Apple Savings

Per the company’s press release

Starting today, Apple Card users can choose to grow their Daily Cash rewards with a Savings account from Goldman Sachs, which offers a high-yield APY of 4.15 percent. — a rate that’s more than 10 times the national average. With no fees, no minimum deposits, and no minimum balance requirements, users can easily set up and manage their Savings account directly from Apple Card in Wallet.

The service’s APY attracted a lot of headlines and rightfully so. At 4.15% with no minimum, this APY dwarfs everything that incumbent banks have to offer (less than 0.1%), making Apple Savings an enticing investment option to consumers. But Apple Savings is more than just a high-yield savings account:

  • The sign-up is very fast and smooth. It took me less than a minute to create an account and transfer funds in. I am not confident the same can be said about the process at other banks or Treasury Direct, where you buy Treasury Bonds.
  • While several fintech startups offer high-interest savings accounts, they do not have the brand name and recognition as Apple. Trust me, that’s a real issue in consumers’ mind. They want their money safe. Fearing that fintech startups may not be around in the near future deters consumers from banking with them.

As interest rates are forecast to stay elevated for a while, banks now have a choice: keep their insultingly low APY and watch deposits go to Apple Savings or raise their interest rates accordingly. Given the appeal of Apple and the sentiment I have seen on Twitter, I won’t be surprised if tens of millions of dollars have already been parked in Apple Savings in the last two days. I hope that a few months from now, WSJ or other business news outlets will report some juicy numbers from “people with knowledge of the matter” because I don’t expect to hear truthful disclosures on this issue from bank executives. But if we see an increase in rates from the banks a few weeks from now, that means the banks are bleeding deposits meaningfully.

What’s in it for Apple?

The answer is: another Apple-style banking service for the ecosystem. To apply for and use Apple Savings, users must have the Wallet app and own an Apple Card. In other words, Apple Savings users are already Apple power users and they just sink a little bit deeper into the ecosystem. That’s exactly what Apple wants. The deeper the engagement, the more unlikely someone will leave the Apple orbit.

Apple is known for offering nice user experience and easy-to-understand/use products/services. This is no exception. From the application process in the Wallet app to the way that deposits can be made and withdrawn, Apple Savings looks to be another on-brand service from the iconic company.

Once a Savings account is set up, all future Daily Cash earned by the user will be automatically deposited into the account. The Daily Cash destination can also be changed at any time, and there’s no limit on how much Daily Cash users can earn. To build on their savings even further, users can deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance.

Users will also have access to an easy-to-use Savings dashboard in Wallet, where they can conveniently track their account balance and interest earned over time. Users can also withdraw funds at any time through the Savings dashboard by transferring them to a linked bank account or to their Apple Cash card, with no fees.4

All of this happens without Apple going through the pain to be a bank. That’s just smart business. It’s not in Apple’s DNA to be a bank. It’s not their strength. It’s not what they do. Plus, standing up a bank and operating one is no mean feat. In addition to normal banking operations, there requires a lot of work to battle fraud and stay compliant with numerous regulations. The partnership with Goldman Sachs saves Apple from those headaches and expenses.

What’s in it for Goldman Sachs?

To be able to make loans, a bank must prove that they have the funds to do so. So the bank either has to accumulate deposits on their own or borrow from the Feds at a cost. As interest rates go up, the cost, called Cost of Funds, goes up as well.

With Apple Savings, consumer deposits are parked on Goldman Sachs’ balance sheet. They pay a high APY right now, but it’s much lower than the interest rates that they impose on their loans to others. For context, while Apple Savings pays 4.15%, Apple Card charges interest rates that range from 15.74% to 26.74%. Goldman is certainly interested in that delta in interest and wants to dole out as many loans as possible. To do that, they need more deposits and that’s where Apple Savings comes in. It’s banking 101.

In the account agreement document, there is a provision allowing Goldman Sachs to change APY at any time. When the Fed lowers their rates, don’t expect the APY of Apple Savings to stay at 4.15%. Even when savings interest rates drop, I think Goldman Sachs will still benefit from this service. Here’s why:

Anyone wishing to get an Apple Savings account must own an Apple Card, which yields 1-3% rewards, depending on how and where transactions take place. Apple Card rewards are shown in Apple Daily Cash, which accrues absolutely NO interest. Consumers who want to earn more interest will have to transfer the funds to their desired destination. The process requires two things: a couple of days and a fund that is sizeable enough. Would you come in your Wallet app once a week and transfer $2.25 there to your checking account? Yeah, me neither.

In the press release two days ago, Apple said that any future Daily Cash will be automatically deposited in Apple Savings account, unless users intentionally change the setting. As mentioned above, I don’t think consumers will frequently take funds out of the Apple ecosystem. Even if an individual customer has a small fund, ten of thousands of users will make a significant contribution to Goldman Sachs’ deposits and balance sheet.

Furthermore, Apple Savings is also an acquisition play for Goldman Sachs and Apple. Making the Savings application contingent on owning an Apple Card will drive the credit card sign-ups. Once in a while, I see Apple run a bonus offer of $75 for new Card users. So, you can see that from this perspective, the benefit that Apple Savings brings is not trivial.

Goldman Sachs recently had to scale down their consumer banking ambition. Overnight growth usually comes with outrageous expenses. And the plan to venture into retail banking came at probably the worst possible time. But with patience and the right execution, the partnership with Apple can help Goldman build a consumer brand to replace the distant, cold-blooded corporate image that the investment bank is associated with. After all, marketing is the strength of only one company in this partnership and it’s not Goldman’s.

That’s why partnering with the ultimate consumer brand in Apple makes sense. Users of Apple Card and Apple Savings will grow to associate Goldman as a consumer bank more. On the flip side of it, Goldman Sachs must also pull their marketing weight and not rely too much on Apple. The risk of being overshadowed by Apple is palpable. And the bank must also learn how to do effective consumer marketing on their own. It’s better to own a capability than to borrow it.

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