Understanding the Apple Financial Empire (2023)
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You can probably think back to a time not too long ago when you considered industry boundaries to be a very real thing: finance companies were finance companies, entertainment companies were entertainment companies.
But now you can look back on your naiveté with a condescending smile — oh you sweet summer child — because we have all witnessed how the entire entertainment industry has slowly but surely become just another project of the tech giants.
Another such takeover is happening in the finance world, and if you want to understand how a $25 trillion industry is about to be turned on its head, there’s no better case study than that of Apple.
Apple will be a major financial services company, right up there with Chase and Bank of America. Their trajectory is clear and inevitable. In this post we’ll cover what their approach has been thus far, and what we can expect to see from them in the future as this plays out over the next decade.
You will see that Apple’s goal with these moves is not just to lend efficiencies to its hardware business, but to build an entirely new empire that will multiply the value of the entire company.
To get started, let’s first recap a general strategy that Apple employs to launch new initiatives, then see how their financial play maps onto it:
Bridges and Wedges
Apple’s approach to product building relies on two primary tactics: building bridges and driving wedges.
When its time to launch a new product, they like to look across their entire ecosystem and ask “which subset Apple customers makes for a good starting market?” and “how can we build synergies between this new product and the products those customers are already using?” This is the bridge building strategy, and due to Apple’s vast closed ecosystem, it offers many avenues for uniquely delightful user experiences.
But sometimes, the territory is too new, and bridges from existing products won’t cut it. That’s when it’s time to drive a wedge with a carefully planned, bold new offering that can serve as the source of bridges for new territory. Because wedge offerings can’t rely on bridges to find success, they require a lot more time and planning to pull off correctly.
For Apple’s nascent financial ecosystem, the wedge was Apple Pay.
In order for Apple Pay to serve as a wedge for future products, Apple needed it to be big. Really big. Luckily for them, they were prescient enough to notice a huge opportunity at the right moment.
Apple Pay
In the years leading up to the Apple Pay launch, contactless payment technology was on the rise. It was called the “EMV” standard, and it was promoted by all the major card networks as the easiest and safest way to pay. It was such an improvement that US card networks decided to force merchants to accept chip cards by 2015, else they’d face increased fraud liability [1]. This triggered a sharp wave of adoption among US businesses, which in turn made EMV cards more popular among consumers.
To Apple, this contactless payment wave presented an enormous opportunity, because by adding an NFC chip to their iPhones and leveraging the emerging EMV standard, they could essentially turn their devices into contactless cards. And with over 40% of the US phone market, they were positioned to facilitate payments for over 70 million people. Now that’s a wedge.
In October of 2014, Apple Pay was officially announced with perfect timing: in the year after, merchant adoption of contactless payment increased a whopping 872% [2]. By December of 2015, nearly 60% of all US storefronts accepted the chip cards [3]. With the wedge firmly in place, it was time to start building bridges to new products. It was time for Apple Cash.
Apple Cash
Apple Cash was introduced in 2017: a digital debit card made for peer-to-peer payments. The announcement featured a image of people sitting at a restaurant, indicating Apple’s focus on facilitating casual payments among friends and family.
Instead of being a stand-alone app, like Venmo, Apple Cash payments are made over iMessage, leveraging the user’s existing contacts. This was a clever way to reach parity with Venmo’s extensive social graph from day one. What’s more, Apple Cash funds could be spent anywhere Apple Pay was accepted. Two beautiful bridges.
Things were looking good for Apple’s burgeoning financial ecosystem, but they weren’t slowing down. By 2019, 70% of US retailers accepted Apple Pay and it was time to bridge it with yet another offering: The Apple Card.
Apple Card
Apple’s first ever credit card was introduced in March 2019. It was a bet against the incumbent banking players. They saw that the credit card experience lacked simplicity and transparency, and they recognized that their trusted brand would be a welcome change to the space (consumer trust in banks plummeted during the 2008 crisis and never recovered).
Although the card was issued by Goldman Sachs, users of the Apple Card would use Apple’s software to manage it. The card lived in the Apple Wallet app, where one could view the transaction history, track spending, and make payments. This places Apple Card holders deep in the Apple ecosystem, exactly where Apple wants them.
Of course, Apple made sure to connect the card to their other offerings: the card worked seamlessly with Apple Pay, and Cash-back rewards accrued on the Apple Cash card every day, which undoubtedly introduced many to the Apple Cash product.
Apple Pay Later
Fast forward to this year — it’s been a busy one for Apple. In March, they announced Apple Pay Later, a new feature of Apple Pay which allows users to pay off purchases in monthly installments. Although it seemed to be a pretty simple feature, Pay Later was actually a huge milestone in Apple’s financial empire.
You see, all of Apple’s other financial products are powered by partnerships with traditional industry players (Goldman Sachs powers the credit card, and Green Dot powers the digital cash card). In contrast, Pay Later is managed in-house with a brand new Apple subsidiary called Apple Financing LLC.
This small detail, originally reported by Bloomberg, shocked the financial world. Why would a consumer hardware company want to get their hands dirty underwriting microloans?
Those who saw Apple’s finance moves merely as an effort to bolster their hardware business could no longer ignore the reality: Apple wants to go head-to-head with the big banks and become a full-blown financial services company. This is more than a theory, the effort even has a name internally: Project Breakout [4].
Apple Savings
Just a few months ago, Apple Card surpassed 10 million holders [5], marking excellent timing for the next rollout: a high-yield Apple Savings account, which would issue 4.15% interest on funds. The savings account was only available to holders of the Apple Card, indicating Apple’s focus on increasing their number of card-holders.
This latest move completes a nice ramp into their financial ecosystem that’s been over a decade in the making: iPhone users find it convenient to use Apple Pay, which introduces them to Apple Cash and the Apple Card, which eventually leads them to the savings account. Those at the end of this ramp are relying on Apple for a huge portion of their financial lives.
