As Apple and Goldman Partner on Savings, Questions on Marcus' Future Grow
OppFi's Setback on "True Lender" Fight, Republicans Urge OCC to "Provide Clarity" on Bank/Fintech Partnerships
Hey all, Jason here.
This time next week, I’ll probably be trying to ignore my jet lag and fall back asleep so that I’m not a total zombie on the first day of Money20/20.
With the surge in interest around regulation of bank/fintech partnerships, want to give a quick plug for a panel at the event on “The Evolution of the Fintech and BaaS Partner Ecosystem,” featuring speakers from Performline, Affirm, and Cross River Bank — details here. If I haven’t gotten sidetracked somewhere, you’ll find me in the audience!
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As Apple and Goldman Partner on Savings, Questions on Marcus' Future Grow
In a move certain to touch off another round of “Will Apple Become A Bank?” speculation (a question that doesn’t even really make sense), last week the company announced that, through partner Goldman Sachs, it will offer high-yield savings accounts within its Apple Wallet.
The savings account announcement is one of several recent developments across both companies’ consumer financial services strategies. In chronological order:
April 2022: news of Apple’s “Project Breakout,” in which it intends to in-source financial services capabilities, like issuing-processing and credit underwriting, is revealed. This came about a week after Apple acquired banking transaction analytics startup Credit Kudos.
June 2022: Apple announces plans to launch a buy, now pay later offering, “Apple Pay Later,” as part of iOS 16. In line with its “Project Breakout” strategy, reports indicated Apple — not credit card partner Goldman — would handle credit underwriting and funding of the loans. Still, Apple would need Goldman to serve as a BIN sponsor to facilitate the offering.
August 2022: Goldman discloses it is facing a CFPB inquiry over its “credit card practices” (presumably the Apple Card).
September 2022: CFPB’s report on buy now, pay later is released.
September 2022: Reports indicate that the Fed is scrutinizing Goldman over losses in its consumer business.
September 2022: Apple releases iOS 16 — without its promised BNPL feature.
September 2022: Reports indicate Apple Pay Later will be delayed until sometime in 2023 due to “technical and engineering” issues.
Meanwhile, Goldman has faced a consistent drumbeat of less-than-positive coverage about its consumer efforts, including of high charge offs on the Apple Card portfolio, a rumored co-brand deal with T-Mobile, and several in-depth pieces critical of Marcus’ performance and Goldman executives.
Where Does A Savings Account Fit In?
In trying to parse where this latest announcement fits in the wider context, it is worth remembering that: Apple and Goldman are both huge, bureaucratic organizations with competing interests within and certainly between them; and that the savings account project has probably been in the works for at least six months and, in all likelihood, much longer.
Apple cannot “become a bank” in the conventional sense of the term
It is also worth remembering that Apple cannot “become a bank” in the conventional sense of the term. While it isn’t uncommon in other countries for commercial businesses to own and operate banks, this has generally been prohibited in the United States since the passage of Glass-Steagall after the Great Depression; even with the effective repeal of many elements of Steagall in the late 1990s, the Bank Holding Company Act continues to require a separation between “banking” and “commerce.”
In theory, Apple (or other commercial business, like Walmart or Amazon), could pursue an industrial loan company charter, though, in practice, the likelihood of this being successful is extremely low.
So, where does this savings account fit into Apple’s strategy — and Goldman’s?
The feature that Apple has announced is that Apple Card users will be able to redirect their “Daily Cash” into a high-yield Goldman Sachs savings account accessible through the app.
Users currently receive 1-3% cash back, depending on transaction type, which is deposited daily (rather than at end of month) to a user’s “Apple Cash Card.” The Apple Cash Card is essentially a prepaid debit account provided by Green Dot.
From the Cash Card account, users can do four things:
spend it directly from the Cash Card
send it as a P2P payment to other Apple users
apply it against their outstanding Apple Card balance
move it to an external bank account
I would love to see usage stats, but I feel confident guessing that most all users either apply their Apple Cash to their card balance or sweep it to an external bank account. Apple has an uphill battle in attempting to displace Venmo and Cash App for peer-to-peer payments in the United States.
