Yaman Jain

2424

BAP(Eco+Commerce)

Topic- Apple Card

(Apple’s collaboration with
Goldman Sachs and
Mastercard)
HISTORY

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.
REASON
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.
OBJECTIVES
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.

Apple card is a virtual credit card that can be integrated into the Wallet
app of the iPhone. The company has partnered with Goldman Sachs
and Mastercard for payment handling and processing. The idea
behind the launch of this new service is to replace the traditional credit
card with a new, smarter and secure payment method across online
and offline stores.

Applying for an Apple Card is possible within the Apple Wallet app
itself. Users can sign up for the card in the app and get a digital card
that can be used for payments. Users can track expenses on a daily,
weekly, monthly and even category-wise basis. There is also a
physical titanium credit card which does not have any other
information apart from the Apple Logo and the card holder’s name
below it. This also means that there is no CVV, credit card number,
expiration date, and signature that are usually found on traditional
cards.

All this information is stored in a special security chip used by Apple

Pay called Secure Element. Apple released the credit card with an
assurance of no late fees, no annual fees, no international fees, and
no over-limit fees. Besides that, the company would also not charge
penalties to users for late payments and offer lower interest rates as
well. Users would get a cashback of two per cent for through Apple
Pay by using the Apple Card and three per cent for making purchases
from Apple’s services itself.
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.
 The POS terminal, provided by an Acquiring bank (also called the
Merchant’s bank) is linked to the Card network. As soon as you swipe
your card, the Acquirer sends a request to the Issuer of your card over
the Card Network. Every card Issuer has a Processor in place that,
among other things, checks whether you have sufficient funds,
spending limit and whether a specific merchant can be accepted.
Once the transaction is evaluated by the Processor, a message is sent
back to the Acquirer authorizing or declining the funds. The whole
process must complete in less than 9 seconds or the transaction will
timeout and your card will be declined. That is why your card can get
declined sometimes even if you have available funds in your account.
If you have enough funds and our transaction is successful, here is
flow

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
Benefits
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.
Limitations
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.
10 predictions for its future

Now that you know the high-level components of the card payment
value chain, let’s look at the most likely strategy for Apple Pay.

1. Focus on the US market only for at least 3 years

It 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.

2. Unlikely to become a business card in the next 5 years

The value proposition of Apple Card might make sense to existing

consumers who spend a lot on Apple products and/or purchase at
stores or websites that accept Apple Pay. But outside the consumer
specific benefits, Apple will need to develop a new value proposition
focused around solving specific business problems.

3. Privacy Concerns

Apple promises that “All of the spending tracking and other information
is stored directly on the device, not Apple’s servers. And Goldman
Sachs will never sell your data to third parties for marketing and
advertising”

The company is fast to tackle the privacy question upfront and focus
on new data that you are about to generate with Apple. But nobody
tells you how you will get scored for a credit card. The credit card
market is all about existing data to evaluate your creditworthiness.
5. It’s going to be great but without a contactless chip

Contactless chip is a pretty standard feature that works with NFC to

make payments without requiring you to present your card. But Apple
Card doesn’t come with a contactless chip. You will be forced to use
your iPhone or Apple Watch that comes with NFC to make a payment.
And if you are out of battery, well… you will be “using it wrong”.

6. The life of Fintech startups as we know it today will change

The recent revelations from Spotify and it’s controversial experience

with Apple 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.

7. More restrictions for other cards to be in Apple Pay

If you want to scan your existing card and make it work with Apple
Pay, you have to make sure that your bank is participating in Apple
Pay. There is a strict process and fees associated with participation in
this program for banks, and it’s likely that restrictions won’t be relaxed
for new banks to enter. Here is a comprehensive list of banks working
with Apple Pay today.

8. The innovation won’t be on the card itself

The card is a viable product but that is pretty much it. Cashback, no
fees, no name cards, personal spending planning and tracker,
expense management — all of these are already existing on the
market. And if you are working with an external Issuer and its
processor, there isn’t much room for innovation. You should try to
innovate on the value-added activities complementing the card.
9. Apple will handle authorization processing within 2 years

The authorization or not decision of Goldman Sachs will most likely be

a binary choice as simple as “Is your credit limit reached or not?” The
real innovation can come if Apple starts to handle the actual
authorization requests and adds an intelligence layer on top of it. This
way Apple will be able to apply business logic and make a card that
follows your rules like Hey Siri, don’t allow Merchant X to charge my
card anymore.

10. Cashback is not a long-term strategy

Apple will give you 3% cashback on Apple products, 2% cashback if

you pay with Apple Pay and 1% cashback for merchants that don’t
accept Apple Pay. Apple Card will get traction given the scale of its
Apple-lovers community. But cashback is more of a marketing
gimmick rather than a long-term strategy. The main source of the
cashback is coming from the interchange received through the Card
network from the merchant discount fees. If cashback starts to
become the norm in the industry, the market will easily inflate prices to
cover for the additional costs and burden on top of the business. It’s a
zero-sum game.