Epic vs Apple, Goldman Sachs trying to get into consumer banking and Uber potentially leaving California

Goldman Sachs wants GM’s credit card business

WSJ reported on 12th August 2020 that Goldman Sachs was in the running for GM’s credit card business. Since it launched Apple Card with Apple last October, it is just a matter of time before Goldman Sachs tries to land another partner. No bank in the right mind would invest in consumer credit card infrastructure just to work with one partner.

A deal with GM would advance Goldman’s ambitions on Main Street. Since launching its consumer arm, Marcus, four years ago, the firm has amassed $7 billion in loans and is aiming for $20 billion by 2025. Holders of the Apple Card had $2.3 billion in outstanding balances as of June 30.

In deals like the one being discussed, a new bank typically agrees to pay a small premium to buy an existing card portfolio and hopes to make up the money by encouraging more spending, signing up more cardholders, and cross-selling them on other products. The deals typically involve sharing of card interchange fees and other revenue.

Source: WSJ

I am working at a bank which has a partnership with a different car brand than GM. One of the issues that we have to deal with is gamers who sign up for a credit card and spend on their first purchase at a dealership to take advantage of big signing bonuses and low interest rate. These gamers, after the first month on book, will subsequently use the card much less. As a result, gamers become less profitable than other cardholders who use their cards more regularly. If they manage to land GM, Goldman Sachs may likely find out that issue which I suspect is NOT among their learnings from Apple Card. Another point worth calling out is that Goldman Sachs relies on Apple’s marketing expertise to acquire Apple Card’s users. With other brands, they may have to develop that skillset and invest; something that they may not find easy or cheap.

The article provided an interesting reference point for Apple Card. It had $2.3 billion in balance as of the end of June 2020. The GM’s portfolio has around $3 billion in balance. As mentioned above, the purchasing behavior of Apple Card holders may differ from that of GM credit card users, but it’s worth pointing out that Apple Card was launched only last October and GM credit cards have been available for much longer. It indicates that Apple Card is likely regularly used and has a decent growth.

Epic Games picked an ‘epic’ fight with Apple and Google

In its latest update of Fortnite, Epic Games offered users a payment option designed to circumvent the App Store and Google Play Store’s rules on commission fees. Using Epic Games’ new payment scheme, users would save around 20% compared to using the in-app payment on the App Store and the Google Play Store while the game maker avoids paying Apple and Google 30% commission. The two giants promptly removed the game from their stores. Epic Games went on to sue both companies for anti-competition practices and abuse of power. In a move conspicuously aimed at provoking Apple, Epic Games released an ads mocking the company’s legendary 1984 campaign.

The quick releases of the ads and lawsuits showed that Epic Games WANTED this fight and expected retaliation from Apple and Google. The game maker has enough money and popularity to think that they have leverage. Plus, it’s likely banking on public pressure and the recent scrutiny into big tech companies from lawmakers. Given the level of planning and what is at stake here, Epic Games clearly thinks they have enough to win, but Apple doesn’t back down. If Apple caves into Epic Games’ demands, it will set a dangerous precedent that any developers that want to get more margin can corner the company. While I do not think Epic Games will win their lawsuits, Apple and Google will ultimately be hurt in terms of brand equity and reputation. Plus, it will give lawmakers more ammunition in their investigation into the Cupertino-based company’s alleged anti-competition practices.

Even though I think Apple has contributed immensely to the distribution of software around the world and the app economies, and in some cases, they didn’t do anything outrageous or wrong, it’s time for them to sit down and rethink the App Store. Recent clashes with developers and increasing pressure from lawmakers, if dragged out too long, will harm the company in the long run. It’s fair to say that despite getting close to the unprecedented valuation of $2 trillion, Apple still enjoys quite some goodwill from many consumers and developers. While the goodwill is still in the bank, it should start rethinking its position on the App Store and avoid future trouble.

California vs Gig Economy

California’s law that requires gig economy companies such as Uber and Lyft to classify workers as employees is going to be in effect on 20th August 2020. The two companies went to the California Supreme Court to seek for an injunction that would table the law temporarily. Today, the Court rejected the motion from Uber and Lyft. Earlier on this week, Uber CEO threatened to suspect operations in California and potentially leave the state for good if their legal fight failed.

This is a far more complicated issue than it may appear. On one hand, I am in favor of the authority looking out for workers by forcing companies such as Uber to acknowledge them as employees and give them benefits accordingly. That is exactly what an authority should be doing. Without legal mandates, how would the likes of Uber cave and treat workers as they should? The fact that these companies have fought ferociously to defeat the new law says all about their intention. Both Uber and Lyft are unprofitable. Their survival may be in jeopardy if they have to endure more expenses as a consequence of AB5, the shortened name of the new law.

On the other hand, if Uber and Lyft actually leave, their departure may hurt some drivers whose livelihood depends on business with the gig economy companies and negatively impact consumers. Imagine what would be like when you could no longer order an Uber in San Francisco or California. Critics of AB5 lament that the law isn’t thought out well and the unintended consequences will outweigh possible benefits. They do have a point.

That’s why I think AB5 alone isn’t enough. It needs complementary initiatives. With regard to protecting the end users’ benefits once gig economy companies leave, I think there will be space for other startups with new ideas and implementation to come in and serve the available demand. AB5, to some extent, will foster competition and innovation. Plus, it does help to have a lot of venture capital fund available in California, that is waiting to be deployed. Another potential opportunity is to build out public transportation infrastructure so that the reliance on ride hailing companies will be alleviated.

Furthermore, the state of California needs to make sure that workers who are affected by the departure of the likes of Uber will be taken care of. Skill training, job opportunities and social safety nets will need to be extended. Of course, there are workers who prefer a flexible schedule that a full-time job doesn’t usually offer, but if the money and benefits are sufficient, given the uncertain time that we are in, I do think many people will change their position.

Disclaimer: I own Apple stocks in my personal portfolio