Can Phone Makers Replace Your Banks?
When Apple launched ‘Apple Pay’ in 2014, it opened the doors for phone makers to enter the financial services market, a segment which no other phone maker had explored earlier. A year later, Samsung launched ‘Samsung Pay’. Earlier this month, Apple teamed up with Goldman Sachs to launch no-fee, high-yield savings accounts for its Apple Card customers. In September, Samsung launched two credit cards in India in partnership with Axis Band and Visa. While Apple’s financial products are not available in India, Chinese phone making giant Xiaomi launched Mi Pay (now discontinued) in India in 2018 in partnership with ICICI bank. Oppo likewise ventured into the Indian financial market services in 2020 with its subsidiary ‘Oppo Kash’. So, why are phone makers entering the financial services market? (Source: IDC) The digital age Today, almost all financial services are accessible through a smartphone. From opening a bank account, KYC, to applying for a credit card or buying an insurance policy—everything can be done through a smartphone. In less than a decade, hundreds of neobanks have mushroomed across the world and operate without any brick-and-mortar offices. The very concept of banking has evolved in the last few years. With more than 1 billion estimated iPhone users globally, Apple was the first phone maker to seize the opportunity. With smartphone penetration also soaring and more people opting to use their phones to make payments, it makes perfect sense for phone makers to target financial services which have grown exponentially as a result. Phone makers have realised that they have the capabilities to build the softwares and, through a partnership with third parties, extend financial services to their customers. Apple, building on its brand loyalty, has successfully diversified into financial services and established a financial ecosystem. According to an earlier report by Bloomberg, Apple is developing its own payment processing technology, which would reduce its reliance on outside partners like Goldman Sachs to power its financial products. Building an ecosystem The idea for phone makers to enter the financial services market is not to tap into the market but rather to create a digital ecosystem for their users. Ron Shevlin, Chief Research Officer at Cornerstone Advisor, said that Apple is not trying to become a bank but to build an ecosystem. Through its financial services offerings like ‘Apple Pay’ and BNPL services, Apple wants to virtually lock its 1 billion users into its ecosystem and encourage them to use Apple products and services and make payments through their iPhones instead of using other mediums such as their bank’s debit or credit cards. The fact that the younger generations today prefer paying from their phones also plays into their favour. In FY 2021, over 35 billion digital transactions worth over INR 60 trillion were carried out in India. The number of digital transactions is forecasted to reach 214 billion by 2026, according to Statista. Much of the growth is attributed to the advent of technologies such as unified payments interface (UPI). Samsung, Realme, and Oppo phones already come with pre-installed payment apps that support UPI payments. OnePlus is expected to join the club some time this year. Digital payments in India (Source: Statista) Customer retention The smartphone market in India today is highly competitive, with more than 50 different players competing in the space. Keeping their customers locked in their ecosystem through various services will also help phone makers in customer retention. “The key to this growth lies in retaining the customer into a smartphone manufacturer’s ecosystem that fulfils many of the customer’s needs through these services, thereby making it harder for them to switch to another brand.” “As a result, now every smartphone company is trying to push for higher adoption of their services to generate brand loyalty, which is typically low with customers when the product gets commoditised,” Varun Kapoor, Practice Director, Digital Strategy APAC at Adobe, said. Flat sales The financial services market is a lucrative one for phone makers as they look to diversify in the light of smartphone sales remaining flat. During the first half of 2022, the smartphone market in India declined by 1% due to weak consumer demand, according to a report by IDC. In a report, Gartner claimed that global shipment of smartphones is set to decline this year due to China’s slowing economy and an inflation-driven drop in consumer spending. Diversifying into other avenues such as payments, videos and music streaming makes sense for phone makers. “To operate at a good profit margin, now brands really need to focus on the ecosystem which is going to exist around smartphones in the form of new wearables, like bluetooth earphones, smart watches, smart speakers along with services like music, video or movie content,” Anshul Gupta, research director at Gartner, said. Will phone makers compete with banks? With Apple now offering savings accounts, it becomes very difficult to distinguish it from a conventional bank. JPMorgan Chase chief executive Jamie Dimon said that Apple wants to give its users a credit journey experience. “They’re going to do merchant processing; they’re going to do merchant lending. It may not be their own balance sheet. But that’s a bank. If you move money, hold money, manage money, lend money, that’s a bank,” he said. Other phone makers are also adding more and more products to the list of financial services provided by them. Earlier in October 2022, Samsung launched Samsung Finance + in India to allow its users to buy its wide range of consumer electronics products. With phone makers providing more and more financial services products—not only in the Indian market but globally—it has become increasingly difficult to distinguish them from what is traditionally understood as a banking institution. While it’s still early to say, a scenario where phone makers would completely replace your banks would be difficult to write off. Should banks be worried? Maybe, but the regulators are in their favour on this one. Recently, the UK’s Financial Conduct Authority launched an inquiry into Apple’s expansion into payments, deposits, credit and insurance. Other companies under the scanner are Meta, Amazon and Google.
Phone makers want to virtually lock their users into their ecosystem and encourage them to use their products to make payments through their phones instead of using other mediums, such as their bank’s debit or credit cards.
Phone makers want to virtually lock their users into their ecosystem and encourage them to use their products to make payments through their phones instead of using other mediums, such as their bank’s debit or credit cards.
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I have a keen interest in creative writing and artificial intelligence. As a journalist, I deep dive into the world of technology and analyse how it’s restructuring business models and reshaping society.