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Last year, Apple surprised many in the financial industry when it entered into a partnership with Goldman Sachs. The behemoth Wall Street investment giant has traditionally been better known for catering to billionaire stock brokers and investment bankers than consumer financing, making it a seemingly odd fit for the almost entirely consumer-focused Apple.
While the original deal only spoke of lower-cost financing options for customers, a few months later it was revealed that the two were actually working on a new Apple Pay credit card that’s now expected to launch later this year. However, a new report from The Wall Street Journal reveals that the background behind the deal between the two heavyweights actually runs a lot deeper, and is showing the influence that tech companies like Apple are having on the big financial firms of Wall Street and how it stands to shape the intersection of banking and technology.
Offering financing for its customers is something Apple has been doing for years, but as the Journal notes, the company had previously been relying on a myriad collection of smaller banks to handle these deals. Sources note that this set of fragmented relationships was becoming frustrating for Apple, so as of two years ago, it decided that it was time for it to rethink the business and find a new single partner with the substance to bring a significant amount of financial muscle to the table.
Not long after Apple began putting out feelers in the banking industry, established consumer banking firms like Citigroup and JPMorgan Chase made serious bids to woo Apple as a partner. However, Apple surprised almost everybody by going with Goldman Sachs — a name virtually unknown outside of the hardcore investment banking world.
While there’s no doubt that the partnership is an unusual one, it actually makes a lot of sense for a company like Apple, which has a long history of thinking outside of the box. With very little experience in consumer finance, Goldman is likely to be much more flexible and open to new initiatives than traditional banking groups, and Apple likely has plenty of those ideas on how to transform traditional finance. With both Apple and Goldman sitting on hundred of billions of dollars in their balance sheets, they’re also both well-positioned to take more risks while also having the necessary clout to provide a higher chance of success.
Now you’ve got a whole new competitor that’s larger than anyone else in financial services. It’s game on.Mal Durkee, former Merrill Lynch investment banker
Goldman has already dipped its toes into consumer finance with Marcus, an online bank that it introduced three years ago, and undoubtedly hopes that Apple’s extremely loyal user base will give it a more solid entry into its target market of wealthy and tech-savvy young adults.
Meanwhile, however, both companies are already starting to “think different” with the impending release of an Apple Pay credit card — likely a virtual card that will exist only within the iPhone Wallet app — as well as a whole new set of “financial health” features that are expected to bring Apple’s expertise with fitness and health tracking to bear in helping users manage their finances and control spending and debt.
There have been rumours for years that Apple was considering a direct move into the financial industry, with the hopes that it could “reinvent banking” in the same way that it has in other areas. However, financial regulations make it almost impossible for any Silicon Valley tech company to pull this off by themselves, which is leading to these kinds of partnerships between companies that would otherwise prefer to go it alone.
As much as Apple needs Goldman’s financial clout, Goldman also needs Apple’s reach and expertise. As the stock market slows, the Wall Street investment firm has been looking to expand into consumer-focused online savings and lending, and Apple’s resources, technological savvy, and customer relationships give it a solid starting point.
For Apple’s part, Goldman became its choice largely because it was a newcomer to the game, not only willing to take risks but able to easily cooperate with Apple’s plans without the burden of having to balance existing relationships with other credit-card partners. Goldman has also been Apple’s primary investment bank for years, having brokered apple’s $17 billion bond sale in 2013 and serving as a regular advisor for Apple’s acquisition deals.
At this point, as much as Goldman will be providing the financial muscle, it would seem that Apple is setting much of the direction for the new partnership. The Apple-Goldman deal goes well beyond Apple’s previous financing deals, and could signal the first big step to Apple effectively becoming its own financial services provider.