Apple Card, fintech, and the future of good money habits

This will date me even more than my nostalgia for Bruce Willis in Moonlighting, but I’m old enough to remember when choosing how to run your financial life meant picking the current account that offered the best freebies.

Branded piggy bank, Young Person’s Railcard, or copy of Now That’s What I Call Music: 17?

Talk about choice paralysis.

As for the banks themselves, there was even less to tell between them. One offered a slightly less ruinous overdraft, another might pay you a few quid on any money it hadn’t nudged you into spending. Once cash machine withdrawal fees were ditched in the 1990s, the banks became interchangeable in most people’s eyes – even if we seldom changed between them.

This bland monopoly invited disruption. It took a while for technology to make that possible, but the past few years has seen a wave of competition.

Young people increasingly wave their phones to pay for things or flash luminescent credit cards that double as flirting tools at the bar. They manage their finances using friendly apps that slide into their direct messages when there’s a service outage. They round up their loose change for a rainy day, and see their spending across town visualised as a heat map. In the US the super-popular Venmo service even turns your spending activity into a news feed that you can share with your friends.

Fintech (that’s short for ‘financial technology’) has exploded, and all this is not even to mention a slightly earlier round of innovation, such as PayPal and the peer-to-peer lenders like Ratesetter.

A list of the UK-based new wave alone sounds like the line-up of a music festival where you’re too out-of-touch to know the bands – Revolut, Monzo, Squirrel, Chip, GoHenry, Dozens, Plum, Yolt, Loot, Exo, Divido, TransferWise, Bean, Tide and many more.1

This list is far from complete. And while London is undoubtedly a hotbed for fintech innovation, there are hordes more doing the same thing around the world.

Now I suspect there’s already a vast range of reactions to this post from the Monevator faithful.

Some of you are old hands at shuffling digital versions of your credit cards or – like my ex, which startled me when I first saw it – paying for almost everything with your phone.

Others had been feeling pretty hip because you just used a contactless card for the first time.2

The point is the financial future is here – if unevenly distributed –  and there’s zero chance of the rate of change slowing.

Apple plays its card

It’s not only two guys in a WeWork office who are trying to shake up financial services.

The world’s occasionally most valuable company, Apple, just unveiled Apple Card, a fee-free credit card that’s linked to Apple Pay and backed by Goldman Sachs.

Due to launch in the US this summer, the tech giant’s card will pay 2% cashback on purchases made with Apple Pay, rising to 3% at the Apple Store or via its (expanding) subscription services.

There will also be a shiny titanium physical card, for those all-important at-the-bar props. You laugh, but when marketing to a generation that routinely uploads photos of their breakfast, this stuff matters.

Vanity will come at a price, however, as cashback with the physical card will only be 1%.

And incredibly it won’t even have a contactless chip in it.3

Apple shares rose on the news of Apple Card (alongside much else) and Visa shares fell, but this may prove misguided. Most of these services run on Visa and MasterCard’s underlying networks, after all.

I think it’s the fintechs who should be most scared, given screenshots like this:

Automatic categorization of spending and maps displaying where you dropped your dough?

This sort of thing was fintech’s domain. They’re going to find it hard to run ahead of Apple and its billions.

Old money

Figuring out the future of fintechs is tricky, then. But divining the fate of existing financial service companies is equally non-trivial.

Take the banks. They’ve been written off by fintechs as lumbering dinosaurs ripe for the devouring.

Perhaps, but in that case start-ups such as those I mentioned earlier – and mobile-first challenger banks like Starling, Tandem, and Atom – have so far proven to be little more than mosquitoes. They might suck a little blood, but for all their buzz the big banks still hold most of the public’s cash and debts on their books.

Preoccupied perhaps by the effort needed just to meet banking regulations, the challenger banks haven’t so far matched the innovation of financial platforms like Monzo, let alone what’s promised by newer entrants.

The challengers are also yet to attract truly landscape-altering amounts of money.

Meanwhile the fintechs have unveiled endless features – from bots that query your spending to tools that help you shuffle your loose change into savings or freeze your cards with a tap on your phone – but they manage mere pennies, relatively speaking.

Happily a fintech is cheaper to run than a big bank. There’s none of the branches, for starters, and Eastern European tech teams can do much of the heavy lifting. Yet most if not all are still unprofitable, not least because of the marketing cost of winning new customers.

As for the big retail banks, they already have roughly all the money. In this sense they’ve already won!

But big bank business models are based on providing expensive loans (when not ripping us off more directly, with say the £35bn PPI scandal), which makes it hard for them to embrace more customer-friendly solutions. They have thousands of costly bank branches to manage down in the face of political opposition. And they have a massive ‘tech debt’, running on legacy systems that might still in places use frameworks devised in the 1950s.

This combination of having most of the money and seeing little need to innovate – especially as it’s so bloody difficult for incumbents – has meant the big banks have mostly sat out the fintech Cambrian explosion.

But I believe 2019 is the year this changes, thanks to open banking.

To oversimplify, open banking is a government-regulated push for banks to make possible the sharing of their customers’ data through a software layer that other banks and third-parties can hook into.

At first the banks seemed to be treating open banking as yet another compliance box to be ticked, but my sense is there’s now a bit of “one for all and all for one” in the air.

Last year HSBC was one of the first major banks to embrace open banking. Its Money Connected enables you to see your savings, loans, and mortgages held with other banks. (Essentially what the fintecherati call a ‘wrap platform’, which have long been popular in places like Australia).

