In 2019, after months of gruelling work, executives at Apple and Goldman Sachs were gearing up to unveil Apple Card, a landmark move for the iPhone maker’s burgeoning ambitions in financial services.
As the launch date approached, the partners hit a sticking point. Apple, keen to be seen as providing unique value for customers and with a habit of grandiose marketing claims, wanted to peddle the product as the “most secure credit card ever”.
Apple limited leverage. Goldman saw the Apple Card as a pivotal product to show it could cater to Main Street customers. “The offering to Goldman was — ‘hey, you don’t have a consumer product and guess what? We can get you access to all Apple customers,’” says a former Apple executive. “Apple was aware that they squeezed everything they could out of that negotiation.”
But with this marketing claim, Goldman had to push back. “You’re open to lawsuits if you say it’s the ‘most’ anything,” said one person familiar with the discussions.
In the end they settled for the more muted claim that Apple Card “provides a new level of privacy and security”, and that the absence of the 16-digit number or security code on the card itself makes it “more secure than any other physical credit card”.
The episode was one of the biggest debates between Apple and Goldman in the run-up to the launch, according to people familiar with the matter, and proved an early lesson for Apple in navigating red tape in financial services.
Now, four years later, the iPhone maker is increasingly comfortable in the space and is stepping up efforts to expand further into it. In the past three weeks alone Apple has — with Goldman’s help — launched two big products.
Apple Pay Later, its “buy now, pay later” product, is the first instance of Apple directly lending to consumers from its own balance sheet. Savings, a high-yield savings account, offers US customers a 4.15 per cent interest rate, 10 times the national average. The deposits will sit with Goldman, which as a licensed bank has access to US government-backed insurance.
The question for banks and other providers of financial services is how worried they should be about a tech company with 1.2bn iPhone users, a $2.6tn market cap and a history of disruptive innovation making moves on to their territory.
Apple’s scale makes even the world’s largest banks look little. Its services division alone, where it earns recurring subscriber revenues and App Store payments, generated $55bn in profit last year — higher than JPMorgan and Citi combined. But it makes up just one-fifth of its total revenues.
And the company hasn’t been shy about its ambitions in this space. Current job ads speak of “transforming the industry in payments, transit and identity”. And Jennifer Bailey, head of Apple Pay, said back in 2016 that Apple was on “a good, long journey for us to replace the wallet”.
For JPMorgan Chase chief executive Jamie Dimon, the risk is clear enough for him to label Apple a bank. “It may not have insured deposits, but it’s a bank,” he said in June last year. “If you move money, hold money, manage money, lend money – that’s a bank.”
Dimon again warned investors of the looming threat this month, saying “large tech companies” have “enormous resources in data and proprietary systems — all of which give them an extraordinary competitive advantage”.
Stephen Squeri, chief executive of American Express, admitted to analysts on Thursday that he too is “paranoid” about Apple and Amazon, which he called “phenomenal” companies with deep links to the consumer.
“We’re not naive enough to think that we can just go on. . . strolling down the street here,” he said. “We think everybody is coming after us.”
This account of Apple’s plans in financial services is based on interviews with eight people involved in the strategy, who requested anonymity as they were not authorized to speak publicly. Apple and Goldman declined to comment.
By design, Apple typically expands into new sectors not through flashy acquisitions but by incremental steps that give it a sustainable advantage over time.
In finance, the fruits of Apple’s slow-burn strategy are clearest with Apple Pay, its wireless payment technology meant to “transform mobile payments” when it was first announced alongside the iPhone 6 in 2014.
Adoption was slow enough that Apple was mocked in its first year in operation. By 2016 just one in 10 global iPhone owners were using Apple Pay. But the user base snowballed to 50 per cent by 2020, according to Deepwater Asset Management. By 2022, adoption hit 75 per cent and the European Commission had opened an antitrust investigation.
“They move at the speed and force of a glacier,” says Gene Munster, managing partner of Deepwater. Commenting on Apple’s next moves in banking, he added: “This will take five to 10 years, but by then we’ll think of Apple in the same vein as Citi, JPMorgan and Wells Fargo.”
The iPhone maker is playing a long game in finance and payments, say three former Apple employees, and its current moves are laying the technical groundwork for taking a bigger share of the market.
