With all the volatility in the US banking sector after the collapse of Silicon Valley Bank, Signature, Silvergate, and First Republic, depositors have been spooked. To allay their fears, they have moved money into safer havens. One recipient has been Bitcoin, another has been the larger banks that are deemed too big to fail, and the third has been into banking products offered by non-banking institutions. In May 2023, Apple launched a savings account and attracted a billion dollars in four days in a quarter of a million accounts. This new account is only available to iPhone users with an Apple card offering an annual return of 4.15 percent which is considerably higher than the rates offered by traditional banks.
This is the press release from Apple:
Starting today, Apple Card users can choose to grow their Daily Cash rewards with a Savings account from Goldman Sachs, which offers a high-yield APY of 4.15 percent — a rate that’s more than 10 times the national average. With no fees, no minimum deposits, and no minimum balance requirements, users can easily set up and manage their Savings account directly from Apple Card in Wallet.
“Savings helps our users get even more value out of their favorite Apple Card benefit — Daily Cash — while providing them with an easy way to save money every day,” said Jennifer Bailey, Apple’s vice president of Apple Pay and Apple Wallet. “Our goal is to build tools that help users lead healthier financial lives, and building Savings into Apple Cards in Wallet enables them to spend, send, and save Daily Cash directly and seamlessly — all from one place.”
Once a Savings account is set up, all future Daily Cash earned by the user will be automatically deposited into the account. The Daily Cash destination can also be changed at any time, and there’s no limit on how much Daily Cash users can earn. To build on their savings even further, users can deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance.
Users will also have access to an easy-to-use Savings dashboard in Wallet, where they can conveniently track their account balance and interest earned over time. Users can also withdraw funds at any time through the Savings dashboard by transferring them to a linked bank account or to their Apple Cash card, with no fees.
The new Savings account from Goldman Sachs builds upon the financial health benefits that Apple Card already offers, with absolutely no fees, Daily Cash on every purchase, and tools that encourage users to pay less Apple Card interest — all, while offering privacy and security users expect from Apple.
This event is significant for the following reasons:
People Are Fed Up with their Banks
You will notice how much emphasis is placed on convenience. It is supremely easy to open this Apple savings account - there is no need to go into a branch and fill in a bunch of forms. Apple has once again focused on all the pain points people have with their banks and worked to provide a seamless solution. Users can withdraw funds at any time - they are not restricted to doing so during bank hours. There are no fees, it is easy to track balances and interest earned. It builds on financial health benefits that already exist with Apple Cards which encourages users to pay less interest. Banks have no interest in encouraging you to pay less interest - they want the exact opposite. They want you to pay as much interest as possible! Technology companies are moving in to eat the lunch of the banks.
This Truly is the Best of All Worlds
You will notice that this savings account is offered in collaboration with Goldman Sachs. One thing you need to understand about global banks is that they are not all created equal. The banking world is divided into two groups - approximately thirty-two banks that are deemed too big to fail and the rest. So what exactly is a bank that is too big to fail? After the financial crisis of 2008, global banking regulators came to the conclusion that certain banks had grown so large and their tentacles were so deeply embedded into the global economy, that if their failure could result in systemic problems in the economy, every effort should be made to insure these banks were protected. They would receive preferential funding at preferential rates, and if at any point they entered into difficulty, they would be protected by governments and central banks. In other words, it would be almost impossible for them to fail. Goldman Sachs is on that privileged list of banks. This means that your savings are protected by Apple’s balance sheet, and Goldman Sachs's balance sheet, and you will enjoy FDIC insurance up to $250,000. This means your hard-earned savings are as close to bulletproof as possible. You get all the benefits of interfacing with one of the greatest technology companies of all time, along with the security and peace of mind of the backing of one of the most secure banks in the world and insurance from the FDIC.
Money is Moving to Safe Havens
Money is moving out of low-yielding bank savings accounts. Although 1 billion dollars is a drop in the ocean in the multi-trillion-dollar savings market, it shows that depositors are concerned about the health of banks that are not too big to fail. You need to remember that almost every bank in the world is technically insolvent. When you deposit money into your bank, that money is almost immediately lent to another customer. This is known as fractional reserve banking and in some countries, there are no reserve requirements. Prior to the COVID pandemic, US banks were required to hold 10% of their deposits in reserves. If a bank received $1 billion in deposits, it needed to hold at least $100 million in reserves that could not be loaned out. With COVID this 10% was lowered to 0% which meant that banks could lend out as much money as they wanted. This may not sound like much of an issue, but what happens if every depositor demands his or her money at the same time? Deposits that banks receive tend to be short term which means that depositors can withdraw them at any time. The money that banks lend out is longer term - they are used to buy homes, finance businesses, etc. This difference in time frames is known as a duration mismatch. If every depositor demands their money back at the same time, it will be impossible for the banks to call back all their loans which means they would be unable to satisfy the needs of depositors. This is what happened with Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank. These are not the only banks to fail in 2023. There was another bank failure that was more terrifying. The second oldest Swiss bank -0 Credit Suisse, also hit the wall and had to be acquired by the oldest Swiss bank - UBS. The reason why this was terrifying is that Switzerland has been known for its banking industry for many years and is often referred to as the "banking capital of the world.” Switzerland's reputation as a banking hub is due to several factors, including its strict bank secrecy laws, stable political and economic climate, and long history of financial expertise. Many wealthy individuals and companies have chosen to deposit their money in Swiss banks due to the country's reputation for confidentiality and security.
So, what is the downside to this offering from Apple? When you invest in this savings account, you are still exposed to counterparty risk. You are “giving” your money to Apple, who are then handing it over to Goldman Sachs. Although you are contracting directly with Apple, you are exposed to two counterparties, and if either counterparty fails (albeit unlikely), you could be in trouble. You also need their permission to access your money. You do not have direct control over your money. Apple is centralized. Goldman Sachs is centralized. Someone else can make decisions over your money. We live in a centralized world. The internet was supposed to herald the democratization of information and in many ways, it did, at the expense of our personal privacy. Today a small number of companies control an inordinately large amount of information. Google answers the questions of 4 billion people every day and tracks our interests and movements. Your device even listens to you - how often have you mentioned something to a friend - such as a desire to travel to Bali - and then you get a pop-up message for flights to Bali. Apple has over 1.2 billion iPhone users which means it could listen to tens of billions of conversations every day. Financially, there is a centralization of power in the hands of financial companies. When you have money in the bank, that does not mean there is a pile of money in a vault with your name on it. It means there is a big computer, and on that computer, there is a file or document that testifies to the fact that you are the owner of that money. It is possible that the file is backed up in some location other than the physical address of your bank, but the information is stored on a centralized server. In theory, although highly unlikely in practice, a hacker can gain access to that server and steal your money. It is likely the bank will compensate you if the attacker does not steal all the money. Banks are also insured, but you understand what I am trying to say. Your money is located in one physical place and this centralization makes it vulnerable to external and internal threats.
How about a money system that was completely decentralized and you never lost control of your money? In other words, you never had to ask someone's permission to do something with your money. When you use your debit card, credit card, or bank card, and you present that at your local coffee shop to pay for that double cappuccino, you are asking permission from your bank to acquire that beverage. If you have exceeded the limit on your credit card, they can decline it. Does it make sense to you that you need to ask permission to use your own money? Bitcoin is decentralized and permissionless. If you hold your Bitcoin in a private wallet, you are the custodian of it. If on the other hand, you hold it on an exchange, you will need the permission of the exchange to do anything with it.
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