This year I’ve had emails from Lloyds, Natwest, and others talking up similar – and related – services.

Santander, for example, has teamed with MoneyBox to enable its customers to round up transaction amounts and automatically pop the difference into a savings account.

This is just the beginning. No sensible bank will offer up its own data without trying to gobble up and make use of the data of its rivals. So now it’s begun they’ll all be at it.

Fintech will eat itself

This must be frightening for the fintech leaders (though I’ve yet to hear any admit it).

If the big incumbent banks copy all the neat tricks of the newcomers, it’s hard to see why customers will bother moving their money. A pink credit card will only get you so far.

In fact I’ve long expected the first phase of the fintech revolution will end with a massive roll-up by the big banks.

Something similar happened 20 years ago, when lots of high interest savings accounts popped up on the Internet and looked set to siphon away the big banks’ cash deposits. But ultimately their business models floundered, despite lower overheads, and they were snapped up by the established giants.

Seeing the same fate for the fintechs is not quite guaranteed. For a start, rolling them up is more technically challenging.

It might seem that buying a fintech would be an easy way to bolt bells-and-whistles onto an old bank’s customer offering, but the nightmare task of stitching the underlying technologies together could make it too much hassle. (Think of the car crash at RBS when it attempt to spin-off Williams & Glyn or the tech meltdown at TSB, for instance.)

Some of the fintechs were founded on the premise that new technology could do things old tech simply couldn’t do.

There’s also the question of what’s really to be gained by the big banks. The start-ups have attracted only small amounts of money so far, and I think there’s uncertainty even where they’ve done a better job at gaining customer numbers. The likes of Monzo and Revolut boast millions of users, but those customers are obviously more footloose – and probably less profitable – than those of us continuing to stick with the accounts we opened as students 30 years ago. Flighty millennials might not be worth paying up for.

Then again, perhaps this fintech revolution really is just that, and we should throw out our old notions of four or five big companies keeping most of our money in their vaults. Maybe the fintechs will continue to leach away assets from the big banks. In the meantime consolidation could be more fintech eats fintech as they strive to turn a profit.

Either way, I believe we can expect big bank accounts to morph to look more like what’s hitherto been offered by the fintechs.

Perhaps the greatest prizes will therefore go to any start-ups that can change the fundamentals of consumer finance – deeply altering our behaviour, say, or running ultra-lean businesses that are able to make us money faster than their deep-pocketed rivals can outspend them – as opposed to the apps with the cutest gimmicks.

Can fintech afford to be a force for good?

One way or another, fintech-style offerings will soon be ubiquitous. Through consolidation or disruption, I expect to see a crowded shelf of viable services competing to manage your money – whether hailing from banks, tech firms, start-up app developers, or your local coffee shop.

This presents a bit of career-risk for us financial bloggers. Many fintechs seek to automate good financial hygiene, from budgeting and saving money for a rainy day to putting your surplus cash into cheap index-tracking ETFs.

They could make good financial habits into a commodity.

Well, that’s the dream. There are competing incentives that suggest the revolution’s aim to do good could run into roadblocks – not least the need to make money.

At a recent event for one fintech raising funding, Dozens, the likeable CEO said he didn’t expect his company to ever provide loans except for sensible purposes like mortgages. All well and good but not particularly profitable. This CEO argues that being built from the ground-up as a super-lean customer-focused company will enable it to forego usurious cash cows such as high-fee credit cards. It is the equivalent of the line from Amazon’s Jeff Bezos, who warned “your margin is my opportunity”.

However if other start-ups turn borrowing money into a fun game, say, and get rich on the proceeds, then more noble-minded firms could lose out to their less scrupulous rivals’ marketing budgets.

We’re therefore likely to see all these services wrestle with doing right by the customer – if only because they have to, because fintech makes managing money so much more transparent – while finding a way to squeeze a profit from us.

Already we’ve seen fintechs drop fee-free foreign cash handling after reaching scale, for example. And big banks have been cutting teaser rates since the beginning of time.

Finally, many of these new services aim to make spending money frictionless – something eagerly embraced by retailers looking to prize us from our savings. What we gain in smart text alerts and automatically investing our loose change, we might lose when airily waving our phones around in a late night out on the town.

Watch this space

So perhaps there will be a future for personal financial advice. As our financial lives get ever more complicated – even if helped by apps that promise to make things easier – there will be landmines and booby traps galore.

I believe that within five to ten years everyone will manage their finances – or at least monitor their finances – using software and systems that only a nerd-dragon would have at their disposal today.

But money and investing will remain a fraught subject, because so much of it turns on our emotions and human frailties – and because the desire for companies to part us from our hoard is at the heart of capitalism.

Boring monolithic banking and money blogging 1.0 is dead!

Long live sexy banking and money blogging 2.0!

For the record I’m a shareholder in several of the fintech firms I’ve mentioned. I’m also considering a small investment in Dozens, which is currently raising money on Seedrs. While we’re at it I also own shares in PayPal, Square, Apple, and a couple of the big UK banks. And breathe! Let me tell you about complicated… 😉

1. Note: See my disclosure comment at the end of this article. [↩]
2. I’m not joking. I’ve been told by industry types that contactless payment usage plummets outside of London, where we’ve all been trained to accept it by London transport. [↩]
3. ‘Incredibly’ in that contactless isn’t a thing yet in the US – they only just got chip and PIN. [↩]