For example, Apple spent years on what was known internally as Project Muirfield — the ability for the iPhone to not just send payments, but receive them. This feature was announced to little fanfare in February 2022: an Apple press release described that merchants using iPhones with ‘tap and go’ NFC chips could now accept payments from credit cards with “no additional hardware or payment terminal needed”. The service works with payment service providers including Stripe, Adyen, and Square.
People familiar with the tech say the implications are far wider: if the buyer and the merchant are both using iPhones or iPads to process payments, that gives Apple the capability to create a closed-circuit that doesn’t require banking partners or networks to run by Visa and Mastercard.
“Right now, they can’t upset banks, and they can’t separate network partners — it’s too important for distribution at the start,” says a former Apple employee. “But you can imagine that the pendulum swings: as more and more people use Apple Pay. . . then the leverage moves into Apple’s camp and they can make other plays that aren’t so dependent on the banks.”
Munster adds that Apple has a long history of partnering with others until it is to their advantage to go alone, and he suspects that is the end game in finance, too. “The list is long of former Apple partners who have become obsolete,” he says.
Sam Shawki, chief executive of MagicCube, which offers similar tech for Android-devices, said the ability for merchants to securely accept payments through smartphones and tablets could render the entire payment device market — a $48bn sector led by Verifone and Ingenico — antiquated.
“This is a fax machine in an age where you can have email,” he said of the single-use devices. “Taking a bite out of [payments company] Block is nothing, but taking a bite of Ingenico and Verifone is something, and taking a bite from Visa and PayPal is the long-term goal.”
Size of the payment device market, led by Verifone and Ingenico
Michel Léger, head of innovation at Ingenico, concedes that software-based point-of-sale solutions have brought “a new era of payment acceptance”, but he argues Apple’s offering will complement physical terminals rather than replace them. It would be “impractical to imagine a fleet of expensive smartphones at the multilane checkout of supermarkets”, he says.
Others in the industry do not see Apple as an existential threat. Eva Wang, a former American Express executive who now heads partnerships at Firework, a video-shopping commerce solution, says Apple’s interest in payments and banking is mostly about extending the reach of the iPhone — to add convenience but also to keep users “locked in ” to the Apple ecosystem.
“If I’m using all this stuff from Apple, there’s a less likely chance of me turning away (to Android),” she says. “What they care about is something very different from the banks.”
The big incumbents definitely need to be “cognizant” of what Apple is doing, says Boe Hartman, former technology chief of Goldman’s retail division that built the infrastructure for Apple Card. But he doesn’t expect to see Apple roll out of the Bank of Cupertino any time soon.
“Banks are rooted in constant regulation, and you have to prove that you’re living up to that regulation every day,” he says. “Someone like Google or Apple just wants the experience to service people, to make people more sticky in their ecosystem. That’s what they want. They don’t want to deal with the regulatory stuff. That’s hard and complex.”
It is firmly in Apple’s interest to limit its ambitions to the customer experience and leave it to others to build infrastructure or deal with credit risk and regulations, says Amit Daryanani, an analyst at Evercore ISI.
That lets Apple take a more selective, higher-margin and capex-lite approach to banking, supercharged by its ability to embed tools into the operating system of the iPhone — rather than in a separate app the user must find and download.
A former Apple executive says the company’s cost of acquiring new customers for Apple Card was “laughably lower than every other credit card company” because it had so many distribution channels.
For instance, Apple reminded users, for years, to sign up for Apple Pay, even giving red-colored notifications in the settings menu that implied something was awry if the service wasn’t set up.
Kim Schwendeman, senior vice-president of payment adoption at Stax, a payment platform for small businesses, says similar tactics could give the Apple Pay Later program an edge.
“It’s easy for consumers who have Apple Pay to leverage those capabilities and get a loan,” she says. “For some of the more established players, their experience is not as frictionless. That will cause some anxiety.”
Apple also has another, longer-term advantage of iPhone user data — which could potentially be used to assess credit risk more comprehensively than a traditional Fico score.
Last year, the company signaled its interest in the idea when it purchased Credit Kudos, an “alternative” credit scoring start-up in the UK.
If such data was deployed for assessing risk, it could be “very powerful in making smart credit decisions”, says Charlotte Principato, an analyst at Morning Consult, a business intelligence company.
“The more information you have about a consumer, the better lending decisions you can make,” he added. And Apple “is sitting on a mountain of data.”
With reporting by George Hammond in San Francisco