So now we’ve covered the story of the Apple Pay wedge, and how it has led to the rest of Apple’s financial ecosystem: Apple Cash, Apple Card, and Apple Savings. We’ve also covered how Apple’s moves to bring the finance work in-house reflects serious ambitions to compete with big banks. The next question is: what happens next?
What’s Coming Next
Apple is a famously secretive company, so we can only guess at what we’ll see next, but there are powerful clues to pay attention to.
One of the biggest opportunities for investment lies in the Apple Cash Card. At the moment, it’s basically a digital-only pre-paid debit card, geared primarily for the narrow use case of peer-to-peer payments. But what if it could become more? What if Apple expanded the Apple Cash product into a full-blown debit card and associated checking account?
The Future of Apple Cash
Transforming Apple Cash into a full debit card and checking account would unlock the ability to cash checks, withdraw from ATMs, and most importantly, the ability to deposit paychecks.
If Apple can become the default place for people to funnel their income, they could more easily promote adoption of the rest of their ecosystem. As you’ve seen in the graphic above, Apple Cash directly bridges to nearly every one of Apple’s other financial products.
With the connection to the Apple Savings account, a percentage of each paycheck could automatically start generating yield. Imagine setting a slider to determine how much to save with each payday.
A physical Apple Cash debit card could even connect with Apple Pay Later, to offer deferred payments even when Apple Pay isn’t available (Affirm recently launched a similar initiative [6]). And with Apple Finance LLC already writing microloans, offering a paycheck advance feature — similar to those offered by Dave and Chime — would be an easy win.
Apple has already indicated a strong focus on family-oriented features. Recurring payments enabling weekly allowances is already possible with Apple Cash, and the Apple Card offers the ability for parents to share their card with dependents and limit their spending. We can expect to see more of these types of features in a fully-blown checking account, allowing Apple to get access to their future customers as early as possible.
Lastly, an Apple checking account would open up the potential for much needed interoperability for peer-to-peer payments. Right now, you can only send money to other Apple users, but by leveraging the ACH and wire capabilities of a checking account, Apple could finally facilitate P2P payments to everyone.
The next big area for investment is a software play, where Apple can play to its strengths.
The Future of Apple Wallet
I expect that we’ll see financial hygiene features coming soon to the Apple Wallet app, with the same elegance and precision we’re used to seeing in the Apple Health app.
You’ll be able to track your expenses, set budgeting goals for spending categories, and receive tips on how to spend responsibly. The user interface of the Apple Savings product is headed in this direction already, however this feature would be generalized to be used across multiple accounts.
Financial hygiene features will help to draw more users into the Wallet app, where advertisements for the Apple Card and Cash Card will be living. It’s also possible that transactions made with the Apple Card or Cash Card will have richer data to generate more powerful insights, creating more a reason for users to switch to those cards.
An Investing Product
Further down the line, it would be entirely unsurprising to see Apple launch an investing product, allowing their users to purchase stocks and crypto with their checking account balance. This is certainly a complicated endeavor and not one I expect to see soon, but it’s the natural next step in the expansion of the empire, and as we’ve learned, Apple’s ambitions are boundless.
Now that we’ve talked about some of the things we might see in the future from the Apple Financial Empire, let’s close by discussing the headwinds the company will be facing in the years ahead.
Challenges Ahead
Government Regulation
One of the most significant challenges to Apple isn’t a competing company or even consumer behavior, it’s government regulation. In the past few years, sentiment around big tech companies have markedly soured [7], and there’s no reason to think it isn’t trickling into congress. A DOJ anti-trust investigation into Apple, which began in 2019, is picking up steam in recent months [8], and it’s not an isolated case. The justice department is making a similar investigation into Google, which went to court last month.
Although Apple has had some notable wins in court over the last few years — with the most recent being against Epic games over the App Store — it will undoubtedly face increasing scrutiny as it looks to move into the heavily regulated space of financial services.
Partner Troubles
Apple’s partnership with Goldman Sachs made the Apple Card possible, but now, just a few years later, the finance giant is apparently souring on the relationship [9]. After reportedly suffering over $1 Billion in losses, it seems that Goldman was not prepared for the relationship. In June 2023, the Goldman CEO reflected that they “did not execute well” in consumer banking.
Rumor has it, Apple is in talks with American Express about taking things over, but the conversations are still preliminary, and even if they did, it would be a challenging transition to say the least.
Mobile Wallet Adoption
Nearly half of all ecommerce volume today is transacted via mobile wallets, but only 12% of global spending is in ecommerce [10]. Despite popular narratives, brick-and-mortar still dominates retail, and that’s where mobile wallets are lagging. Only 5.8% of in-store payments were made via mobile wallets in 2022, a rate that’s been relatively flat for several years [11]. Even with Apple’s dominance in mobile wallets, they still only command 2.8% of in-store transactions.
It seems that even when the technology is available, decades of consumer spending habits lead people to prefer their physical cards. Apple can only do so much to change this behavior, it’s going to take time.
Conclusion
The Apple financial ecosystem is about nine years old now, but as we’ve covered, their steps so far indicate that their roadmap to total dominance extends much much further. This is only the beginning.
Despite the challenges ahead for Apple, I’d still bet on their success. The company has proven time and time again that they’re more than capable of disrupting industries and overcoming odds. They’ve been responsible for more than one massive consumer behavioral shift since their inception.
If it all comes to pass, we may see a world where the big tech giants hedge out the big banks of today. Google, Amazon, and especially Apple will bring their strengths in technology to make a new era in consumer finance defined by streamlined user experiences and innovative new capabilities.
I, for one, welcome it.
