the numerous unprofitable activities to incumbents. And in any case simply exporting the already substantial US product arsenal to the rest of the world could keep them busy for long time.
• The competitive implications are extremely significant. For instance, with Apple Savings, consumers will find it easier to obtain a competitive rate on cash deposits, thereby reducing one of the most significant profit streams for banks (deposits markdowns). Additionally, by using Apple Pay and Apple Tap to Pay to close the payment loop in many transactions, Apple may significantly threaten Visa, Mastercard, and PayPal's vast revenues (currently the largest world-market-capitalization players in retail banking). It's worth noting that Mastercard is a significant partner for Apple Pay Later. Furthermore as discusses, in consumer and mortgage lending, they could beat banks not only on customer access but also on reach of the credit scoring.
• Rolling out the strategy worldwide won't be easy for Apple. Retail banking is not yet a global business due to cross-border differences in laws, taxation, currencies, consumer habits, industry structures, and government control over the industry (such as in China). As a result, it will give more time to local banks fintech companies to adjust, prepare, and react (if they move early).
• Apple may be imitated by Google/Android. With approximately 3 billion users worldwide, Google's Android platform presents an even larger (although on average less affluent) customer base than Apple's. Albeit there are weak signals from Google, Apple move has for sure gone noticed in Mountain View. And one may expect also smaller mobile operating systems to move along.
• Make no mistake, the big winner here are the consumers, who will receive easier, better banking services at lower costs. In the short term this is a given, but the medium term odds are less certain. In fact, the dominant position that Apple could theoretically achieve, may not be as good for consumers' well-being. Furthermore, when financial data is added to the vast set of data already available, Apple's share of each customers' information could make it seem like a new 'Big Brother'. Institutions and lawmakers will have to monitor.
• In one way or the other, this time incumbent retail banks have to react, Apple (and possibly also Google/Android ?) is a nightmare competitor to face. Currently, the pressure is clearly much hotter in the US market where Apple has broken the tie. Elsewhere there is a bit more time, but in the next years no retail bank worldwide will be spared from these developments. How long before the major European markets will see concrete competition in banking services from Apple (and Google)? Somebody truly believes it will be longer than 3 years?
• Incumbent retail banks may try to counteract by leveraging on those elements where Apple could be less effective, for instance:

- delivering a unique value proposition from bundling products, not easily replicable by Apple, etc such as those ones where the human touch is still highly valuable (eg investment services) or that require a regulated license  (eg overdraft with current account, investment services linked with the cash deposit, etc)

- focusing on segments that are less vulnerable to Apple/Google (eg older less sophisticated but affluent customers, wealth management, corporate banking)

• However they will have to improve the UX for their customers on many products and especially on the current account as the anchor of the relationship. All of this would require sizable investments and efforts in:

- Material simplification of the business model

- Accelerated evolution of the core banking systems towards a flexible cloud-based architecture that better support the new business model and UX

- Broad digital skills enhancement

- More partnerships with Fintech players

- Cutting costs, to offset a likely revenues decrease

• It is not an easy reaction, current rich interest margins may feed some inertia in retail banking incumbents, however the risk is more the “boiling frog syndrome” or a "death by thousands cuts", rather than a fast bloody coup. Hence most banks will be slow to move, always waiting for the Barbarians to come.
• Last, there will be a lot of homework for banking regulators and supervisors alike. They will have to develop a holistic view of the progressive transformation of the industry and allow for the new role of these very powerful (and possibly non regulated) non-banking players and perhaps even encourage incumbents to invest and prepare for this new challenging evolution.