The iBank of Apple: Arguments for and against Apple entering retail banking

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Apple is now a major retail payments processor with 575 million iTunes accounts and one click payment capability.  That they highlighted this in yesterday’s worldwide developer conference is possibly a warning shot of sorts to the banking industry.

Ok, I admit it – I am in pretty deep with Apple gadgetry.  I’ve got the iPhone, the iPad Mini, the 15″ MacBook Pro Retina.  I’ve purchased pretty much every case and peripheral for these devices imaginable – at least twice.  I also develop iOS apps for fun in my spare time and look at Apple from a developers perspective as well.  I’ve got it bad, for sure, but what if two of my major interests (Apple gadgetry and Banking Technology) actually came together as one – what would this world look like?

What arguments does Apple have for entering this space?  Here are a few:

Arguments For

Analysts, critics and pundits laughed when Apple opened retail stores (and we all know how that turned out) and they likely would laugh again on the prospect of Apple iBank – yet Apple has some key reasons to consider entry:

- Footprint:  Apple already has 407 stores in 14 countries complemented by a strong online presence.  Given the trend towards mobile and internet banking as primary channels and the branch as a sales and discovery centre, this might be the right mix of physical and virtual presence.  Imagine the financial genius bar right next to the Apple genius bar.. you can get your iPhone screen replaced and sign up for a new fixed term investment all in one appointment.

- Savvy: The online App Store is only five years old yet has become an e-commerce juggernaut.  If anyone could redefine the online and mobile banking experience it’s Apple.

- Payments margin:  Apple already has over half a billion iTunes accounts with credit card information.  If they can disintermediate the path from the customer’s wallet to them the sheer scale allows for significant margin gains.  This in itself is a significant driver.  If Apple is hosting a customer’s current account, moving those funds from this account to an Apple deposit account (in exchange, say, for a shiny new Mac Pro) is very easy and avoids intermediary fees.

- Devoted Community:  When is the last time you saw consumers rallying around a banking brand?  Exactly.  Now imagine the lineups on the first day of the iBank opening.

- Push into Enterprise: Apple clearly has aspirations when it comes to business and enterprise customers.  This requires additional sales sophistication, enterprise leasing programs, and large-scale financing.  With the shift of computing driving innovation from the consumer space into the enterprise space (rather than the opposite direction) Apple is in a position to increase its business and enterprise market share – and will need suitable financing and leasing options available.

- Walled Garden:  Apple can increase perceived and actual banking security by controlling the hardware, operating system, software and banking experience from an end to end perspective.  This creates a multi-factor authentication environment which traditional banks would struggle to compete with, and security remains a major concern for consumers.

- Legacy free:  Apple’s greatest advantage is that it doesn’t carry all of the legacy that most banks do;  from a flexibility and operating model perspective they can choose a direction without worrying about how to shift the existing systems, processes and organization to fit.

Arguments Against

- Regulatory pain:  Certainly anyone in the banking industry over the last five years would argue that Apple would have quite a bit to learn to become adept at the various regulatory frameworks that they would need to adhere to.  The lack of legacy helps in this regard, but this is certainly a consideration and barrier.

- Settlement and clearing restrictions:  It would likely take some time, some licensing and some lobbying to get set up as a direct clearer in every relevant jurisdiction.  This is tedious and would be strongly opposed by existing members (unless they are sleeping at the switch, or in line for a new Mac Pro) — but Apple is a big player and certainly could lobby hard in this regard especially if governments and central banks see them as consumer friendly and helping to remediate current challenges in the banking system.

- Low margins:  Many would argue that of all of the uses for capital now, retail banking is not an efficient use given the low interest rate conditions and pressure on spread income.  I think much would depend on Apple’s efficiency of delivery, internal cost of capital and whether or not banking provides additional leverage for them in other areas.  This is also just considering existing business models, if Apple were to reinvent the model all current margin models are out the window.

- Ramp up time:  Financial services expertise would need to be brought in and this would take some time – how long would depend on the initial launch strategy.  This would be a signal to the industry and would likely result in some defensive competitive targeting.  If the ramp up takes too long this could be costly and introduce risk.

Summary

The way I see it, Apple has more reasons to enter the industry than to avoid it.  Although from a growth perspective they still have much more work to do within their core focus area of retail and business computer sales, if banking is an area that can help their core business I would not be surprised to see them move in this area.  What do you think?  Would you bank at the iBank of Apple?

 

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Original Post: http://www.corebankingblog.com/2013/06/the-ibank-of-apple-arguments-for-and-against-apple-entering-retail-banking/

2 Comments

  1. Your analysis of the pros and cons of Apple entering the banking market is spot on. However, there is one basic assumption underlying your analysis that I would challenge. What if Apple entered the financial industry without actually becoming a bank? Given the immense regulatory pressure that they would be inviting and the relatively low profit margin they would gain by becoming a bank, this just seems unlikely. However, as other non-traditional financial institutions are proving, you can play a big role in the financial industry without becoming a bank. Just look at PayPal, Square, Moven, Simple, and dozens of other start-ups. These institutions aren’t looking to disintermediate banks, they are looking to reintermediate themselves into the process. They are looking to control the customer interaction layer and leave the regulated back-end banking processes to the banks.

    These institutions are looking to provide a more seamless and enjoyable user experience. Does that remind you of anyone? Apple would excel at this. As you point out, they already have the online and physical infrastructure to do it. They already own the tablet and smartphone ecosystems (both physical devices and mobile operating systems). Given all this and adding in a private-label banking partner like Bancorp Bank, Apple could dominate the financial industry without ever becoming a regulated bank.

  2. Good analysis with a large oversight: Apple’s history and DNA. Everything they’ve done has been about integration of hardware and software to produce hight margin products. And as their recent advertising says, the choose to do a few things very very well.

    All of which argues strongly against Apple wishing to become a bank.

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