Traditionally known as an investment bank, Goldman Sachs did not usually count consumers among its clientele. The effort to venture into consumer banking started with its proprietary platform called Marcus. Then, in August 2019, GS launched its first ever credit card, Apple Card, in collaboration with Apple. In 2021, the bank announced that it was going to acquire the General Motors credit card portfolio from Capital One. The acquisition was only completed in February 2022, but it had some effect on Goldman Sachs’ balance sheet a few quarters prior to the completion (more on this later). Along with the GM portfolio, GS also added a platform for home improvement consumer loan originations in GreenSky.
It’s interesting to study the performance of Goldman Sachs’ consumer banking arm for two reasons. First, it will help us understand more how difficult and expensive it is to build and sell consumer banking products from scratch. Second, it is also a proxy of how the Apple Card has been doing, given the notorious secrecy of the Palo-Alto-based tech giant.
Between Q3 2019 and Q3 2021, we can be sure that all credit card balance on GS’ balance sheet came from Apple Card. I confirmed it to a member of the bank’s Investor Relations team (see below)
The GM portfolio and the acquisition of Green Sky were both closed in Q1 2022. It’s safe to say that the bank only included the additional loan balance on its books by then. Said another way, all credit card balance through Q4 2021 was from Apple Card
Between Q1 2021 and Q4 2021, the bank’s lending commitments included their estimate of the GM portfolio’s balance of $2 billion. The exact language is: “Credit card commitments also includes approximately $2.0 billion relating to the firm’s commitment to acquire a credit card portfolio in connection with its agreement, in January 2021, to form a co-branded credit card relationship with General Motors. This amount represents the portfolio’s outstanding credit card loan balance as of September 2021. However, the final amount will depend on the outstanding balance of credit card loans at the closing of the acquisition, which is expected to occur by the first quarter of 2022.” (Source: Goldman Sachs Q3 2021 10Q)
The GM portfolio’s estimated balance of $2 billion as of September 2021 was down from the $3 billion figure reported in August 2020
Between Q1 and Q3 2022, GS credit card lending commitments (another term of the amount of credit lines extended by the bank to credit card customers) included $15 billion in credit lines from the GM portfolio. From Goldman Sachs Q3 2022 filing: “Credit card lines issued by the firm to consumers of $60.66 billion as of September 2022 and $33.97 billion as of December 2021. These credit card lines are cancellable by the firm. The increase in credit card lending commitments from December 2021 to September 2022 reflected approximately $15.0 billion relating to the firm’s acquisition of the General Motors co-branded credit card portfolio in February 2022.”
Because lending commitments from the GM portfolio didn’t change over the last 9 months, even after the move closed, it’s quite safe to assume that credit card balance stays stagnant at $2 billion, give or take
Using the figures reported by Goldman Sachs and the facts mentioned above, I estimate that as of September 2022, the Apple Card portfolio had $12 billion in balance and $46 billion in credit lines. Those figures were significantly up from $3 billion in balance and $19 billion in commitments as of September 2020. That’s tremendous growth in just 24 months. At $12 billion in outstandings, Apple Card still trails behind the Amazon Prime Card, which is rumored to have $20 billions in comparison. But if Apple and Goldman Sachs can maintain this growth rate, that gap should be closed soon.
Apple and Goldman Sachs give me a $6,000 line on my Apple Card. Assuming that is the average credit line for every Apple Card holder, it would indicate that there are approximately 7.7 million customers in the portfolio ($46 billion divided by $6,000). The figure passed a sniff test to me when news outlets reported the GM book had 3 million customers and there were almost 500 million credit cards in the US. Furthermore, given the popularity of Apple devices in the US, where there are 330 million people in population, the Apple Card portfolio has a lot of room for growth in the future.
In addition, because credit cards are unsecured loans, I’ll be remiss if I don’t talk about delinquency rates of the Apple Card. In Q1 2022, when Goldman Sachs first reported past due loan amount, the 30+ day delinquency rate of the Apple Card was 3.5%. As the issuer tightened its credit policy, coupled with loan deferral programs as well as three rounds of stimulus checks, the delinquency rate dropped to as low as 1.63% before rising back up to 1.9% in Q4 2021. Compared to the 30+ day delinquency rate of Bank of America or Chase, Apple Card’s rate was about 70 or 100 basis points higher as of Q4 2021. While the risk exposure is not as good as it can or should be for GS, remember that the bank has relatively little experience in the credit card industry that has been around for 70-80 years.
Then, the GM portfolio came. The 30+ day delinquency rate of Goldman Sachs’ credit card business shot up to 2.3% in Q1, 2.73% in Q2 and 3.08% in Q3 2022. Keep in mind that this portfolio was previously managed by Capital One. Capital One is more willing to book consumers with FICO less than 670 than its peers. As a consequence, Capital One credit card books tend to have higher delinquency rates. Case in point, the 30+ day delinquency rate of its domestic card was 2.97% as of September 2022. While I don’t doubt that the introduction of GM increased Goldman Sachs’ risk exposure, the tough environment in 2022 might have also caused more Apple Card customers to miss payments.
