Follows Apple’s growing fintech ambitions

Apple Inc. is well positioned to take a bite out of the financial services market with its growing payments ecosystem, despite some recent product delays.

The conspicuous absence of updates regarding two expected financial technology offerings with Apple’s iOS 16 launch this fall means more details need to be worked out. But analysts expect Apple to continue expanding its fintech footprint, noting a number of advantages that should help the company grab some market share in the space. These benefits include consumer affinity, trust in the Apple brand and an active device install base that the company expects to grow to 2 billion globally by the end of 2022.

“Apple is in a unique position to own the interaction between consumer and merchant through the increasing prevalence of digital payment channels, both in-store and online,” said Kevin Kennedy, analyst at Third Bridge.

Apple did not respond to requests for comment on the status of two expected new fintech products: the company’s planned high-yield savings account or buy-now, pay-later offerings. The Apple Pay Later product was announced in June during the company’s WWDC22 developer event. The high-yield savings account offer for Apple card users was announced in October.

Plant seeds

Over the past decade, Apple has launched a number of financial services, starting with its digital Wallet app and the digital payment system Apple Pay. Apple Card, the company’s digital credit card launched in 2019, had 6.7 million users as of early 2022, according to a Cornerstone Advisors survey of credit card users.

Thanks to the iPhone and Apple Watch, Apple has the advantage of a huge customer base. A stream of tailwinds is pushing Apple toward the fintech and payments market, including increased use of digital wallets, greater adoption of merchants accepting QR codes and instant payment features, and an increased appetite from regulators to encourage competition against the Visa Inc. duopoly. and Mastercard Inc.

“Apple is building a revenue model around its banking products and services that over time will be a pretty meaningful contributor to the business,” said Jordan McKee, principal analyst at 451 Research.

Apple’s iOS 16 launch opened up a number of new Apple Pay features for users, including detailed receipts and order tracking, and the ability to make a bundled purchase to multiple merchants in the same transaction.

Apple is betting that the Apple Card will help boost the use of the Apple Cash Card, its debit product, because of its favorable revenue dynamics, including the interchange fees it charges merchants.

Credit card issuers such as Visa and Mastercard now share Apple Card interchange fees with Apple and Apple’s banking partner, Goldman Sachs Group Inc., said Hrvoje Pavisic, a fintech analyst and the author of the FinTech Wave newsletter.

“I think a lot of people will use [Apple’s high-yield savings account] because it doesn’t cost you anything to transfer the money there,” Pavisic said.

Obstacles ahead

Despite Apple’s significant advantages in rolling out fintech services, the company has faced its share of obstacles. A footnote in an announcement on Apple’s website detailing the new features in iOS 16 said the company’s planned high-yield savings account is “coming in a future update for qualified applicants in the US” and may not be available in all states.

The announcement did not refer to the buy-now, pay-later program, which is expected to allow customers to split a purchase into four equal payments over six weeks, with no interest or fees.

When the savings account is launched, analysts expect it to generate interest from consumers. so they Goldman is likely to put its annual percentage return around the 2.5% mark offered by the bank’s Marcus High Yield Savings Account.

“I don’t think Apple needs to offer the best price,” Kennedy said. “Any competitiveness lost on the APR spread will be supplemented by the convenience of carrying those balances on a digital wallet.”

Interest rates on savings accounts from traditional banks are still extremely low, even in today’s higher interest rate environment. “If you get 1% interest [from Apple]that’s still a lot more than the 0.01% you get from your regular bank,” Pavisic so.

451’s McKee sees the savings account offering as having strategic value for Apple.

“Apple is trying to get users to keep their money within the Apple ecosystem,” McKee said.

One common feature that the Apple Card lacks is a direct deposit option. Apple is likely to pursue this functionality in the future, 451’s McKee said, noting that Block Inc.‘s Square payment processor also didn’t have the feature at launch, but eventually added it.

Future ambitions

To continue growing its fintech business, Apple needs buy-in from merchants willing to accept Apple Pay, which would enable consumers to tap into the tech giant’s growing line of digital wallets, analysts said.

A 451 Research survey conducted in March and April found that 42.5% of business executive respondents said that offering shoppers alternative payment methods such as Apple Pay or Alphabet Inc.’s Google Pay was very important to their organizations. The survey included responses from about. 250 decision makers at small, medium and large North American trading technology companies.

Because most Apple devices have become mobile point of sale terminals, Apple creating its own payment processing infrastructure for merchants to compete with alternatives such as Square, Stripe Inc. and Dutch payment processor Adyen NV is a logical next step, McKee said.

Apple’s ability to conquer emerging markets in the fintech area — such as the cryptocurrency market, or cross-border payments between countries — depends on macroeconomic and regulatory factors, analysts said.

To make a viable entry into crypto, for example, Apple would have to make significant investments in its compliance team given the challenges inherent in managing cryptocurrencies’ volatility, said Fintech Waves’ Pavisic.

Meanwhile, regulatory complexity, foreign exchange requirements and competition present significant headwinds for any company looking to start offering money transfers abroadsaid Third Bridge’s Kennedy.

Just under a third of the 451 respondents (31.3%) said they were most interested in using cryptocurrency in business to facilitate cross-border transactions.

“Apple tends to seek out areas where there is friction and where there is an opportunity to create a better experience,” McKee said. That could include creating its own stablecoin, which uses Blockchain technology but is backed by a fiat currency like the US dollar or gold, McKee said.

“There are still some very clear user experience challenges with crypto and converting crypto back to fiat currency,” McKee said. “But down the road, I think I think it’s a very realistic use case, and one Apple and others may pursue at some point.”