Apple Does Finance

I’m an Apple fan and have been an avid user of its products (and a shareholder in the company) for many years. While traditionally it’s their fall hardware event that garners the most attention, this week’s event was probably their most significant in a decade.

This isn’t Apple’s first foray into digital services but, to the untrained eye, it certainly felt like it. The company used the opportunity to step away from hardware for a moment and focus squarely on services.

It’s now fairly well-known that Apple is seeking to move away from its reliance on hardware (iPhone) revenues and grow its subscription and recurring revenue lines. This shift has been underway for some time, as the company seeks to diversify revenue with TV, news, music, gaming and of course, wearables. Plenty of analysts have explored this from a top-down perspective.

What sets this week’s event apart is the announcement of the new Apple Card, backed by none other than Goldman Sachs. Tim Cook boasted of the biggest innovation in credit cards “in 50 years.” While no individual feature is revolutionary (there are already mobile wallets, virtual credit cards with regularly changing numbers, apps for tracking spending, and cards that give cashback), this is a classic case of Apple doing what it does best: taking exciting technology that has reached a certain early maturity, and bundling it together to create an exceptional user experience.

Apple wasn’t the first to introduce MP3 players, smartphones, or tablets, but they’ve certainly been the most successful, thanks to their patience and design talent. It’s hard to bet against Apple when it comes to the credit card business, especially with its successful track record in payments via Apple Pay.

This move takes place against a backdrop of increasing concerns regarding user data and privacy. The tech giants are being subjected to a wave of skepticism (and, in some cases, anger) regarding their inability to keep users’ data safe and secure, which will undoubtedly feed through to bottom lines over the long run (just look at Facebook Portal’s disappointing uptake). Apple continues to set itself apart with a focus on privacy, leveraging its seamless combination of software and hardware to better protect personal data.

Many will wonder why Apple are even bothering to go into finance if they’re not going to sell your data or earn huge interest on outstanding balances. Firstly, it’s a smart way to keep people in the Apple hardware ecosystem the next time they think about a phone upgrade. With Moore’s Law falling apart, winning customers in the handset business purely on the basis of hardware features is getting tougher. However, if it can keep people in its ecosystem, Apple has a better chance of retaining those ~60% margins.

But secondly, this is the first real instance of Big Tech company stepping into the realm of financial services – at least in the developed world. With an active installed base of 1.4 billion units worldwide (including 900 million iPhones), this is not a coincidence. Crucially, as the controller of that much hardware, Apple has a fantastic platform from which to start capturing revenue in other verticals. Those iPhones are effectively sophisticated biometric readers sitting in our pockets. The integration of Touch-ID/Face-ID and its “Secure Element” helped build Apple Pay, and allowed Apple to negotiate steep discounts from card issuers and payment processors. That first step allowed apple to dip its toes into payments revenue, earning approximately 0.15% from each transaction. The new Apple Card takes this one step further, as they evolve from being just a processor to a fully-fledged card issuer, allowing them to earn much more of the ~1.5-2.5% interchange fee that is charged on card transactions (plus of course the interest on card balances). Having needed the banks to help get Apple Pay up and running, Apple is now going after them with their Card.

While this is new here in the West, this is old hat in China, where WeChat and Alipay dominate consumer finance. Their hegemony comes from control of the “superapp” ecosystem and the ease with which they can regulate the user experience by managing whole verticals. It’s not just traditional banks that should take notice, but fintech challengers as well. Plenty of startups are trying to go direct-to-consumer, but their impact is invariably limited by marketing spend, reach and resource constraints. And there are also the incumbents to contend with. 

Big Tech’s reluctance to dive into financial services was never going to last. Apple’s announcement marks a new chapter in the race to cross the chasm from technology to finance and build the go-to financial ecosystem for consumers globally. Details are still sketchy on Apple Card’s full feature-set, but if it’s true to its word on zero international fees, Revolut is effectively obsolete. In fact, I wouldn’t be surprised if Apple has studied the likes of Monzo and Revolut, honing its offering by learning from the triumphs and failures of fintech innovators. Taking these learnings, they believe the time to jump into financial services is now. And one thing that Apple has always had is great timing.