Apple Threatens To Take a Bite Out of Regional Banks

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

Last month, Apple extended its foray 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 offering an annual percentage rate of 4.15%—more than 10 times the national average. Anticipation for Apple’s product has been building since it was first announced in October 2022.

Apple isn’t the only tech-oriented firm offering non-traditional alternatives to stash their cash—and potentially earn a lot of money doing it.

Online discount brokerage Robinhood revealed new a savings account Thursday yielding 4.65% annually. Robinhood “Gold” members paying a monthly fee of $5 will qualify for the account; non-Robinhood subscribers earn 1.5% for uninvested brokerage cash.

In recent weeks, some bank customers have grown skittish about depositing money in the U.S. banking system, whose foundation recently has exhibited its widest cracks since the global financial crisis. “A bank’s greatest vulnerability is a loss of confidence, bank culture is defined by stability, prudence, and governance,” Michael J. Hsu, Acting Comptroller of the Currency, said on Wednesday.

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

Turmoil Drains Bank Deposits

Since March, concern about unrealized balance sheet losses at regional and mid-sized banks has caused a deposit drain at many of those banks. Amid three regional U.S. bank failures and the takeover of 166-year-old Credit Suisse by Swiss rival UBS, median deposits declined 3% and 2%, respectively, at nine key regional and 23 mid-sized banks tracked by Wedbush Securities.

The uncertainty around regional banks continues. Shares of banks such as PacWest (PACW), Western Alliance Bancorporation (WAL), and Zions Bancorp (ZION) have declined dramatically since the beginning of the year.

Meanwhile, Apple’s move builds on the Apple Pay feature launched on iPhones in 2014. It followed by launching Apple Cash in 2017, and Apple Card in 2019. Then earlier this year, it unveiled its Apple Pay Later feature, providing loans through its Apple Financing, LLC subsidiary.

By traditional standards, Apple is not a bank. But it’s starting to look like one.

Apple believes in the value of owning the relationship between consumers and vendors. And thanks to Apple’s reach of the iPhone, the fintech has the infrastructure to enable that relationship ownership. Afterall, 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 globally in the market, and iPhone users touch their devices an average of 2,617 times per day, meaning if you’re shopping, your phone is probably already in your hand and it’s probably an iPhone.

“If you’re a vendor and taking the iPhone for payment is easier, Apple is now your boss,” said Matt Stoller, research director of the antitrust advocacy group American Economic Liberties Project to Vox.

Offering Attractive Rates and FDIC Protection

The interest rates Apple and Robinhood currently offer vastly exceed those found at most traditional banks.

In April, U.S. savings deposit accounts yielded an average of just 0.39%, according to Federal Deposit Insurance Corporation (FDIC) data. Giant, diversified banks such as JPMorgan Chase (JPM)—less reliant on deposits to fund their operations than smaller banks—still pay rates as low as 0.01%.

Some depositors may worry nascent app accounts won’t provide the same regulatory deposit protection as FDIC-insured bank accounts. That’s true for balances in PayPal (PYPL) and Venmo, though the FDIC protects balances in those accounts that come from direct deposits via paychecks or government benefits.

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

The Apple savings account interest rate of 4.15% doesn’t make the top 15 financial institutions offering the highest rates. But that has not slowed its success.

It’s noteworthy, of course, that the FDIC also insured deposits at the three recently failed banks and the regional and mid-sized banks now enduring dwindling deposits.

However, reflecting accounts that exceed the FDIC’s maximum coverage, the regional and mid-sized banks tracked by Wedbush have a median of just 57% and 69% of their total deposits insured, respectively.

The Bottom Line

Apple isn’t a bank; it relies on Goldman Sachs for that. But the duo has already made a dent in the finance market, and some project that success will continue. Simultaneously, consumer confidence in regional banks is likely on shaky ground, but Apple was the world’s favorite brand for the 10th straight year in 2022, according to Interbrand’s annual Global Best Brands ranking. The only bank to make the top 25 brands was JPMorgan.