Now, with the addition of a Goldman-powered high-yield savings account that sits along side the credit card, users can opt to have their cash back automatically deposited there instead. While Apple’s announcement didn’t state an interest rate, it’s likely to match whatever Goldman is offering on its Marcus-branded accounts — currently 2.35% APY.
However, it’s clear that Apple and Goldman are hoping that the account will become a home for more than users’ spare change. The images used in the product announcement demonstrate a user adding to their savings balance both from receipt of an Apple Cash P2P payment and from an external linked bank account.
What does Apple get from all of this? Even if the account itself is at Goldman, like with the credit card, the UX is Apple’s. Adding the feature gives users a reason to keep funds within the Apple/Goldman ecosystem — something the existing options (Cash Card and P2P payments) seemingly have failed to achieve.
It’s also likely Apple is receiving some kind of commission from Goldman based on the number of accounts and/or total savings account balances generated from the offering.
For Goldman, the savings feature speaks to the only part of its consumer strategy that has been a clear success: gathering cheap, sticky deposits. While the savings account offering appears that it will be limited to Apple Card holders at launch (likely to simplify KYC/account opening processes), there’s no reason not to make it generally available to US (and, eventually, UK) Apple users in the future.
Goldman’s Shrinking Consumer Ambitions
The news of an Apple savings account is a much needed PR boost for Goldman’s fledgling consumer ambitions.
Still, what’s missing from the announcement is also notable: “Marcus” fails to make an appearance.
Now, this shouldn’t be entirely surprising. The back of the Apple Card includes the Goldman Sachs logo, rather than the firm’s down-market Marcus brand — a decision Apple reportedly pushed for during Apple Card negotiations.
But amid reporting that internal and shareholder discontent with the consumer business’ performance is rising, the missing “Marcus” may be a sign of things to come.
A Marcus checking account, already significantly behind schedule, was once slated for a mass-market roll out. Now, reports indicate, it will be offered first to existing wealth management clients, in order to save on the marketing expense of a general rollout.
Further, Bloomberg reports Goldman is considering what would be its third major reorganization in four years, which would combine the firm’s asset management and wealth businesses — further deemphasizing Marcus.
If you consider the Apple savings news through this lens, it could be interpreted as a sign of Goldman rethinking its consumer strategy. Instead of continuing its efforts to create a full-stack, direct-to-consumer digital bank under its own brand, Goldman can leverage the pieces it has created and partner with others, like Apple, on distribution.
Such a strategy would capitalize on Goldman’s assets and strengths — bank charter, balance sheet, risk management, compliance, legal — and pair it with Apple’s: massive reach, product, UX, marketing/advertising, and customer service.
This approach — what we’re now calling “banking-as-a-service” and “embedded finance” — can be an immensely profitable banking business model.
But executing such a model requires speed and flexibility in how and with whom a bank partners, something that tends to favor smaller, more risk tolerant banks.
If Goldman wants to recoup the billions it has spent building its consumer infrastructure, it’s going to need more distribution partners than just Apple.
OppFi Faces Setback in California “True Lender” Fight
Earlier this month OppFi faced a setback in its bid to continue operating in California, when a California state court overruled the demurrer it filed that sought to have the California DFPI’s cross-complaint, which argues that OppFi is the “true lender,” dismissed.
The crux of the case is a disagreement over whether OppFi, a non-bank fintech, or FinWise, its Utah-based bank partner, is the “true lender.” FinWise enjoys state interest rate preemption, which enables it to “export” the interest rates of its home state of Utah into California.
As a non-bank lender, OppFi itself does not enjoy such protections. Instead, OppFi’s model depends on its bank partner being considered the “true lender,” as OppFi’s loans carry APRs as high as 160% — far in excess of California’s usury cap.
OppFi is arguing that it is a technology, marketing, and servicing vendor to FinWise Bank — the “true lender.”
California’s financial regulator, the Department for Financial Protection and Innovation, is arguing that the arrangement is a thinly disguised attempt to evade state law and that, because OppFi holds the predominant economic interest in the loans, OppFi is the “true lender.”
Per analysis from law firm Ballard Spahr (emphasis added):
“In its demurrer to the cross-complaint, OppFi did not raise Section 27(a) of the FDI Act. It argued that the DFPI’s claim that the Program Loans violate the CFL fails as a matter of law because the Program Loans were made by the Bank and loans made by a state-chartered bank are exempt from the CFL’s rate cap pursuant to the usury exemption for state-chartered banks in the state’s Constitution and the CFL. It also argued that the DFPI’s attempt to avoid this result by asserting that OppFi is the “true lender” on the Program Loans has no basis in California statutes or common law.
