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Apple Isn't Disrupting Banks, It Is Helping Them

This article is more than 4 years old.

“Silicon Valley is eating the banks’ lunch,” proclaims the Financial Times. Technology companies such as Apple are set to take over the services traditionally provided by banks, such as credit cards, foreign exchange, loans and payment services. Though the article admits that tech companies have been talking about this for a decade, and progress has been – well, non-existent, really:

The embarrassing fact for the entire fintech industry is that it has failed to take significant share of core banking activities despite a decade of a benign credit environment with banks hampered by their recovery efforts after the 2008 crisis.

Now the cycle is turning. Banks are no longer hampered by wrecked balance sheets and enormous fines. The strong dollar has tightened global credit conditions appreciably, even with interest rates at all-time lows. Economies around the world are experiencing slowdowns. Yet despite this, we are to believe that tech companies are about to disrupt banks more than they have managed to do in over a decade of far more supportive conditions. What on earth is the reason for this astonishing optimism?

© 2019 Bloomberg Finance LP

Apple Card, apparently. “The clearest example is the just-launched Apple Card, a virtual interface on the iPhone to help keep track of spending and a physical titanium card for fashion victims,” says the FT.

Really, FT? Here’s how Apple itself describes Apple Card:

Apple

It’s a credit card, not a “virtual interface.” There is nothing novel about a credit card. A credit card is, as its name suggests, simply a line of credit which is drawn upon when using a card to make purchases. Apple’s card may be fancy (and fragile), but behind it is a bog standard credit facility, just like every other credit card in the world. So the question is, who is issuing that facility?

Credit card facilities are provided by banks. Cards may be branded by a retailer, but the actual issuer is always a bank. This is even true for giant retailers such as Walmart, though they undoubtedly have the balance sheet strength to offer credit lines; Walmart’s credit card is issued by the online bank Synchrony. In fact, Synchrony issues an astonishing 115 branded cards, including Paypal’s credit cards, Amazon Prime’s store card and fuel cards from Chevron and Texaco. You can find the full list here.

Apple Card’s strapline “Created by Apple, not a bank” implies that the credit line is provided by Apple itself. If that were the case, then Apple Pay would be groundbreaking. It would mark Apple’s transformation into a bank – and a bank of such a size and reach would indeed eat the lunch of existing banks.

Sadly, the strapline is misleading to the point of dishonesty:

Apple

The card that is “created by Apple, not a bank” is actually issued by – a bank.

You’d think that Apple would at least have gone into partnership with one of the nimble fintech companies that do bank-like things while largely avoiding bank-like regulation. At least then it could legitimately claim that its credit card was not created by a bank, though that doesn’t mean banks wouldn’t be involved – after all, fintech companies themselves have to use banks to gain access to mainstream payment services, which are essential for credit cards. But no. Apple has chosen as its partner one of the biggest banks in the world – the infamous “vampire squid,” Goldman Sachs.

Goldman Sachs, you may remember, was the bank that was censured by the U.S. Senate for betting against its own customers. Admittedly that was a decade ago, when it was an investment bank operating in the shadows, out of sight of U.S. bank regulators. Now investment banking has gotten itself a bad name and returns on shadow activities aren’t what they used to be, Goldman Sachs is reinventing itself as a (regulated) retail bank. Its online Marcus savings products and unsecured personal loans are targeted at retail customers. And now it is offering personal credit cards too.

Let’s just remind ourselves what Matt Taibbi had to say about Goldman Sachs’ business model:

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money…

Well, Apple certainly smells like money. Lots of it.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.

Goldman Sachs is getting into retail deposit-taking and lending, in a big way. That is the most heavily state-supported part of banking, not least because it contains the most vulnerable customers. CNN observes that Marcus is already doing subprime lending funded by ordinary people’s savings:

The company has lent $4.75 billion out in personal loans through Marcus and 13% of those loans have gone to customers with FICO scores below 660, which is roughly the definition of a subprime borrower.

Among the loan types offered on Marcus’s website are debt consolidation and credit card consolidation loans. Of course, savings are FDIC insured – so this looks very much like the bank using the security provided by government insurance to risk up for higher returns.

CNN also notes that Apple, presumably with Goldman Sachs’ approval, has issued information on how people with low credit scores can still get Apple Pay cards if they meet other criteria. So far, Goldman Sachs appears to be selling its credit cards exclusively to Apple’s customers. But I wonder whether Apple will be as successful at tying down the slippery squid as it is at locking in its customers. Goldman Sachs is always happiest when it is on both sides of the trade. Apple may live to regret this unholy alliance.

The FT’s appeal to Apple Card as evidence that tech companies are about to disrupt the banks is evidently misplaced. A branded credit card issued by a major U.S. bank is not going to threaten the dominance of banks in the credit card industry. What it will do, though, is redistribute it. Goldman Sachs is clearly hoping to “chow down” on other banks’ credit card businesses by taking advantage of Apple’s ability to cross-sell services to the faithful users of its gadgets. And Apple is helping it to do so. The security features on Apple Card make it attractive for customers to stop lodging third party cards with Apple Pay and use Apple Card instead, while the perks on Apple Card include preferential cash back rates for purchases made using Apple Pay. If Apple users start adopting Apple Card as their preferred payment method, Goldman could quickly seize a large part of the personal credit card market. That, without question, is its goal.

It is not disruption of banks that we should fear, but the power that giant tech companies like Apple can give to the banks they choose as partners. Taibbi warned that Goldman Sachs is always looking for new opportunities to milk the gullible and exploit the vulnerable. Am I the only person who finds its new-found interest in subprime retail lending to tech-savvy but financially naive customers worrisome?