Apple working to bring more financial services in-house

[LOS ANGELES] Apple is developing its own payment processing technology and infrastructure for future financial products, part of an ambitious effort that would reduce its reliance on outside partners over time, according to people with knowledge of the matter.

A multi-year plan would bring a wide range of financial tasks in-house, said the people, who asked not to be identified because the plans aren't public. That includes payment processing, risk assessment for lending, fraud analysis, credit checks and additional customer-service functions such as the handling of disputes.

The effort is focused on future products, rather than Apple's current lineup of services. Still, the news sent shares of CoreCard and Green Dot - 2 of Apple's existing partners - down more than 10 per cent apiece on Wednesday (Mar 30). Goldman Sachs Group, another key partner, slipped as much as 1.2 per cent.

The push would turn the company into a bigger force in financial services, building on a lineup that already includes an Apple-branded credit card, peer-to-peer payments, the Wallet app and a mechanism for merchants to accept credit cards from an iPhone. Apple is also working on its own subscription service for hardware and a "buy now, pay later" feature for Apple Pay transactions, Bloomberg has reported.

Part of the project has been dubbed "Breakout" internally, underscoring the idea of breaking away from the existing financial system, according to the people. A representative for Cupertino, California-based Apple declined to comment on the plans.

The Apple Card currently uses CoreCard as its core processor, overseeing the process of sending transaction details to a bank for approval. The credit card relies on Goldman Sachs for other components like lending, some customer-service tasks and credit checks, as well as the handling of transaction and payment histories - what's known as a ledger. Those partners are likely to remain on board for current products.

Apple shares briefly gained on the news but slipped back down to a decline of about 0.4 per cent as of 2.25 pm in New York. The stock had posted increases 11 days in a row before Wednesday, marking its longest streak since 2003. Affirm Holdings, meanwhile, fell as much as 4.5 per cent before trimming some of the loss. That company offers its own "buy now, pay later" service.

Apple's project represents its biggest foray yet into the world of finance, and it may not be an easy task. Other technology companies, including Facebook parent Meta Platforms and Alphabet's Google, have taken on ambitious financial projects only to scale them back. That included Meta's development of its own digital coin and Google's plan for bank accounts.

But Apple has a head start in the form of its payment service. Launched in 2014, Apple Pay has become an important part of the company's services business, which now generates almost US$70 billion a year. The group is run by Jennifer Bailey, a longtime Apple executive who previously ran the company's online store.

Financial services help keep users glued to their iPhones and generate revenue from interest and transaction fees. That's why the company wants greater control over the process, letting it roll out new options more quickly and potentially collect more revenue.

It also may help Apple expand future services to additional countries. Though Apple Pay is available in more than 70 countries, services such as peer-to-peer payments, the Apple Card and the Apple Cash Card remain US-only. Partners such as CoreCard and Green Dot are focused on the US, limiting Apple's ability to grow.

Last week, Apple acquired UK-based startup Credit Kudos, which uses bank data to make lending decisions. The company will likely tap that technology to help build its own infrastructure.

As part of the initiative, Apple is developing its own processing system that it aims to use instead of CoreCard. It's also creating tools for calculating interest, rewards, approving transactions, contacting and reporting data to credit bureaus, accepting or rejecting applications based on its own risk assessments, determining and increasing credit limits, and handling transaction histories.

The first product that will rely on the new system is expected to be the upcoming "buy now, pay later" service. That feature, called "Apple Pay Later" internally, will have 2 parts: " Apple Pay in 4" for short-term, 4-instalment payment plans without interest and "Apple Pay Monthly Instalments" for long-term payment plans with interest.

Apple is discussing using the in-house technology for the 4-instalment plan. Apple would continue to work with Goldman Sachs on the longer-term instalment offering, which will also have a higher maximum lending amount. The company is considering additional partners beyond Goldman Sachs as well, letting it offer competing plans with different interest rates and payoff deadlines.

Moving to an in-house payment processor would be a significant undertaking for Apple, and while development has advanced, the company has faced some hurdles and could ultimately delay its plans or - in a very unlikely scenario - choose to remain with partners.

Apple has also discussed becoming the lender for the more basic of the "buy now, pay later" services as well as its future hardware subscription plan. Few companies can match Apple's financial resources. It had more than US$200 billion in cash and marketable securities at the end of the last quarter and generated almost US$95 billion in profit during the last fiscal year.

If Apple were to become the financier, it would probably focus on fairly low transaction amounts - in the low hundreds of dollars - and target users with high credit scores. In this scenario, the company may also require the use of debit cards, which are less risky for "buy now, pay later" lenders than credit cards.

The company's in-house risk assessment engine would take into account consumers' history as Apple customers, such as if they have routinely paid off purchases or ever had their credit card attached to iTunes or the App Store declined.

But even if future products don't rely on partners such as Goldman Sachs, CoreCard and Green Dot, the company doesn't have near-term plans to drop those firms from current offerings - including the Apple Card and Apple Cash Card.

Though the tech giant plans to handle credit checks itself for Apple Pay Later, it will still use existing credit bureaus to generate scores. The company already relies on firms such as Equifax or TransUnion to handle such tasks. BLOOMBERG


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