Apple's Financial Services: A Potential Threat to Regional Banks?

Apple Inc. (AAPL)'s ongoing push into financial products and services could spell trouble for regional banks, which are trying to retain deposits amid the recent crisis in the banking system and rising interest rates.

Key Takeaways

• Apple's high-yield savings account with Goldman Sachs attracted nearly $1B within four days of launch.
• Robinhood (HOOD) also unveiled a high rate savings product this week.
• Over the past few months, regional banks have faced their most significant challenges since the global financial crisis.
• The apps offer highly attractive rates to the consumers.

Last month, Apple expanded into finance by launching a high-yield savings account, allowing Apple Card users to store their daily cash rewards in a Goldman Sachs (GS) savings account that earns an annual percentage rate of 4.15%. Offers - more than 10 times. National average. Anticipation has been building for Apple's product since it was first announced in October 2022.

Apple isn't the only tech-oriented firm offering non-traditional options for hiding its cash -- and potentially making a lot of money.

Online discount brokerage Robinhood on Thursday revealed a new savings account with an annual income of 4.65%. Robinhood "Gold" members paying a monthly fee of $5 will be eligible for an account; Non-Robinhood subscribers earn 1.5% for brokerage cash with no investment.

In recent weeks, some bank customers have grown concerned about depositing money into the US banking system, whose foundation has recently demonstrated its widening cracks since the global financial crisis. "A bank's greatest vulnerability is loss of trust, a bank culture defined by stability, prudence and governance," said Acting Comptroller of the Currency Michael J. Sue said on Wednesday.

For its part, Apple's timing has proven to be impeccable. The brand loyalty and consumer confidence of the company is unmatched. People are actively looking for the best high-interest savings accounts, and Apple's new savings account option attracted nearly $1 billion in deposits in its first four days; $400 million on its first day.

The Turmoil Emptied Bank Deposits

Since March, concerns about unrealized balance sheet damage at regional and medium-sized banks have caused deposit withdrawals at those banks. Average deposits at nine major regional and 23 medium-sized banks declined by 3% and 2%, respectively, amid the failures of three regional US banks and the acquisition of 166-year-old Credit Suisse by Swiss rival UBS.

Uncertainty continues around regional banks. Shares of banks like PacWest (PACW), Western Alliance Bancorporation (WAL), and Zions Bancorp (ZION) have declined dramatically since the start of the year.

Meanwhile, Apple's move builds on the Apple Pay feature launched on iPhones in 2014. This was followed by Apple Cash in 2017 and Apple Card in 2019. , LLC Asst.

By traditional standards, Apple is not a bank. But it is starting to look similar.

Apple believes in the value of owning the relationship between consumers and vendors. And thanks to the reach of Apple's iPhone, fintechs have the infrastructure to enable ownership of that relationship. After all, to get an Apple Savings Account, you need an Apple Card account, which means you need an iPhone. There are more than 2 billion iPhones on the market globally, and iPhone users touch their devices an average of 2,617 times per day.

Meaning if you're shopping, you probably already have a phone in your hands and it's probably an iPhone.

If you're a seller and it's easy to take an iPhone for payment, Apple is your boss now, Matt Stoller, research director for the antitrust advocacy group American Economic Liberties Project to Vox.

Offering attractive rates and FDIC protection

Currently, the interest rates offered by Apple and Robinhood are much higher than those found at most traditional banks.

In April, US savings deposit accounts earned an average of just 0.39%, according to data from the Federal Deposit Insurance Corporation (FDIC).

Large, Diversified Banks Like JPMorgan Chase (JPM) -- which rely less on deposits to fund their operations than smaller banks -- still pay rates as low as 0.01%.

Some depositors may be concerned that the nascent app accounts will not provide the same regulatory deposit protections as FDIC-insured bank accounts. This is true for balances in PayPal (PYPL) and Venmo, although the FDIC protects balances in accounts that come from direct deposits via paychecks or government benefits.

Because Goldman Sachs services Apple's accounts, deposits of up to $250,000 on those accounts are eligible for FDIC protection, just as they do at brick-and-mortar banks. Similarly, Robinhood uses a so-called "sweep account" to move its brokerage account cash to a network of FDIC-insured banks.

The Apple savings account interest rate of 4.15% is not among the top 15 financial institutions offering the highest rates. But that hasn't slowed its success.

Of course, it's worth mentioning that the FDIC also insured deposits at three recently failed banks and regional and mid-sized banks, which are now bearing dwindling deposits.

However, regional and mid-sized banks tracked by Wedbush averaged only 57% and 69% of total insured deposits, respectively, reflecting accounts that exceed the FDIC's maximum coverage.

Last Line

Apple is not a bank; It's up to Goldman Sachs for that. But both have already made a dent in the financial markets, and some project that success will continue. At the same time, consumer confidence in regional banks is likely to waver, but Apple was the world's favorite brand for the 10th year in a row in 2022, according to Interbrand's annual Global Best Brands ranking.

The only bank to make the top 25 brands was JPMorgan.