In April 2023, the iPhone maker Apple introduced a savings account for the Apple Card, its latest move in a series of ventures into the world of financial services.
Due to Apple’s strategic advantages over banks, some argue that Apple threatens the banking industry, citing a deal Apple signed with Goldman Sachs responsible for over $3bn accumulative loss for Goldman. However, legal considerations undercut commercial motivations for Apple’s entry into banking.
Apple’s first step into financial space is the unassuming Apple Pay introduced eight years ago, a card replacement feature that 75% of iPhone users now use. Last year, with over $6tn in transaction value, payment via Apple Pay surpassed that of MasterCard, becoming the second most popular digital payment system.
The ubiquity of Apple Pay paved the way for the Apple Card, introduced in 2019 and issued by Goldman Sachs. The credit card features zero fees and ultra-low interest rates, allowing it to acquire almost 7 million users in less than four years.
Having unveiled Tap to Pay in early 2022, enabling the iPhone to accept contactless payment, and Pay Later just last month, Apple recently added a savings account to its lineup of financial offerings with a competitive 4.15% annual percentage yield.
Compared to financial institutions, Apple possesses several key advantages. Firstly, Apple’s assortment of connected products creates a “network effect”. The mutually enhancing effect that iPhones, Airpods, Macbooks, and even chargers produce on one another will extend to Apple’s financial products. On the one hand, the network of products constitutes a convincing proposition to consumers; on the other, consumers may find themselves “locked in” and struggle to change to another company.
Moreover, having unhindered access, Apple could analyse user data with its world-leading proprietary systems. Apple’s interest in using user data to assess credit risk is signalled by its purchase of Credit Kudos in early 2022, a credit-scoring start-up. The access to user data enables Apple to make profitable loan decisions and compete in the traditional credit-rating space.
Lastly, Apple is well-positioned to tackle a problem specific to banking. Banks typically operate with 90% borrowed money, curbing their ability to generate profits within acceptable risk levels. If a bank lends more money than its total deposits, a massive withdrawal or “bank run” would be its end. Apple, as the iPhone manufacturer, operates with a cash-rich business model, with a cash-to-debt ratio of 1.5 in Q1 2023. The abundance of cash allows Apple to lend with its own money without distressed depositors queuing for withdrawal.
Some new outlets have suggested that Apple, positioned to capitalise on its strategic advantages, presents a serious threat to traditional banks.
Even though Apple is not legally a bank, Jamie Dimon, CEO of JP Morgan, claims that Apple operates just like one: “It may not have insured deposits, but if you move money, hold money, manage money, lend money – that’s a bank.”
Besides the loss of market share, banks may need to look out for Apple’s potential to create a closed loop: a transaction that uses exclusively Apple products from beginning to end. For instance, a payment to a merchant may be initiated from Apple Card, facilitated via Apple Pay, received on Tap to Pay, and paid back via Pay Later; banks are cut out of the process. The more types of financial products Apple offers, the less reliant it becomes on banking partners.
The Apple Card deal best illustrates Apple’s looming threat to banking. Behind the made-in-heaven match between Silicon Valley’s foremost and Wall Street’s crème de la crème is an unfavourable deal that cost Goldman $3bn over the past three years.
Designed to sell more iPhones, the Apple Card is an irresistible package: zero fee, low-interest rate, and high savings. To a bank, that means high risk, low reward, the very opposite of how banks make money. Goldman’s eagerness to partner with Apple reveals not just its desire to expand its retail banking segment quickly but also Apple’s dominant negotiating position.
However, past and future antitrust-related concerns assuage Apple’s potential threat to traditional banks. The F.S. sector is one of the most closely watched spaces, especially post-2007. The trend of increasing scrutiny only continues.
In Feb 2022, the European Commission opened an antitrust investigation into Apple Pay (see TSL article by Maddy Preedy). Watchdogs continue to monitor Big Tech dabblings in financial services (see TSL article by Wanjiru Chigiti). As it stands, Apple is a long way from serious antitrust infringements. Still, it is heading towards that direction, particularly as it uses sector-specific dominance to cross into other arenas.
The more Apple operates like a bank, the more regulatory scrutiny it will receive. From a legal perspective, Apple is well-advised to keep traditional banks as partners, shifting legal responsibility to their shoulders whilst leveraging its strong position in the technology world to secure favourable deals.
The practice of short selling has garnered significant media attention in recent months. It started with Hindenburg initiating a short position in Adani Group companies and Icahn Enterprises.
The American Bankers Association recently wrote a letter to the U.S. Securities and Exchange Commission stating that short sellers brought healthy banks to their knees through abusive practices.
Most investors make money by buying a stock that they believe will rise in value and holding it for a long time until it eventually rises, then selling it to make a profit. However, some investors adopt a contrary approach. These are known as short sellers because they are ‘shorting’ a stock.
