On March 25, Apple announced a dedicated credit card, the Apple Card, set to arrive in summer 2019. Here are some of my thoughts on the reasoning behind Apple’s decision, the potential to capture market share, and how the capabilities of the Apple Card measure up against competitors and today’s available technology.
First of all, this is Apple at its best in masterminding branding. If you look at the Apple Card ad, it reads “this is Apple Card, created by Apple not a bank”. This should have been called Apple Mastercard from Marcus. In technical terms, this a co-branded credit card issued by Goldman Sachs under the license of Mastercard. Both Mastercard and Goldman Sachs are well-known public companies with around $250 billion and $75 billion market caps respectively, but more importantly, Apple Card would not exist without the two. In today’s regulatory environment, an issuer still needs to be regulated under Federal Reserve Bank rules in order to ensure cardholder risk is underwritten properly, the settlement of the card transactions is done accurately, and a network to provide acceptance and transaction handling.
Apple did thank both institutions – albeit only in the keynote speech. Had they partnered with, say Chase, I believe they would not have had this much freedom in their communication. The fact that Goldman is entering into the consumer business for the first time with a newly established Marcus brand must have given Apple this much leeway. Goldman is an investment bank at its core, known for its deal-making – they must have looked at the Apple Card with a total price tag and compared it with how much they would have to spend to grow organically on their own.
Apple has now put its cards on the table – this is a shift of brand for Apple from product to services – as I will explain.
Now let’s talk financials.
Fees – no fees?
Apple proudly says there are no hidden fees. I hate hidden fees, too – no doubt we all do. Any bank getting into consumer credit business today should stay away from such games and I like the fact Goldman also agreed to it. Sometimes, however, there are not-so-hidden fees such as late fees which could apply here. If the customer is late, banks need to do many things as required by the regulation and they all incur additional costs. While fees such as card fees or international fees could easily be gone, after an initial period of some years it might not be a wild assumption that late fees could make a comeback.
We don’t know the interest rate yet, although Apple says it will be among the lowest in the industry. Credit card interest rates in the US vary significantly based on issuer policies such as cardholders’ FICO scores and ‘month on books’ – an industry term referring to how long the cardholder has been a member. There are also always some attractive balance transfer options with low or no interest fee for the first 6 months. I would imagine for FICO scores of 740 or more Apple Card will be charging 12-14%, while for lower scores that number could be north of 18%. As cards are convenience products, people tend to care less about such rates than they would, for instance, about consumer loans.
I also believe that as Apple learns this lesson and Goldman starts making sophisticated pricing buckets, these rates could increase within several years. Of course, it may also be safe to assume that Apple gets a percentage of this income. If I were Goldman, I would keep a sharing table based on the number of cards in the system so Apple would be tempted to bring in more customers. According to the Nilson Report, the percentage of people who revolve their balances and pay an interest rate has been declining over the years and is about 28% nowadays. This means more people pay off their balances each month and less people are subject to those interest rates. Again, Apple wants to be seen as the ultimate customer-friendly company, so it makes sense to advertise that they will help people pay less interest.
The income of the Apple Card without any other fees is only twofold: One is the interest rate we covered above, and the other is the interchange Goldman will get from Mastercard – actually, from the acquirers through Mastercard – every time the card is used. This is typically between 1-2% in the U.S. based on retailer and transaction type. These are usually used to offer cash backs from the issuer’s revenues. The Apple Card offers 3% cash back for Apple store purchases, 2% for any other purchase made via ApplePay (mobile or contactless), and 1% cash back for physical purchases. So how do the numbers add up? My guess is that Goldman agreed to pay 2% on both Apple store and ApplePay purchases, which translates into giving back much of the money they make on interchange. Apple further contributes 1% to its own store transactions, hence the 3% cash back. Goldman is also giving back 1% of physical card purchases while keeping the other half to itself, hoping to cover all operational expenses.
How much are we talking and what might these expenses be? Let’s take a closer look at the numbers. 600 million credit cards in the U.S. spend $3.2 trillion annually, according to the Nilson Report. If the Apple Card secures 1% market share with about 6 million cardholders, that would mean about $32 billion spend on these cards. If half of these transactions are made with a physical card that is $16 billion. And if Goldman gets to keep half of that typical 2% interchange that would be $160 million annually. Some of that money will cover processing costs including the production of the titanium physical card, bad loans and I would not be surprised if Apple also asked Goldman to kick in some marketing funds as well as a ‘loyalty’ payment to Apple.
Apple shifting its brand from product to services
So, what is the rationale behind Apple wanting a card of its own to begin with? Was it even Apple that came up with this idea or was it Goldman, the ‘wizards of Wall Street’, pitching the idea? My guess is that both sides saw this as a great opportunity, but Goldman was the more eager side. Let’s dissect motivations: many companies want to have some form of card operation so they can collect and keep data about their customers. Apple has so much data already it does not need that. What it needs is to create additional revenue streams and this is one way to do it. But with a company annual net income of about $60 billion dollars, any ‘additional revenue’ only becomes meaningful after it reaches a certain size.
