Apple Card — Privacy vs. Ecosystem Lockdown
When Apple held its event in March 2019, the only new ‘hardware’ it introduced was the Apple Card, “A titanium, laser-etched, Apple-designed credit card”, and it really caught a lot of attention. Apple as a company has always stood behind design and good user experience, writing guidelines that define how user interfaces work (see their Human Interface Guidelines, first started in 1987) and meticulously crafting their products (see their corners!) and more recently it has started to promote itself as a company that cares about privacy and allowing consumers control over what they see and do in the world.
With the launch of the Apple Card, Apple is promoting a card that gives daily cash-back (3% back on anything Apple, 2% on anything bought with Apple Pay and 1% on anything bought with the physical card), has no hidden fees and that represents “simplicity, transparency, and privacy”, proposing a stark change from the traditional way that financial institutions make money—promising the separation of user data and financial institutions.
Current accounts as a concept are not the money makers in banks, in fact most (if not all) are loss leaders. Monzo’s CEO Tom Blomfield revealed a while ago (so this may have changed significantly) that Monzo looses on average £40 per year per user, a figure actually drastically lower than the on average £100 it takes to acquire a single consumer. In contrast you may have seen headlines like “Banks and building societies make £139 a year on each of the UK’s 61 MILLION current accounts” but these titles are misleading in the fact that this does not mean that each current account makes that money, it’s the additional “products” financial institutions sell including savings accounts, credit cards, loans, overdrafts and a whole bunch of extra add-ons. A connection is made from bank to consumer that makes both parties more willing to engage with each other — the consumer knowing more about the bank and being able to easily apply for one of these other products and the bank having data on how the user behaves and how they spend, therefore being able to deduce whether they would be good to entrust with a product.
With the advent of machine learning and more advanced tracking, banks have evolved with the times as well. All your purchases allow banks to build up pretty detailed profiles of who you are and what you are like. This data can be harnessed in so many ways, from making better generalisations on how trustworthy you are to lend to based on consumer trends and how you align with these (in the same way that insurance companies will analyse where you live and give you higher or lower car insurance rates) to understanding general consumer habits (which could potentially feed into investment choices).
In fact, according to BAI, ‘two thirds of financial services organisations “sometimes” or “infrequently” use customer data in a way that allows them to better serve customer needs’, and this number is only set to increase with 46% saying they could ‘make better use of data about customers to improve product and service recommendations’.
This is why Apple’s offering is so unique. On their site, they promote that “Even Apple doesn’t know what you bought. Or where. Or how much you paid” and they have promised that Goldman Sachs will only use the data for operation of the card and not for marketing, sharing or selling to third parties. This privacy-focused effort will potentially reduce an area that traditional credit card companies make a lot of money off.
So how will it make money? Lets think of the three ways a traditional credit card makes money:
- Selling user data
- Charging transaction fees
- Charging interest on payments
We’ve already deduced that no. 1 is a no go, so let’s go to 2.
Apple Pay does make money for Apple, invisibly to the consumer in the following ways:
A. Either the card issuer (Visa, Mastercard, American Express etc) or the merchant is charged a fee when a user uses Apple Pay (the Financial Times reported this as 0.15% in the US and lower in the rest of the world)
B. Terminals that support Apple Pay could have to be approved by Apple and go into their expensive MFI program (however I have not found any data to suggest this happens and therefore would discount this one)
On to 3.
Back on the Apple website, “It’s the first card that actually encourages you to pay less interest”. Now yes, that doesn’t mean that everyone will pay no interest because they are being encouraged not to, rather this will not and can not be the only way they envisage making the most money. In fact reports have already come out that Goldman Sachs is dipping into subprime lending, yet the card does not come with the usual caveats that one of these cards has (namely a security deposit).
Although I could be skeptical and say that this could be the way that Apple proposes to make money, I think their vision is more that everyone should be able to get the Apple Card, rather than they want to lend to everyone. Why would they like everyone to get a card? That surfaces a fourth way Apple will make money that traditional credit cards cannot:
4. Locking you into the ecosystem
Very simply, Apple sells consumer software and hardware. To apply and use an Apple Card you must own an iPhone. All account management, balance payments and spending reports currently run through the wallet app and to get the most out of the card you must use Apple Pay (the 1% on everything is easily beaten by many cards). Apple is locking you into its ecosystem in another way, and is making it very hard to escape, and I think this will be a trend for Apple in the future.
As someone who owns a lot of Apple devices, switching away seems like such a hassle — if I were to have an Android phone as my main device, I wouldn’t be able to use my Apple Watch, all my iCloud items would not sync between devices, I would not be able to see all my iTunes Movies and a lot of other features such as Handoff would not work. They really have me locked in. However, I am not the average consumer. The average consumer will potentially have an iPhone and an iPad. We know that Apple has won the tablet war. But consumers could be willing to switch to Android for their smartphone, in fact a lot of them do, and this is where the Apple Card comes in. The Apple Card is a ‘free’ Apple product. A beautiful titanium card that will definitely be a status symbol for the next decade (in the same way that AirPods currently are). It is a lock, a secondary lock that is intertwined with their day to day. Only a small subset of consumers will be willing to switch from iOS to Android due to the steep learning curve in the user interface. If they now also have to change how they pay and give up their card, it will further discourage them, and make their next purchase of an iPhone all the more logical (and get 3% off!).
N.B. An argument could also be made for Apple’s new “Sign in with Apple” feature which I would be interested to find out whether can be done on non-Apple devices easily without having an Apple device with the user.
