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Do you think Apple’s bank will work? Why not, old fruit?


Do you think Apple’s bank will work? Why not, old fruit?

Apple has more cash than it knows what to do with. What the hell, start a bank already!

Mark Barnes

The most important rule in business is knowing what business your business is in. I once asked a friend how his business made money. “We buy space for other people,” he replied. “A lot of money flows through our business. Some of it sticks to the walls.” Quite a lot, as it turns out.
The survivors, the winners, have all worked out what they do, who they are, where they fit. If you don’t know, some clever youngster will work it out and disrupt you out of business. Either find value where others don’t or solve a problem. McDonald’s is a property company selling burgers. Waze lets its customers draw, and then use, their own maps. Uber is convincing people they don’t need to own a car. Apple led the digital world in designing and making personal computers.
Apple now wants to start a bank. It has some serious foundations to start with. Apple has more cash than it knows what to do with: $300bn, sitting idly, albeit tax efficiently, somewhere in the more than 25 countries it operates in around the world. It has 1.5 billion users and more than 500 million people pass through its more than 500 stores every year. It would be in the top 50 wealthiest countries in the world, if it was one.
What the hell, start a bank already!
In the new world of technology, data mining, social media, artificial intelligence algorithms and the relentless focus on the individual, everybody knows everything about everybody. Exploiting client spending – in the nicest possible way, of course – is the whole game. Client acquisition strategy is the only strategy in town. Some firms are way ahead in this, intentionally or otherwise.
Will Apple’s bank work? I’m not sure. Too big to fail is not a good enough reason to take risks outside your core competence. Idle capital is beguiling; be careful.
Whether you like it or not, whether it is sustainable or not, banks have a very specific economic construct, within a rigorous oversight framework, with specific skills and experience that makes them work. Banks leverage equity to earn small percentage returns on their total assets, which translate into a generous multiple of those returns on their equity (before you make any mistakes).
Retailers who start banking their clients’ purchases (selling on credit) often get into trouble. Funding a discretionary consumer purchase with debt is flawed in principle. A pair of designer-label jeans doesn’t have a yield to service the interest cost (implied or actual) embedded in the “six months to pay” deal you just did with the store. The formulaic credit assessment, the scorecard, is designed to enable selling, not decline credit.
Apple is getting into banking with Goldman Sachs, hardly a beginner in the field, so they’ll know what they’re doing, for so long as they don’t get mixed up between banking and product sales. Size, even for banking, is not the panacea for success. Deutsche Bank and Commerzbank must surely be considering a merger for other reasons?
As business models are challenged by real economic environments, more and more financial engineers are brought in to keep the share price rising. Their strategies range from the obvious (like share buybacks) to the mischievous, to the downright fraudulent misrepresentation of the financial position of the firm. Entire industries have been spawned on financial interventions.
Private equity funds, doing leveraged buyouts, are the masters of this universe. The idea is to find asset-rich, “undervalued” companies, buy them using as much debt as you think they can bear, and then literally squeeze the cash out of them (cutting costs, selling assets, delaying payments of creditors, accelerating payments by debtors, retrenching staff, slashing “unnecessary” budgets like marketing, research & development and corporate social investment to repay the debt as soon as possible and then harvest the increased margins, to multiply the value of the initial equity invested.
When it works, it is spectacular. When you go too far, it is destructive. Ask 3G Capital what happened to Kraft Heinz, which has lost half its value since the deal was done in 2015, despite an impressive initial increase in margins. The truth is that brands, which bestow on their owners the right to charge a premium, require continuous investment to stay ahead.
New banks will emerge and prosper; there is no doubt about that. But the successful new players will have specific banking reasons to be in banking, and they’ll likely be far removed from the asset-based lending models of yore.
• Mark Barnes is CEO of the Post Office.

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