Apple Inc. is getting into the credit card business, teaming up with Goldman Sachs to launch the Apple Card, a fee-free credit card that’s integrated into Apple Pay.
The move, part of the Cupertino, California iPhone maker’s effort to expand beyond the saturating smartphone market, received mixed reviews on Wall Street with even analysts at Goldman Sachs wondering how successful it will be. The reason for much of the skepticism: Apple Pay.
Every time customers use their Apple Card with Apple Pay they receive daily cashback of 2%. Purchases made with Apple get them 3% back cash back. But all other purchases receive a 1% cash back reward. It’s that reward on all non-Apple Pay purchases that have some analysts worried.
“Even though Apple Pay is becoming more available, we would still expect a large percentage of transactions to be done at the 1% return level (using the physical card) so we would expect the typical consumer to perceive the cash return rate to be OK but not great,” wrote Goldman Sachs analysts in a research report covered by CNBC. The analysts predict Apple will land about 21 million users for the card, spending about $1,000 a month on it. That would result in $882 million in revenue, not enough to give it an earnings lift in the short term.
Echoing that sentiment Nomura Instinet analyst Jeffrey Kvaal said 2% cash back is respectable but it’s not the highest in the market. Not to mention fees on credit cards have already been on the decline. The analyst thinks Apple would need $50 billion in outstanding balances on the card to generate $1 billion in revenue. That would mean more balances than Wells Fargo. “We expect the revenue opportunity to be largely from interest gained off lending rather than fees from spending given its cash back rewards,” wrote the analyst in a research note to clients. “Any revenue Apple generates is likely to be highly profitable from a gross margin perspective.”
Apple is taking a page from fintechs with its credit card by melding zero fees with helping consumers get and stay out of debt. In addition to the no-fees, Apple said it will provide interest rates that are among the lowest in the industry. If a customer misses a payment Apple won’t penalize them. The Apple Card also displays different payment options and what the interest is for each choice. Customers can choose to pay more each month and/or make more frequent payments.
Ease of use is another aspect of the Apple Card. Customers sign up in the Wallet app on their iPhone and can start using it immediately. Relying on machine learning, and Apple Maps, transactions are labeled with the merchant name and locations. Purchases are categorized by color. The Apple Card also provides weekly and monthly spending summaries.
During an event Monday Apple’s Chief Executive Tim Cook called Apple Card “the most significant change in the credit card experience in 50 years.” It’s a bold statement, but one some disagree with. Apple isn’t the first or even early to the market in launching a low-interest rate, fee-free credit card. Simple came on the scenes a decade ago and since then many fintech competitors have emerged. Petal, the New York fintech which recently raised $30 million in venture funding, is already offering consumers a lot of the perks Apple is touting with the Apple Card. Traditional credit card companies including JPMorgan and Citi have stepped up their rewards offerings to lure more consumers their way, presenting another challenge to Apple.
“I’m scratching my head about the points of true differentiation,” with the Apple Card, Matt Harris, Partner at Bain Capital Ventures said. “Most of the product details they cite — mapping spending, clear merchant names, leveraging behavior finance to encourage responsible credit, categorizing spending using, and … wait for it, colors — all of these things have been staples of consumer fintech since Simple launched 10 years ago.” He said the 2% daily cash back on a credit card with no fees is a distinction but makes little economic sense for Apple.
The way Harris sees it, the tech company is either willing to subsidize the Apple Card to grow usage of Apple Pay, is using the data it has on customers to make smart credit decisions or it has future financial products in mind. “Two percent cash back, with no delay (before you pay your bill, which is unusual), on a card with no fee, is pretty awesome. When combined with a product designed to discourage revolving, it makes the economic equation here very thin,” said Harris.
Date: March 28, 2019