This is done by borrowing the stocks from a broker expecting the stock’s value to decrease. They then sell the borrowed stocks to an investor while still high. For instance, if the stock value of company X is $150 per share, the short seller borrows this share and sells it to another investor for $150. Later, when the stock’s value eventually declines, they repurchase the shares at the lower price and return them to the original broker, pocketing the price difference as profit. So, if company X shares reduce from $150 to $50 per share, the short seller will buy the stake for $50 and return it to the original broker. Since they have $150 per share from when they sold the borrowed share, they will make a profit of $100 per share.
However, it’s important to note that short selling carries inherent risks since the short seller essentially bets on the stock’s value decreasing. If, contrary to their expectations, the stock’s value rises instead, they are obligated to repurchase the shares at the increased price, resulting in financial loss.
A famous example of short selling is when some investors took short positions in mortgage-backed securities in the U.S. because they were convinced that prices would fall when the real estate boom collapsed. The collapse eventually happened and was a leading cause of the 2008 financial crisis. The short sellers who took short positions made a considerable profit during this crisis.
These events have been dramatised in the popular movie ‘The Big Short,’ based on the book with the same title. Numerous short sellers also shorted Wirecard AG, the German fintech company. This followed reports stating that it engaged in a series of fraudulent accounting activities to inflate its profit.
A recent example is Hindenburg Research shorting Adani Group companies. Hindenburg did this by first publishing a report accusing Adani Group of stock manipulation and accounting fraud that has taken place over decades. As a result, Hindenburg stated that Adani Group shares were overvalued, and it has taken a short position against the company.
Hindenburg did so through US-traded bonds and non-Indian traded derivatives because India’s anti-short selling rules will make it difficult for Hindenburg to short Adani Group companies in India. Another example is Hindenburg’s research shorting Icahn Enterprises. It accused Icahn Enterprises of overvaluing its holdings and relying on a Ponzi-like structure to pay dividends. There are also those short sellers who have made more than $7.5 billion in 2023 by shorting regional bank stocks due to the current regional banking crisis in the U.S.
Short selling has positive and negative impacts on the market. In terms of positive impacts, short sellers may strengthen the market by exposing companies whose stock prices are overvalued. The research published by short sellers, such as Hindenburg Research, reveals accounting inconsistencies and fraud in a company. Investors deserve to know this information before investing a large amount of money in overvalued stocks.
For instance, the Hindenburg Research report on Adani Group came days ahead of a planned sale of Adani shares to the public. If the allegations against Adani are accurate, then short-seller Hindenburg has saved investors from investing in a company that has engaged in fraud and stock manipulation.
On the flip side, if it is reported that numerous investors are shorting a particular stock because they believe it is overvalued, it can lead to other investors looking to sell the stock, which will reduce the value of the stock. This will be a huge loss for the company and its current investors. For instance, the American Bankers Association has accused short sellers of shorting the stocks of regional banks that are in good financial health. They state that this activity eventually reduces the value of the stocks and causes financial harm to the banks.
Companies that are the victims of short selling activity may hire lawyers to sue the short seller. For instance, Adani’s Group is considering legal action against Hindenburg Research. Hindenburg stated that it would welcome this action and stands by its report.
Financial regulators such as the U.K.’s Financial Conduct Authority and the U.S. Securities and Exchange Commission may bring claims against short sellers for market manipulation. This may happen if the short seller falsely accuses a company of fraud to influence the share price of the company. Lawyers will be needed to defend short sellers against such enforcement actions.
The effect that short seller reports may have on the shares of a company will be an incentive to hire lawyers that can undertake thorough legal due diligence before an initial public offering. This will reveal any potential weaknesses before short sellers discover them.
Furthermore, companies that have recently been attacked by the claims of short sellers may hire lawyers alongside auditors to investigate the claims of the short seller to disprove them.
The number of Chinese transactions in Europe fell from 153 in 2022 to 139 in 2023. Concerning the UK, whilst it is top with 27 Chinese investments across several sectors in the year ending 2022, there evidenced a decline from 36 the previous year. Whilst the numbers may seem insignificant, their fiscal representation is not; in 2022, across the UK and Europe, investments and acquisitions declined by 22% to €7.9 billion, the lowest since 2013.
China has stated that ‘rising energy prices, inflation, interest price hikes and political developments at an international level’ are the predominant inducements instigating the decline. However, the reasons given by its trade partners are somewhat more disquieting, with highlights as follows:
The threat to national security
The UK’s National Security and Investments Act 2021 (NSIA 2021) equips the government with, in addition to others, mandatory approval and remediation measures to scrutinise M&A transactions in mitigating and eradicating threats to national security.