As a result, I believe that the Apple Card portfolio has higher delinquency rates that what some other issuers reported, and the acquisition of a portfolio from Capital One apparently didn’t help.
New changes at Goldman Sachs
On 1/12/2023, Goldman Sachs announced that they made changes to their business segments and how they would report results to investors. Specifically, the bank will combine Consumer Banking, which includes its credit card division, and Transaction Banking to form what they call Platform Solutions. In the same filing to the SEC, Goldman Sachs disclosed pre-tax earnings/losses of the new segments in the last three years. The Platform Solutions segment lost almost $800 million in 2020, a tad over a billion in $2021 and over $1.2 billion in the first 9 months of 2022. Some news outlets and folks on Twitter were quick to attribute these losses to the Apple Card. So let’s take a look
While we can safely distribute much of the provision to the Apple Card, given the size of the portfolio, Operating Expenses made up most of the losses. This fact and the lack of detailed disclosures make it impossible to know whether the Apple Card really drove such expenses. Remember that Platform Solutions now includes the bank’s digital platform Marcus, Green Sky, the GM portfolio and Transaction Banking. Any of these can have an outsized impact on expenses, especially when the bank invested in infrastructure for future growth. Working at a bank that has retail banking and credit card products, I can tell you that normal consumers don’t know how complex and intensive it is to run and sell these products. Here are a few teams I remember on top of my mind:
Finance to control the purse
Compliance to make sure everything is legal
Credit Risk to help set the underwriting policy
Operations to make sure everything runs smoothly (and Operations is an umbrella term for several teams like Marketing Engineering, Credit Ops, Rewards, Embossing, Customer Care)
Customer Management to handle campaigns post-acquisition
Client Management to take care of projects and communication with our partners
Acquisition team to run campaigns to book customers
Data Analytics to help the business leverage data to make decisions
It’s a giant endeavor to run a Consumer Banking arm. So it’s not really surprising to me that Goldman Sachs is racking up losses at the moment. What I am not convinced of is that the Apple Card is highly unprofitable. Because we don’t have the data to back that up. At least, not yet.
How Amazon’s big private-label business is growing and leaving small brands to protect against knockoffs. It’s almost a given that Amazon strives to grow their private label business. Private label has been popular among retailers for a long time due to its attractive gross margin. Every business seeks to improve their margin and Amazon is no exception. Plus, activities that happen on these retailers’ property, whether it’s Costco stores or Amazon’s website, belong to them and they can do data analytics on them however they want. How do you think Costco knows what items to put their own private label brand Kirkland on? This is a risk that brands must be aware of when using Amazon as a channel. To lawmakers, it’s a common practice in the retail world. Not everything that the likes of Amazon do warrants an investigation. However, we do need to keep Amazon and other big retailers honest, and hold them accountable if they do something shady to benefit themselves at the expense of consumers.
The Super App Model May Not Be Suitable for the US Market. The fact that the Super App Model is popular in Asia, but not in the US is an interesting topic. I personally don’t think that under-powered smartphones drives much adoption in Vietnam. The likes of Grab operate only in big cities in Vietnam where most people use very good smartphones. If you go to rural areas, most likely you will find that consumers don’t know about these apps, let alone using them. I do think the lack of privacy concern in Asia, compared to the attitude in the US, is a boon to the Super App Model. Less regulatory scrutiny. Less resistance to sign up from consumers and hence, lower acquisition expenses.
The coming fight over the gig economy, explained. The federal government is attempting to classify gig workers as full-time employees, again. This is now at a proposal stage and will take some time before it can become an official rule. Even then, gig companies like DoorDash, Instacart or Uber, will challenge it to court. I am also unclear on how all the parties involved figure out a way to protect the freedom that gig workers enjoy while giving them benefits as full-time employees. Some drivers even prefer such freedom to a big higher pay. We are far from seeing the last chapter of this saga. Even then, I think the new proposal would likely benefit incumbents such as Uber or DoorDash. No other competitors have their scale to overcome higher operating expenses due to having to pay workers more.
($) Under Pressure, Goldman CEO Ditches Dream of Consumer Domination. While it’s positive that Goldman Sachs CEO wants his company to diversify and have a consumer-friendly image by offering consumer banking products, because it is a highly competitive and commoditized space, I am not really surprised that they have not got it off the ground. Scale matters. Because the bank is starting from scratch, they do not have the scale that other banks more established in the consumer space do. That necessitates high acquisition expenses; which won’t please investors. But how else would they go out and sign up people to open a checking account when the likes of Chase offer $300 bonus? Short-term pain is inevitable while long-term game is uncertain. That’s where the bank is at.
