Thoughts on Apple Pay and Apple Card

In this post, I want to discuss Apple Pay & Apple Card

Apple Pay

Natively available on almost every Apple device out there, Apple Pay is one of the most popular mobile wallets on the market. In 2020, 92% of mobile wallet transactions funded by debit cards in the U.S were through Apple Pay. This level of popularity can mean a windfall for Apple because for every Apple Pay transaction, the company is reported to earn 0.15% of the volume. In Q1 FY2020, Tim Cook revealed that the annualized Apple Pay volume was at $15 billion. At 0.15% take rate, Apple earns around $22.5 million in extra revenue for, what I would imagine, a very high margin service. Even with that advantage, I believe that Apple Pay still has plenty of potential to realize.

First, the wallet feature is still absent in many countries in Africa, Asia and South America, where a large portion of the world’s population resides. As the adoption of Apple Pay ramps up, it should increase the total transaction volume and consequently some additional revenue for the company. The second lever lies in how Apple Pay is and can be used. As of now, it is most used in online mobile transactions. In-store mobile transactions just don’t gain enough traction as there are only 6 out 100 shoppers that use the service in stores, even 7 years after launch. I don’t expect the in-store trend to change in the future. Where I do see growth opportunities for Apple Pay, though, is in online web transactions. As more customers upgrade from old Macbooks and iPads to more modern versions equipped with Touch ID and Face ID, it will make Apple Pay for web transactions an easier and more seamless experience. Finally, Buy Now Pay Later (BNPL). The whole market is red-hot and Apple is rumored to be working on its own BNPL solution. The big advantage for Apple here is that the feature comes in the Wallet app, which comes natively on every single device. Users don’t need to download any other app to apply. As the concept of BNPL becomes more common due to the popularity of apps like PayPal, Affirm, Klarna or Afterpay, Apple will just ride the coattail and won’t have to spend much money and time educating shoppers on the service.

Of course, I’d be remiss if I didn’t mention that there are also headwinds to Apple Pay. Companies such as Shopify, PayPal, Square, Affirm and Klarna all want to be the go-to app & checkout options for shopping transactions. These companies are well-known in the U.S and many international markets, as well as have enough resources to truly compete with Apple on this front. Hence, it won’t be all rosy roads for Apple Pay, but I do expect it to continue to grow in the future. If PayPal can process over $1.2 trillion in annual payment volume, it’s possible that Apple Pay could rise to $100 billion in volume, meaning $225 million in revenue and almost pure profit for the company. Since there are 1.65 billion installed devices in the wild, $100 billion in volume would translate to less than $100 per device a year. It seems doable to me.

Apple Card

Apple Card is a co-branded credit card issued by Goldman Sachs. The mega bank is about to close the GM portfolio purchase in the next quarter or two. Hence, their credit card balance is mostly, if not entirely, from Apple Card. According to the latest quarter result, Apple Card balance was $6 billion as of September 2021, up from $3 billion just a year ago. In other words, the Apple Card portfolio doubled its outstanding balance in 12 months’ time. The size of a co-brand portfolio is often a private matter, but I managed to find a few as a reference for Apple Card

• Gap: $3.8 billion in outstanding balance as of March 2021
• GM: $2.5 billion in outstanding balance as reported in October 2020
• Amazon: $15 billion in loans as reported in June 2021
• Canadian Costco: $2.38 billion in loans as reported in September 2021

A portfolio’s outstanding balance changes from day to day. Therefore, these numbers may be very different from now. Plus, these companies have a different business model, brand name and card offering than Apple. Nonetheless, I do think growing a credit card portfolio to $6 billion in loans in two years is not a small feat.

According to Experian and ValuePenguin, the average credit card balance in the U.S has been a tad more than $6,000 between 2019 and 2021. If we apply that number to the Apple Card portfolio, it means that the portfolio has a bit less than 1 million accounts. However, given that Apple Card doesn’t have a big signing bonus or intro offer and it can only earn 2% cash back when used with Apple Pay, I think that the average revolving balance is lower than $6,000. In fact, I think it’s very common that people just get an Apple Card because 1/ they want a nice-looking metal card and 2/ they want to put their big Apple purchase on installments. In the latter case, an Apple purchase should range from $1,000 to $3,000 in most cases. As a result I’d think that Apple Card’s average card balance likely ranges from $2,500 to $4,000.

Average Revolving Balance Per Account	# of Accounts (in millions)
$2,500	2.4
$3,000	2
$4,000	1.5
$4,500	1.3
$5,000	1.2
$6,000	1

The number of accounts can determine how much money Apple can get from this arrangement with Goldman Sachs. In the cobrand credit card world, the issuer has to compensate its partner for leveraging its brand. The compensation includes a finder’s fee (a certain amount for a new account opened) and a profit sharing agreement which may be based on interest income or purchase volume, for instance. I have seen smaller brands command $60 per a new account. Hence, it won’t surprise me one bit if Apple can demand a three-digit finder’s fee from Goldman Sachs, given that Apple shoulders all the marketing efforts. At $100 per a new account, 1 million accounts brings in $100 million in revenue for Apple. Even if we factor in the marketing and reward expenses that Apple might incur, it’s possible that Apple can bring in more than the $100 million figure since we know nothing about the profit sharing part between them and Goldman Sachs.

In short, even though these two services have great potential and can bring in meaningful revenue and margin to Apple, given the size of the company, they won’t move the needle much. Instead, they are great value-added services that enhance user experience on Apple devices. With Apple Pay, transactions on every website or app that enable the service are so easy to process. With Apple Card, it’s likely the only product that come with no fees and installment plans every time you make a big Apple purchase. As long as Apple users remain loyal and attached to the company’s devices, these services will have the runway to grow. Remember that Apple Card so far is only available in the U.S.

Disclaimer: I have a position on Apple.