You’ve Been Warned: Apple Is Coming for Payments

This was inevitable.

You can’t keep growing 10% as the baseline number gets larger and larger without venturing into new arenas.

And it appears Apple is finally reaching that plateau with revenues in the hundreds of billions of dollars.

Apple’s revenue now has periods where it declines significantly.

This knowing that the rate of inflation over the past 12 months still averaged much, much higher than the trash put out by the BLS when you account for actual spend (i.e. food, energy, shelter, and compouding effects); in other words, Apple’s revenue is really stalling.

Apple’s reality is that everyone who wants (and can afford) an iPhone has one. And as the iPhone gets more powerful it displaces the need for other hardware modalities:

However, the period [Q3 2023] marked Apple’s fourth consecutive quarter of year-over-year declines in total revenue, as Mac sales declined 34% (to $7.61 billion) and iPad sales dropped 10% (to $6.44 billion). 

https://variety.com/2023/digital/news/apple-q4-2023-earnings-services-revenue-record-1235778346/

Apple’s services business unit is still chugging along at 16% growth but we’re not sure how much longer Apple will be able to charge 30% tariffs on their App Store, which accounts for a large portion of services revenue.

At some point Apple will be legislated like monopolies/utilities we imagine, just like Google seems to be facing.

We’re not calling for the legislation per se, but we can definitely see things breaking this way.

When you get to the the size of Apple there are only two real vectors for digital growth (we assume Apple doesn’t want to get into non-tech lines of business like real estate or hard assets):

1. Finance
2. Healthcare

Finance touches everything. And as odd as this will sound, we can tell you from personal conversations with asset allocators who manage trillions of dollars that there is no shortage of funds, only vectors that drive good returns.

Finance is a large enough market where Apple could add hundreds of billions (or more) in new revenue, assuming it executes well.

The other is healthcare, where the US parades out a socialist medical system only to pretend it’s capitalistic. We sadly get the worst of both worlds: relatively crap coverage and ballooning costs.

Apple, with all the health data they’re collecting, could legitimize itself as an industry player with a foray into the healthcare industry. No clue if it looks like an insurance program, private clinics, or something else, but it’s surely on their radar.

This periodical knows much less about healthcare than payments, however, so we’ll be focusing today’s discussion on Apple’s potential in finance.

Let’s start by noting that Apple is already a bank.

Sort of.

No, it doesn’t have a full-on bank charter, which comes with tons of regulatory headaches, but it’s basically a shadow bank, and these entities hold half the world’s assets.

Here are Apple’s financial products:

1. Business lending. Apple Financial Services underwrites financing to education and business sectors to help move more of their hardware.
2. Apple Card. Via a crumbling partnership with Goldman Sachs, Apple offers consumers a credit card.
3. Savings account. Dovetailed with their credit card, Apple Card users can grow their daily rewards with a savings account.
4. Apple Pay. Use your Apple device to digitally pay at millions of local businesses.
5. Apple Pay Later. Apple’s take on BNLP, Apple underwrites the risk and allows consumers to pay over time.
6. Apple Cash. Like Venmo, Apple users can send money to anyone on iMessage with a linked debit card.
7. Apple Wallet. This is a bit of a catch all for some of Apple’s finance offerings but does do some cool things like promote digital ID so you can leave your wallet at home in certain states.

Apple has accomplished much of the above through partnerships, but as their growth slows they will need to verticalize and own more of the pie.

If we look at the options on the table, gobbling the credit card opportunity is the largest.

Visa and Mastercard pound out a combined ~$50B in annual revenues at what is realistically 99.99% margins (it takes $6M to build and run the card schemes using the math from PIX).

So despite all the employees who work at the two card schemes it takes nothing to run those businesses. We’ve literally had executives at the card schemes tell us that the reason they employ more than 10 people is to avoid being legislated like the duopolies they are.

Classic.