After reviewing numerous California decisions, the court characterized the demurrer as a request by OppFi for the court “to ignore the substance of the loan transactions as alleged in the cross-complaint.” It then recited various characteristics of the Program alleged by the DFPI in its cross-complaint and stated that “[a]s alleged, the substance is that OppFi is the lender.” The court then concluded that “[i]n light of long-standing California law, at this early stage, the court cannot rule as a matter of law that FinWise is the lender of the loans at issue.””
While, in this case, it was interest rates that reached 160% APR that drew the regulator’s attention, the underlying legal questions around “true lender” are rate agnostic.
If the case were to be decided in the California DFPI’s favor, it would introduce greater uncertainty into all fintech-bank lending partnerships — not merely the small number used to originate loans at rates that exceed state usury caps.
The Ballard Spahr analysis makes this point in its conclusion by saying (emphasis added):
“We believe this case is extraordinarily important. Unless it settles, it creates a risk to the viability of bank model online lending that is structured like OppFi’s Program…
In light of the threat posed by this case, banks and non-banks that are engaged in bank model online lending should now take a fresh look at the structure of their bank model and consider what steps they can take to mitigate risks.”
Republicans Urge OCC to “Provide Certainty” for Bank/Fintech Partnerships
It’s 2022, and everything is partisan — fintech and banking-as-a-service regulation is no exception.
Last week, the ranking member of the House Financial Services Committee, Patrick McHenry (R-NC), led the Republican members of the Task Force on Financial Technology in sending a letter to acting Comptroller of the Currency, Michael Hsu.
The five Congressmen expressed concern that recent statements and actions from the OCC would be detrimental to “innovation,” arguing (spacing adjusted and emphasis added):
“Innovation is a critical component of the U.S. economy, and we are concerned with the potential for further uncertainty around partnerships and the consequences for consumers.
New financial products and services can drive down costs and foster greater inclusion and competition in our financial system.
Under the previous administration, the OCC worked to provide banks and their customers with a clear understanding of the regulatory and supervisory expectations surrounding emerging products and services and how to properly assess risk.
While we expected the OCC to continue to provide clear rules of the road and support innovative banking services, such has not been the case.”
The letter requests the OCC to respond to questions on numerous topics, including:
how the OCC will go about determining what is ‘acceptable’ in fintech-bank partnerships
how the OCC will ensure that the regulatory burden on banks/fintechs is commensurate with the actual risks they pose
how the OCC’s stance may impact the underbanked, communities of color, rural communities, and small business
if, as it said it would, the OCC is improving its staff’s technological expertise
how exactly the growth of fintech-bank partnerships, if left unchecked, could result in a ‘crisis’
While there is little chance this inquiry will in any way change the OCC’s current course of action on bank-fintech partnerships, it serves as a preview of what is likely to come if Republicans take control of the House and/or Senate in November.
Particularly if there’s split control of Congress, which seems increasingly likely, Republicans are likely to focus their limited power on launching time-consuming inquiries into regulatory agencies across the government — including the OCC.
CB Insights’ Fintech 250
CB Insights’ annual “Fintech 250” dropped last week.
The list is meant to include the “most promising private fintech companies in the world.” Per CB Insights, the companies “were chosen based on factors including proprietary Mosaic scores, funding, market potential, business relationships, investor profile, news sentiment analysis, competitive landscape, team strength, and tech novelty. The research team also reviewed over 2,000 Analyst Briefings submitted by applicants.”
No surprise that I see a lot of familiar and well-known names on here, including many companies I’ve had the chance to speak with over the course of the past year.
Congrats to everyone featured in this year’s list! It’s a notable feat in any year, and even more so this one, given the difficult operating environment.
Other Good Reads
How Fintech VCs Can Actually Be Helpful (Fintech Takes)
What the Federal Crackdown on Bank+Fintech ‘BaaS’ Partnerships Means (The Financial Brand)
How a New Anti-Woke Bank Stumbled (WSJ)
Watch: Pardon the Finterruption (Money Experience Summit)
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