WORKWEEK

I was thinking through some stuff the other day and realized WWDC was right around the corner (June 6-10th). I have a soft spot for Apple-related fintech products:  Back in 2014, I became briefly obsessed with understanding how Apple would launch a digital wallet and how they could make money off of it. I ended up breaking one of the bigger business stories around the launch—Apple reached a deal with the top 5 banks and negotiated a lower transaction fee (around 15 to 25 basis points) and an agreement to classify Apple Pay transactions as “card present” transactions. The story put me on the map as a journalist and was cited in publications like Bloomberg and the New York Times, which was pretty cool. 

When I first started FTT I wrote a lot about the Apple Card, and it helped get FTT cited in publications like CNBC. As Apple gears up for one of its bigger fintech launches without much fanfare from the media, I feel like its worth diving in wtf Apple’s doing in fintech right now. 

To me, Apple’s building something akin to Shopify Capital, but for consumers—Shopify used its network of small businesses using it to host their e-commerce store, extracted and cleaned the data to figure out when merchants needed capital to expand, and launched a thriving merchant lending business that catapulted the company to new heights. In Q1, Shopify lent nearly $350 million in loans to merchants on its platform. 

Where Shopify has easy distribution to merchants, Apple has similar advantages with consumers. They make iPhones and a lot of those iPhones use Apple Pay & the Apple Card. And Apple’s been working behind the scenes to build out a lot of new capabilities both underneath and on top of those existing products. 

(I’d like to note that much of the following is based on media reports—I don’t have any inside knowledge here. But most of them are from Bloomberg’s Mark Gurman who has an impeccable track record of breaking Apple Pay stories.) 

Much of my hypothesis is around Apple Pay Later, Apple’s upcoming buy-now-pay-later product. While reports said that Apple was working with Goldman around this, it looks like they’re doing far more internally than for the Apple Card. 

A recent Bloomberg report from Gurman outlined Project “Breakout,” a multi-year project to build out an  in-house payments platform with tons of capabilities, including “tools for calculating interest, rewards, approving transactions, contacting and reporting data to credit bureaus, accepting or rejecting applications based on its own risk assessments, determining and increasing credit limits, and handling transaction histories.” Those functions are typically handled by the card processor or a bank, not the consumer-facing product on top (by comparison, only a few neobank have built this.) 

Apple also bought a UK-based fintech startup called Credit Kudos for a reported $150m in March of this past year. Weird! According to the company’s site, which was surprisingly still up, it  “leverages Open Banking to enhance affordability and risk assessments” that uses “transaction and loan outcome data” to underwrite users. Apple’s also hiring for these areas–risk, a head of data science for Apple Card with consumer lending experience (as well as 200+ other jobs that reference “payments” and 55 that reference “payments platform.”)

There are a lot of similarities in strategy—before Shopify launched Shopify Capital, and the number of other fintech products, Shopify built out a payment gateway to become a payment facilitator. In English, Shopify built out a bunch of payment infrastructure so that they could process payments on behalf of their sub-merchants. Stripe, which works with Shopify on this, has a great guide on what payment facilitators do. That not only enabled Shopify to make money on payments but also gave them more data visibility on their merchants too. By getting better insights, Shopify could determine which merchants were growing fast and could use an injection of capital to fund inventory, buy more supplies, or whatever that merchant would need to grow. In Q1, Shopify lent nearly $350 million in loans to merchants on its platform. 

By becoming a payment facilitator, Apple can also capture a larger slice of payments revenue than before. But it also gives them a platform to collect all the transactions on the Apple ecosystem and process them through one singular funnel—giving them data visibility on how consumers spend with Apple and on Apple devices. And with Apple Pay Later serving as a BNPL software layer on top of all Apple Pay transactions, a large percentage of the transaction volume Apple will be siphoning through its payment system could be shifted to its new consumer lending division. 

Apple has a ton of advantages here—Apple’s been running an online e-commerce store for decades via the iTunes Store and the App Store and the company has around $200 billion in cash. Apple will reportedly be funding “Apple Pay in 4” loans while having Goldman fund the larger installment loans, giving them insight as a consumer lender without having to dive in headfirst. 

The question is: if Apple’s lending off its balance sheet and collecting revenue from a lending product, it does make more sense than ever for Apple to become a bank. By being able to hold consumer deposits, Apple not only lowers the risk of default and non-payment by having access to a user’s funds, but it also makes it cheaper to lend off of those deposits. That seems a bit far off, but a simpler way would be to apply for an Industrial Loan Charter like Square. A May 2022 congressional report outlining Big Tech initiatives in finance and fintech highlighted ILC’s as a way for nonfinancial firms to offer financial services: “…a Big Tech with an ILC charter could benefit from access to deposits and deposit insurance without the increased regulatory burden and costs of consolidated financial oversight by the Federal Reserve System.”

Over the past decade of fintech, one fact has been abundantly clear—distribution is king. With Apple now enabling millions of dollars in transactions through Apple Pay and Apple Card, creating a BNPL software layer on top to monitor every transaction and turn it into an installment loan could be as transformative to Apple’s business as Shopify Capital was. 

And what about merchants? Well more on that next week but this has huge implications for them too. Apple will not only have the infrastructure to support new initiatives with merchants, but has already started testing turning iOS devices into payment terminals. With Apple sitting at the nexus of consumer physical and e-commerce retail, there’s a clear path to tackle merchant financial services too.