These powers have since been exercised twice by the government. In July 2022, a proposed deal between Beijing Infinite Vision Technology Company Ltd and the University of Manchester, whereby the former was to provide intellectual property licensing to the latter’s vision-sensing technology, which had both military and civilian capabilities, was blocked as it was deemed a threat to national security.
On 17th August 2022, an acquisitions deal was blocked between Super Orange HK Holding Ltd and Pulsic Ltd. Super Orange sought to purchase the entire share capital of Pulsic; however, the software used in constructing Pulsic’s electronic design automation products contained intellectual property which could also be used for military gains.
Concerning the EU, in the fall of 2022, Germany blocked two prospective acquisitions of domestic semiconductor producers under its Foreign Trade Act, namely that of Elmos Semiconductor’s chip factory by Silex, the Chinese subsidiary of Sai Microelectronics and that of ERS Electronic by an undisclosed Chinese company.
In early 2022, Italy annulled the 75% stakeholding of two Chinese holding companies in Alpi Aviation, an aircraft manufacturer, following an investigation into an alleged breach of rules concerning the sale of military particulars.
Humanitarian concerns present tangible issues when partaking in trade deals. China has appeared seemingly ineffectual in meeting its human rights obligations under the International Labour Organisation (ILO). However, it recently ratified two of the ILO’s Fundamental Conventions, the Forced Labour Convention 1930 and the Abolition of Forced Labour Convention 1957 in 2022.
This ineffectuality was highlighted in a speech by EU President Ursula von der Leyen on EU-China relations on 30th March 2023, who stated that ‘the grave human rights violations occurring in Xinjiang are…a cause for great concern. How China meets international obligation regarding human rights will be another test for how – and how much – we can cooperate with China’.
There are also mentions of oppressive and retaliatory measures taken by China over smaller countries and clothing brands opposing its poor human rights practices. Brokering trade deals with a government that seemingly has little regard for human rights erodes credibility; therefore, how does one procure much-needed trade deals whilst holding a world superpower accountable?
Geopolitical tensions are critical reasons behind the heightened scrutiny of such acquisitions and the decisions on whether to entitle those transactions in the first instance. Most European countries oppose the Russia-Ukraine war and have openly condemned Russia for instigating it. Yet, there appears to be a thriving ‘no-limits friendship’ between Russia and China, despite Russia’s unwarranted actions. This friendship causes uncertainty about the political intent behind China’s increasing investments in Europe, thus presenting an arduous task in navigating and eliminating risks whilst engaging in vital trade deals with China.
There are escalating tensions between the EU and the U.S. The U.S. has increased sanctions and restrictions on Chinese trade due to, among other things, its violations in Xinjiang province under the Uyghur Human Rights Policy Act 2020. More significantly, the U.S. has imposed restrictions on new semiconductor sales to China in an attempt to decelerate China’s technology sector.
The EU, a significant U.S. trading partner, is set to finally ratify the proposed EU-China Comprehensive Agreement on Investment (CAI), negotiated in 2020. The U.S.’s primary cause for concern is that the CAI does not allow the EU to ally with the U.S. in imposing restrictions or controls on Chinese trade should its government violate labour or human rights provisions.
There are also underlying tensions between China and the EU China often imposes restrictive trading terms on its trading partners, so much so the Dispute Settlement Body (DSB) of the World Trade Organisation received a second complaint from the EU, in that ‘Chinese measures unduly restrict the possibility to enforce intellectual property rights…inconsistent with China’s obligation under the Agreement on Trade-Related Aspects of Intellectual Property Rights’, with the DSB agreeing to establish a review panel. This move will likely strain trade relations between both parties, potentially reducing investment in the EU.
Trade, investments and acquisition opportunities facilitate economic growth; therefore, fewer opportunities lead to stagnation for all sectors. For instance, corporate and business finance lawyers will face a downtick in M&A and company formation transactions, and business immigration lawyers will experience similar in terms of enquiries concerning settlement and business visitor visas.
That being said, there may be a boost for some. For example, commercial litigation lawyers may need to advise and advocate for their clients due to withdrawals and the blocking of trade deals. Commercial property lawyers may realise an upturn in property disposals as some clients relocate to their country of origin or elsewhere.
For the legal industry in general, it would mean that large global law firms and firms with interests connected to China must reassess their positions and business ethos to thrive in changing circumstances. In reassessing their position, some law firms thus affiliated would see a reduction in the procurement of services, leading to a decline in net exports and turnover and, ultimately, a significant loss of jobs.
Panic need not set in yet; China has the world’s second-largest economy, with a GDP of just over $17 trillion (in 2021) behind the USA. Therefore, it has substantial negotiating power and can settle deals, specifically in countries with developing economies and with perhaps ‘less’ stringent stances.
As a result, there will be business opportunities elsewhere, although attaining those opportunities will seemingly be contingent on expansion ambitions and a firm’s predilection, if any, for evading controversies.