The Strategy Of Apple's Financial Services

Introduction

There are many reasons why Apple (NASDAQ:AAPL) is currently the most valuable company in the world. Its products have become a must-have and the company has been able to leverage its install base to build an impressive ecosystem that locks customers in, making them more valuable overtime for the company.

In this article, I would like to go over one aspect that sometimes is overlooked about Apple's ecosystem. We will consider how Apple is stepping into fintech territory up to the point I actually consider it the best fintech pick among all. Read my previous analysis on AAPL here.

How Apple Became a Fintech Company

Let's take a look at the steps Apple has taken over the past decade.

In 2014, Apple announced for the first time Apple Pay, designed for users to add their credit or debit card on file from their iTunes Store account. Apple boasted about its security and privacy, reassuring consumers that the company would not collect purchase history, nor would it sell to any third party. It is hard to estimate how much revenue Apple Pay generated alone once it was launched. However, if we look at the 2015 10-K, we see that services sales increased by almost $2 billion. Of course, this increase can't be all traced back to Apple since every year Apple is able to grow its previously existing services. But for sure, part of these $2 billion came from Apple Pay.

Fast forward to 2019. In March of that year, Apple introduced the Apple Card, a credit card built into the Apple Wallet app, providing through a partnership with Goldman Sachs and Mastercard. The card showcases a simple application process, no fees, and a rewards program that gives back a percentage of every purchase as cash on customers' Apple Cash card. This was coupled with machine learning and Apple Maps to create an app to help customers better visualize their spending. According to Apple, the Apple Card would lead customers to a "healthier financial life". Through Apple Card Monthly Installments, for example, customers can purchase new iPhones and pay for them over a 24-month period with no interest. In this way, Apple releases a service that leads to further revenue and more spending on iPhone replacement.

In 2021, Apple introduced Apple Card Family enabling people to share their Apple Card and build a Family Sharing group. People are allowed to co-own an Apple Card and share and merge their credit lines.

In 2022, Apple empowered businesses to accept contactless payments through Tap to Pay on iPhone. In this way merchants in the U.S. can use their iPhone to accept Apple Pay, contactless credit and debit cards or other digital wallets through a tap to their iPhone.

Last month, Apple introduced its Buy Now Pay Later service, which allows users to split purchases into four payments spread over six weeks with no interest nor fees.

A few days ago, Apple announced its savings account from Goldman Sachs, offering a 4.15% APY. No fees, no minimum deposits and no minimum balance are required. This service helps consumers leverage their daily cash rewards. This means that once a savings account is set up, the daily cash earned by the user is automatically deposited into the account. Users can also deposit additional funds into the account, if they wish to do so. Funds can be withdrawn at any time by transferring them to the linked bank account or to the Apple Cash card. As usual, no fees are applied.

The goal is building its own float

What is Apple aiming at? I think Apple's case is rather interesting because it shows how a company born as a hardware manufacturer has deeply understood how the hardware products it sells can be a sort of Trojan horse into consumers' spending habits. In other words, Apple is using its device installed base as the foundation of an ecosystem built on top of it. The aim is clear: monetize as much as possible its devices' usage.

As McKinsey shows, many metrics point out how BNPL offers lead to higher spending. Apple is set to benefit from this in multiple ways. The most important of all, however, is now before everyone's eyes: Apple is creating an ecosystem where customers will deposit their money, giving Apple a huge opportunity to create its own float. In other words, Apple receives money upfront and pushes customers to keep it within its ecosystem to earn a return and make their purchases.

I think this is even more important when considering how Apple has made it clear it is aiming at becoming cash neutral. This means Apple wants to have as much cash as it has debt. Cash neutral doesn't mean no cash, but simply that cash and debt balance each other to zero. Apple is targeting this goal through massive share buybacks, dividends and by raising a bit its debt.

Now, by building its new financial services ecosystem, Apple can reach cash neutrality without having to issue more debt. The reason is simply put: its float will provide very low interest financing. True, Apple has a very good credit rating and almost anyone tries to lend money to the company at very convenient rates. Yet, with interest rates rising, Apple seems to be ahead of the game by building its own way to meet its financing needs. This can lead Apple to lower even more the amount of cash it holds on its balance sheet. Where is this money going to go, considering R&D is already well financed? To me the answer is clear: buybacks and dividends. The success of Apple in the financial services industry seems to me something that may trigger a big shift in how Apple manages its balance sheet.

At the end of 2022, Apple services was the second largest source of revenue for the company after iPhone sales, with $78.13 billion. This includes sales from advertising, AppleCare, cloud, digital content, payment, and other services. While not all of this can be linked to Apple's financial services, this number gives an idea of the size of the ecosystem Apple is building. If we add the amount of money customers will deposit in the savings account, we are before numbers that hint how Apple has the strength to build a float of tens of billions. We will need to wait for future earnings calls and financial reports to find out if Apple discloses any number that can help us out. However, as of now, I think Apple's strategy is clear: monetizing its users while building a float that will make its cost of capital even lower than it is today.