So thats $49.994B of annual EBITDA, or what would be a 40% increase to Apple’s $125B in EBITDA.

We’re not saying Apple will displace the entirety of Visa and Mastercard out of the gate, but it’s a very enticing ball to swing at.

And that’s just the card schemes: once you add the revenues from the issuing and acquiring banks you’re really looking at big numbers.

One estimate puts US 2023 issuing revenues at $182B. McKinsey estimates that US SMBs will spend $100B on acquiring by 2025 (out of a total of $150B in US acquiring revenues) and if you include all of the financial products around the processing – software and services, commerce enablement, balance-sheet offerings – it’s a $1.2T US opportunity.

Big, big numbers, even if you’re Apple.

Fortunately for Apple, they have laid so much of this groundwork that it’s a relatively short walk to execute on the opportunity.

To create a network Apple needs both sides of the market.

And they’ve got it.

Apple has 6.7 million people using Apple Card.

There are over 500 million people who are estimated to use Apple Pay across the globe, with 55 million using it in the US.

It’s not exactly fair to compare this with issuing banks since Apple Pay users aren’t likely to use Apple Pay for every transaction, but assuming Apple did convert these people it would make Apple the same size as Discover Networks, or the fourth largest issuing bank.

Why do so many people use Apple Pay?

Because since its founding in 2014, Apple Pay is now accepted at over 85% of US retailers. That’s 850,000 doors.

Compare that to Clover who’s in 200,000 rooftops.

Apple is on a different level.

Apple has patiently built a two-sided marketplace over the past two decades. They’ve clearly got someone who knows what they’re doing and now it’s just a matter of execution.

What could Apple do?

Apple must find a way to incentivize consumers to use Apple as their deposit institution. Once the’ve done this, Apple can stitch Apple Pay together with a bit of logic:

IF the user uses Apple Pay as debit, instantly transfer funds to merchant via cheapest route possible,

ELSE underwrite transaction and float the user’s credit and make 24% APR for the pleasure.

All Apple needs to convince merchants to open an Apple Deposit account is not rape them for 3% on each transaction.

It’s that simple, frankly.

Getting consumers to make Apple their deposit account will take the most work, but given time Apple can run enough tests to figure out the appropriate carrots and sticks, and it’s not as if Apple is running out of money or hasn’t shown that they can play the long game on strategy.

Here’s a graphic we built to show how Apple’s rail could work.

The connecting infrastructure is what we’re calling Apple Deposit, which is a bank account controlled by Apple. Apple can seamlessly move funds between account holders for free and in real-time.

If an account holder doesn’t have a balance then Apple can underwrite the credit and charge high rates like any other issuing bank.

The most novel aspect would be the cost of payments: can Apple do something that convinces consumers to take lower rewards so merchants consider Apple Pay a no brainer?

Currently Apple Pay is tethered to a consumer’s credit card, yielding the merchant no real benefit.

The consumer gets their credit card “rewards” when using Apple Pay, even if in reality the consumer is losing 3% on every transaction because they’re being surcharged to death.

If Apple could convince US consumers to behave like Europeans, where rewards are effectively non-existent, it would have something really powerful. Now the cost for using Apple Pay as a merchant is much lower than conventional card schemes and merchants would sure as shit be pushing consumers to pay with Apple Pay.

Think of something like this: every Apple Pay purchase is 2% lower than the merchant’s published price. Merchant saves money, consumer saves money, and over time as Apple pushes everyone it the listed price would just be the price that consumers pay, and the merchant sees deposited.

See our piece on our proposed Discover strategy.

And once Apple had all this data they could expand into a ton of other merchant product categories: lending, etc..

Let’s not forget that Square’s Cash App already does this, it’s just at a much smaller scale and until recently was dependent on the merchant using Square POS.

Card processing is a very easy thing to execute once you have network scale, and we cannot think of a more profitable line of business: virtually every dollar would drop to Apple’s bottom line.

Feels like this is just a matter of when, not if.