Inside the only lithium producer in the U.S., which provides the critical mineral used in batteries by Tesla, EV makers. Despite its importance, lithium is still very novel to most consumers. I hope this piece on a free yet popular site like CNBC will generate interest. I have mixed feelings towards this issue. On one hand, I hope that we will find more lithium because it will mean there are more chips which will result in more innovation. On the other hand, extracting lithium or other rare Earth minerals is very harmful to the environment. I hope somewhere somebody is working on a new technology that can power technological innovation without harming our environment
Other stuff I find interesting
($) How Finland Put Traffic Crashes on Ice. Slowing down vehicles instead of outright banning them, pouring resources into understanding why crashes happen and fining speedy drivers according to their income are some ingredients in the magical formula that helps Finland expand their road networks safely. “The Finnish transportation system is as impressive for its safety as it is for its multimodality. Only 219 people died on Finnish roads in 2021, or four per 100,000 residents — just one-third the US rate. And Finland’s roadways are growing steadily safer. Fatalities plunged 50% between 2001 and 2019, when Helsinki made international news for going an entire year without a single pedestrian or cyclist fatality. (Last year there were two, down from 22 in 1990.) Like its neighbors Norway and Sweden, birthplace of the Vision Zero traffic safety movement, Finland’s roads today are safer than they have been in decades.”
($) You Don’t Have to Be Vegan to Help Save the Planet. My wife and I have not been eating beef for months and instead of animal-based milk, we drink soy and almond milk. We do not plan to change that any time soon. We make these choices because we believe they are good for our health and help us lose weight. But apparently, our diet also benefits the planet: “Beef’s climate footprint is almost 100 times greater than that of plant-based protein sources like beans and legumes. Brian Kateman, who co-founded the Reducetarian Foundation in 2015 to advocate for cutting back on meat-eating for environmental reasons, points out that eating meat also comes with sizable water consumption. One 6-oz. serving of beef has a staggering water footprint of 674 gallons, according to the Water Footprint Network, compared with 34 gallons for a cup of coffee and 21 gallons for a single serving of salad consisting of lettuce, cucumbers and a tomato.”
Apple today announced a new Savings account for Apple Card that will allow users to save their Daily Cash and grow their rewards in a high-yield Savings account from Goldman Sachs. In the coming months, Apple Card users will be able to open the new high-yield Savings account and have their Daily Cash automatically deposited into it — with no fees, no minimum deposits, and no minimum balance requirements. Soon, users can spend, send, and save Daily Cash directly from Wallet.
Apple Card users will be able to easily set up and manage Savings directly in their Apple Card in Wallet. Once users set up their Savings account, all future Daily Cash received will be automatically deposited into it, or they can choose to continue to have it added to an Apple Cash card in Wallet. Users can change their Daily Cash destination at any time.
To expand Savings even further, users can also deposit additional funds into their Savings account through a linked bank account, or from their Apple Cash balance. Users can also withdraw funds at any time by transferring them to a linked bank account or to their Apple Cash card, with no fees.
Apple’s savings account marks the second time Apple and Goldman Sachs tag team to launch a financial product (with Apple Pay Later, Goldman Sachs’ role will be less prominent). Apple will take care of the customer experience while the iconic bank will handle the banking side. It makes perfect sense. Who is better than Apple in crafting a great user experience on devices that they manufacture? Apple also does not have any appetite in becoming a bank. Speaking from personal experience, I can tell you that while it’s great for consumers that banking is highly regulated, such regulatory oversight and scrutiny constitute a great deal of overhead for banks.
From Goldman Sachs’ perspective, they have ambition in growing their retail banking business. First, it’s Apple Card. Then, they got the GM portfolio and are said to be launching a T-Mobile credit card soon. Goldman Sachs has the drive and tools to handle the complex and cumbersome banking regulations. However, legendary as an investment bank as Goldman Sachs is, it will have to spend a lot of money on creating a consumer-friendly image as well as on acquiring customers.
The race to book new checking and savings accounts becomes increasingly expensive. Chase rewards new qualified customers who open a new Savings account with $300. I have seen similar offers from other financial institutions. My guess is that Goldman Sachs will have to compensate Apple for every Savings account opened through the Wallet app. The freedom that Apple mandates on the product for their customers means that it will be much more difficult for Goldman Sachs to forecast the cash flow and deposits. On the other hand, whoever opens this Savings account is less likely to close any time soon and Goldman Sachs won’t have to deal with gamers (who signs up to something just for the bonus and then leaves). If there are 10 million Apple Card users in the US, Goldman Sachs could potentially sign up thousands of Savings accounts in no time, due to this partnership.