If I were Goldman, I would make revenue calculations for Apple for 5, 10, 15 and 20 million cardholders. It is easy to arrive at these numbers if you look at Apple’s customer base. 100 million people use iPhones in the U.S. so if Apple convinces 10% of this base to get an Apple Card, this would be 10 million cardholders. And if Apple gets, say, $50 per card per year, then with 10 million cards that would amount to $500 million of net income. Going forward, if this deal is successful, expect Apple to seek additional partner banks in other countries and push aggressively for Apple purchases with Apple Card financing options in order to eventually increase cardholder numbers from 10 million to 50 million globally – resulting in a net income toward $2 billion. (In many other countries the deal Apple will get will be less lucrative due to lower levels of credit card revenues abroad.)
One could argue this income is next to nothing for Apple. Yes and no. $2 billion compared to the present day of annual $60 billion might seem small, but that $60 billion income is the result of much effort and incurring many costs. The Apple Card would bring in net additional income as all the costs will be born by Goldman. Yes, this income may still be small for Apple, but a credit card is a great way to engage with the customers – and Apple will find it useful as it continues to shift its brand image from a hardware and software company to a services one. Many of these services will require monthly payments which would give the Apple Card further opportunities to offer additional promotions and engagement options.
Marcus who? Apple throws a lifeline
On the other hand, Goldman has been trying to get into the consumer business with its Marcus brand by collecting deposits. The next natural step for Goldman is credit cards, but with a brand-new name and lack of expertise in the consumer field it will cost them dearly to reach a certain size. They could have acquired a card portfolio but that would have brought on additional issues around inactive customers and NPLs. Starting fresh and building a credit portfolio is the more attractive option, especially if you can partner with a name such as Apple. The downside is that they will not be in the driving seat of this partnership – but then again, they lack the experience to make such calls.
I am sure Goldman is paying a hefty price but depending on how you compare this cost with the opportunities, it can be justified. The titanium card with no number is certainly just an attractive customer gimmick – I do not expect it to be the new fast-emerging trend. There are millions of plastic cards out there that would need to be renewed and banks will not rush to do this. A card number can also come in handy in some situations, such as for ecommerce or MOTO transactions. And not all banks have great banking apps that make these details easily accessible.
The challenges that lie ahead
Does Apple have any challenges? Of course. It is not a credit card company and will likely have to work harder than it currently believes to attract millions of cardholders. Its interfaces with Goldman’s card processor and its capability set will be another challenge as most processors will have a difficult time adjusting to weekly payments and flexible interest rates.
I believe the even bigger challenge for Apple will be maintaining good relations with other banks. Apple currently charges 15 cents per ApplePay transaction and has locked its NFC antenna for its own apps. Until now, Apple’s relationship with the banking industry has been neutral. Now that Goldman and Apple have their own card, it is no longer fair game for other banks. They will start raising their voice about the fees, and some bigger banks will want their own wallets accessing the NFC antenna as they currently do with Android phones. Apple may be in a strong position, but legally it will be more difficult to keep the NFC antenna locked forever. You can read more about the ApplePay conundrum in my 2014 article.
The Apple wake-up call: Spotlight on the user experience
What’s the biggest change the Apple Card will have on banking? The realization that financial institutions need far better customer interfaces.
American cardholders have been suffering from boring banking apps with limited functionality for years. I have yet to see a banking app with a debit card picture and transaction list. Credit card functionality on these apps is limited to the most basic functions and the interface is, to say the least, dull. Apple’s creation of far superior screens to manage card functionality and an all-round sophisticated visual interface is eventually going to push banks to improve their own apps. This is a great development! Functionalities such as payment schedules, spending categories, instant notifications and location services will prove great tools for cardholders to gain better control their financial life.
My past career work revolved around trying to develop customer friendly products and services, and the banks I worked for – Garanti Bank and BBVA – are globally renowned for having the best banking apps, as voted by industry’s leading research firms. Payment apps such as BBVAWallet and Bonus Flash had more than 20 million downloads and are still used and enjoyed by consumers around the world.
All those years of knowledge now go into developing something great for American banks – the myGini app! myGini helps banks and credit unions offer an enhanced shopping experience through a state-of-the-art app and loyalty engine. Almost every bit of functionality that Apple introduced for the Apple Card is already available in myGini and we are eager to see if American banks will now be more enthusiastic to implement a mobile solution we know will satisfy their customers. We’re continuing to do our best to convince them for a while now, but we are happy that a big name such as Apple now also shares our ambitions. This is a strong wake-up call for financial institutions.
Look beyond the UI: bring emotion into the shopping experience
Banking is about banking transactions, so it needs to be fast and secure. Cards are for shopping – so a customer-centric shopping experience shouldn’t just be about banking. Shopping involves more emotions and requires different parts of the brain to work. Most banking apps today cannot address these requirements properly, so we need to develop additional user-friendly functionalities. That’s why we developed myGini.
There are two more things that myGini has which the Apple Card does not: creative rewards from other retailers and installments. You can read more on why these are key functionalities for modern banking apps in my article here.
Send an email to email@example.com and let’s start the conversation. Who knows, we might even help you to launch before Apple…!