Apple Card — The Story…
First Background
Once upon a time… Apple’s Services business, which includes iTunes, the App Store, and Apple Pay, it is one of the fastest-growing segments within the company, but it is still dwarfed by hardware sales. Services pulled in $10.9 billion in sales in the fourth quarter of 2019, compared to $73.4 billion for products. The Apple Wallet and Apple Pay were the Cupertino company’s foray into digital wallets and payments, a multi-trillion dollar business. But it lacked a more versatile payment product that had a wider range of options and gave its users no reason to pay with anything else. Apple Pay is still not universally accepted, but Mastercard is.
Apple’s strategy is using the iPhone as the ultimate gateway to transforming every iOS and Mac user into a series of multiple recurring revenue streams from products made first and in some cases made better by other companies, be it Apple Music, Apple News, iCloud, or the new TV app. With the Apple Card, the company is going one step further and trying to capture not just what you consume, but also the financial means you use to do so.
Why does Apple need Goldman Sachs or Mastercard?
Apple needs Goldman Sachs for risk management. The role of the Issuing Bank is to bear the risk of the credit cards and provide the risk management know-how necessary to assess the creditworthiness of individuals. Further, the Goldman Sachs Bank is licensed by Mastercard to issue cards and manage the associated funds across the Mastercard network.
As the financial industry is highly regulated, partnering with an experienced player like Goldman would be helpful. Goldman also stands to benefit from the partnership; while the investment banking behemoth launched its online consumer bank in 2016, it doesn’t have a branch network or an established brand in the retail market, and this is where Apple’s vast base of iPhone users could be helpful.
Apple needs MasterCard for its infrastructure. The role of the card networks (Mastercard, Visa, Union Pay, etc.) is to handle the actual payment processing. They are facilitating the process of moving money from your bank to the merchant’s bank when you pay with your card. The card networks are the ones providing the necessary platform for communication between all the players. They have built a massive infrastructure for processing transactions.
Collaboration Structure:
This is a Joint Venture between Apple, Goldman Sachs, and Mastercard as all the three businesses are directed at and limited to a particular finite task. Apple designed the card and will handle its software interface for iPhones. Goldman Sachs is responsible for the underlying infrastructure, managing payment disputes, handling transaction data and collating information for monthly statements. Mastercard is serving as the payment network.
But Again, Why Apple card?
Apple needs an apple-card for control. Apple wants to put itself in the center of the growing eco-system. Apple prefers to quickly burst the air out of the growing market, and develop it in its own pace and (rules). And to do so, it needs to have a stake in the payment initiation side of the equation. The revolution won’t be Apple Card, but the surrounding set of services that includes P2P transfers, NFC payments and faster and safer checkouts with already stored cards on the devices.
Economics of Apple Card
Mastercard receives fees from issuing and acquiring financial institutions. They make money on a portion of the total transaction volume (around 0.13% called assessment fees). There is also a fixed fee that is charged from the merchant called merchant discount. The merchant is the one selling you stuff. This is him/her paying for using the services of the card networks. This fee is distributed among all players in a card transaction. Additionally, Apple and Goldman Sachs make money from the interest rate. The average Annual Credit Card Interest Rate in the US is 17.67% and Apple gives you a rate between 13.24% to 24.24% based on your creditworthiness
To best illustrate this, let’s look at what happens when you swipe your card to pay $100 to a merchant that accepts card payments.
Collaboration Analysis
The outpouring of press coverage about the partnership helped Goldman Sachs bring attention to its efforts to make financial products for everyday people. While the bank has long been a Wall Street institution, it has only recently attempted to ramp up its new consumer-facing business. For Apple, the credit card is thought of as a way to bring in more recurring revenue from iPhone users and further enmesh them in its web of services.
For Apple, the financial services space appears attractive to the company, as it could leverage its base of affluent iPhone users, its tech expertise and its massive software and device ecosystem to deliver financial services. As the financial industry is highly regulated, partnering with an experienced player like Goldman would be helpful. Goldman also stands to benefit from the partnership; while the investment banking behemoth launched its online consumer bank in 2016, it doesn’t have a branch network or an established brand in the retail market, and this is where Apple’s vast base of iPhone users could be helpful.
While it’s not clear what terms Apple has Goldman has worked out, it will likely be some kind of revenue-sharing agreement with Goldman, like Apple has with developers and digital service providers on the App Store. If we assume that Apple takes a 20% cut on these revenues, it could garner about $1.1 billion in revenues from the partnership by 2022. The two companies
could eventually expand into other lucrative areas, such as wealth management and potentially checking accounts operated via the iPhone.
On the other side, the recent revelations from Spotify and it’s controversial experience with Apple (Apple trying to control Spotify’s market share) brings a lot of questions on the table. There are hundreds of startups that allow personal finances, card management, and other card relation operations outside the Apple Pay wallet. The temptation of changing the App Store policies for rivals will be just a whim away.
Additionally, Apple card will be unlikely to see the product outside of the US market in the next 3 years. Even if we assume that Apple will be using the global presence of Goldman Sachs outside the US, Apple needs to start handling multi-currency wallets and expand beyond US dollars. Especially given the volatility of some strong currencies in the Forex markets during the time of Brexit and the Trump administration.
So tell me your thoughts, do we need one more card in our wallet?
The following video is unboxing the titanium Apple card if you are interested.
