The National - How Apple is giving US banks a run for their money

Apple's entry into the US financial services sector with a high-interest savings account will drive robust competition among smaller banks, online lenders and credit unions, benefiting consumers as they seek the highest yield possible to grow their savings, according to analysts.

However, larger US banks are unlikely to raise the “next to nothing” annual percentage rates (APY) they offer to savers in response to Apple's competitive market rate.

“The best yields tend to be offered by online banks and smaller banks and credit unions. The largest banks are offering next to nothing on deposits,” Ted Rossman, senior industry analyst at New York-based personal finance website Bankrate.com, tells The National.

“I think competition will remain robust among the smaller institutions and the online banks that compete on rates, but I don’t see the big banks moving their rates much, if at all. They don’t compete on rates.”

On Monday, the iPhone maker said Apple Card users in the US could open a savings account with investment bank Goldman Sachs that carried an APY of 4.15 per cent — more than 10 times the national average.

The US national average APY on savings accounts is currently 0.35 per cent, according to Federal Deposit Insurance Corporation (FDIC) data.

Apple’s savings account comes with no fees, no minimum deposits or balance requirements, and users can manage it directly from the Apple Card in their Wallet app, the company said. However, there is a balance limit of $250,000 — the maximum insured amount for deposits under FDIC regulations.

“This competitive interest rate could incentivise Apple Card users to consider utilising Apple's savings account as a way to potentially earn more on their savings,” says Vijay Valecha, chief investment officer at Century Financial.

“This would likely create increased competition in the banking industry, as Apple's brand recognition and massive customer base could attract a large number of consumers seeking higher returns on their savings.”

While Apple’s APY of 4.15 per cent is a competitive rate, it is not the highest on the market, according to Bankrate data.

The highest APY in Bankrate’s database is 4.81 per cent, which is being offered by online bank UFB Direct.

This is followed by an APY of 4.75 per cent being offered to savers by online lender CIT Bank, a division of First Citizens Bank, which recently acquired collapsed Silicon Valley Bank.

Based on Bankrate’s data, Apple’s 4.15 per cent APY is the 11th-highest yield on the market.

In comparison, bigger name banks such as Wells Fargo is offering an APY of 0.15 per cent, while Bank of America and Chase have one of the lowest APYs on the market, at 0.01 per cent, according to Bankrate.

This has incentivised savers in the US to switch to more competitive interest rates as the majority of larger banks continue to offer customers low savings yields despite consecutive interest rate hikes by the US Federal Reserve.

“Savvy consumers and businesses have moved their money to banks and credit unions offering better deposit rates,” Mr Rossman says.

Last month, the Fed raised interest rates by 25 basis points, bringing the Federal Open Market Committee's short-term rate to between 4.75 per cent and 5 per cent, the highest level in 16 years.

It was the Fed's ninth interest rate increase over the past 12 months to combat inflation, which reached a 40-year high of 9.1 per cent last June, and restore price stability.

“Apple’s foray into finance has the potential to disrupt traditional banks, as its strong brand recognition and extensive technological capabilities may attract a significant portion of consumers who are looking for alternative banking options,” Mr Valecha says.

“This could impact traditional banks' customer base and revenue, as consumers may choose to move their savings to Apple's high interest savings account.”

This is already being seen, with large financial groups Charles Schwab, State Street and M&T shedding $60 billion in combined bank deposit outflows in the first quarter of this year, as customers moved their money in search of higher returns, the Financial Times reported on Monday.

The flight in deposits was also fuelled by the collapse of Silicon Valley Bank, Silvergate Capital and Signature Bank in March, the FT said.

Instead, savers are turning to higher yield products such as money market funds and bonds, especially short-term government bonds, which recently recorded an influx of deposit inflows, Mr Rossman says.

However, many savers are still not earning enough on their deposits.

“More than three quarters of savers [in the US] are earning less than 3 per cent — this is a missed opportunity, since everyone needs emergency savings and you might as well earn as much as you can on those funds,” Mr Rossman adds.

“This could represent hundreds or maybe even thousands of dollars in free money each year.”

Bankrate’s 2023 Online Savings Survey, published last month, found that 75 per cent of online accounts in the US offer an APY greater than 3 per cent.

This is despite only 22 per cent of respondents to the survey saying they are earning 3 per cent or more on their savings accounts, while 16 per cent of savers are not earning any interest at all.

Among Americans with short-term savings, only 7 per cent of savers are earning 4 per cent APY or more on their savings and an additional 14 per cent are earning between 3 per cent and 3.99 per cent APY, the survey — which polled more than 3,670 US adults between February 28 and March 3 — found.

“Higher returns on federally insured savings and money market accounts represent the only free lunch in finance,” Greg McBride, Bankrate’s chief financial analyst, said at the time.

“You get additional return and don’t have to take any investment risk to get it.”

Millennial savers are most likely to earn 3 per cent or more on their savings (26 per cent), compared with 23 per cent for both Generation X and Generation Z, and 17 per cent of baby boomers, the Bankrate survey found.

Meanwhile, one of the key features of Apple's savings account is the ease of setting up an account directly from a user’s Wallet app on their iPhone, according to Mr Valecha.

This makes it convenient for existing Apple users to open and manage a savings account without the need for a minimum deposit or balance requirement, he adds.

When customers use their Apple Card they receive cashbacks ranging from 1 per cent to 3 per cent on all purchases.

The cash rewards can be transferred to a regular bank account, used for bill payments or to send money to friends and family. They can also deposit their cash rewards in the new savings account.

“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,” Apple said on Monday.

Last month, Apple also introduced Pay Later in the US. Based on the popular buy now, pay later model, it allows users to break up their purchases into four instalments over six weeks with no interest or fees.

Users can also apply for loans ranging from $50 to $1,000 through Pay Later.

The service is being offered through Apple Financing, Apple's new subsidiary that is responsible for credit assessment and lending.

The seamless integration with Apple's existing ecosystem of products and services could attract a large number of consumers seeking higher returns on their savings, Mr Valecha says.

However, it could also raise concerns about data privacy and security, as Apple collects financial data from its customers, he adds.

“Ensuring the privacy and security of this data will be critical to maintain consumer trust,” he says.

“As with any financial decision, it's important for consumers to carefully evaluate their options and make informed choices based on their individual financial goals and needs.”

The recent bank failures have also highlighted the importance of protecting US consumers’ savings deposits, Mr Rossman says.

In March, tech-heavy lender SVB became the biggest bank failure after Washington Mutual's collapse in 2008, which triggered the global financial crisis.

It became the starting point for a series of bank collapses in the US, including Silvergate Capital, Signature Bank and First Republic.

“Some people have moved their money to the largest banks — those that are deemed globally systematically important — as a result,” Mr Rossman says.

However, FDIC insurance should be the main consideration — or the government-backed National Credit Union Administration (NCUA) insurance in the case of credit unions — for savers to protect their money.

“As long as you’re within those limits [of] $250,000 per depositor per ownership category, you’re fully protected,” he adds.

“Go for the highest yield — it doesn’t matter if you’ve never heard of the bank before. As long as it’s protected by FDIC or NCUA insurance, your money is just as safe there as it would be in the giant megabank with a branch on every corner.”