From a consumer perspective, what are the benefits? Goldman Sachs already has a Savings product with 2.35% APY. I think this new Apple’s Savings account will have a similar yield. More importantly, it is the convenience and customer experience that will be the deciding factor. Instead of going through a bank’s complex application process, users can sign up for an Apple’s Savings account on their phone. Additionally, users can move money in and out of the account seamlessly at any time and instantly. With incumbent banks, it will take several days. We should not underestimate the impact that instant gratification has on user satisfaction.
Apple is building a Super App in the US?
Here is what Apple is currently offering:
Hardware: excluding very old models, AirPods and other headsets, all other Apple devices in the wild are capable of conducting transactions. And there are A LOT of them in the US. Whether it’s in stores or online, consumers can use their devices to make or receive a transaction
Wallet App/Apple ID: most Apple users use one Apple ID and all information is automatically updated and synchronized across devices, provided that they are connected to Internet. In other words, transactions and rewards earned from the physical Apple Card or a Macbook will show up on an iPhone without any action from a user
Apple Pay: arguably the most popular checkout option at counter and online on the market
Apple Card: an Apple-branded credit card that offers 2% cash back on everything with Apple Pay as well as 3% at Apple and a few other retailers. Users can also put their Apple purchases on installments with Apple Card. Rewards from Apple Card will be automatically turned to cash in Apple Cash that can be redeemed any time
Apple Pay Later: a new yet-to-launch BNPL service that will allow users to break a service into 4 installments with no interest or fees
Apple Cash: a service that enables Apple users to send money to and receive money from other people. Like a digital checking account
Apple Tap To Pay: this feature allows merchants to turn their iPhones into a payment terminal. A consumer and a merchant only need to put their iPhones close to one another and boom, the transaction is done
The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others.
It all started with Apple Pay in 2014. After almost 10 years, Apple Pay is accepted at many merchants in the country and around the world. It’s in the hands of millions of consumers who own Apple devices. Now, other pieces are in place to make Wallet and Apple devices something that consumers will use every day in “a seamless, integrated, contextualized and efficient experience”. I don’t know if the Apple executive team already had this vision a decade ago, but if they did, kudos for patience, long-term vision and execution.
JPMorgan Chase acquires payments fintech Renovite to help it battle Stripe and Block. Incumbent financial institutions are sparing no coins to invest in their technology stacks. Capital One has always touted itself as a technology company. JPMorgan Chase has plowed so much money into fintech that the long-time CEO Jamie Dimon is under pressure to justify the investments. But that’s the name of the game. Any company that wants to compete in finance in the future will need to put money where its mouth is
Goldman’s Apple Card business has a surprising subprime problem. Given the lack of disclosure from either Goldman Sachs and Apple on earnings calls, it’s helpful to finally to see some performance metrics of the Apple Card portfolio. The headlines are that more than 25% of the overall outstandings is from folks with FICO lower than 660 and the loss rates are among the highest in the industry. The article did well to note that Apple Card is a young business; therefore, its loss rates may not be fully comparable to other fully established ones. I’d also love to learn about the share of balance from Apple purchases. My theory is that since a lot of people use the Apple Card to break their payment into installments, the lower FICO crowd is responsible for the bulk of such payment plans’ balance. Is that necessarily a good thing? I don’t know. But if these “bad apples” are barred from holding an Apple Card ever again, whoever is left will be good loyal customers.
($) Instagram Stumbles in Push to Mimic TikTok, Internal Documents Show. If I were Meta investors, I would be worried. The company commits huge investments, HUGEEEEEEE, to the Metaverse, a concept championed by the CEO which, in my opinion, is very very far from reality and of course, monetization. Its business model built upon surveillance tracking is under pressure from Apple’s privacy-centric, though controversial, policies. Meanwhile, Reels, which is one of the highest priorities, is no match against TikTok. According to the Chief Operating Officer of Instagram, Reel’s differentiation comes from the ease of sharing content. I mean, that’s a very weak point. “Instagram users cumulatively are spending 17.6 million hours a day watching Reels, less than one-tenth of the 197.8 million hours TikTok users spend each day on that platform, according to a document reviewed by The Wall Street Journal that summarizes internal Meta research. The internal document showed that nearly one-third of Reels videos are created on another platform, usually TikTok, and include a watermark or border identifying them as such. Meta said it “downranks” these videos, meaning it shows them to smaller audiences to reduce the incentives for those that post them, but they continue to proliferate. For Reels users, the result is that often they are shown videos recycled from another, more popular platform. The portion of Instagram users who think the company “cares about” them fell from nearly 70% in 2019 to roughly 20% earlier this summer. On the question of whether the product was “good for the world,” the score fell from more than 60% in 2019 to slightly over 45%.”
Other stuff I find interesting
Good enough. On Twitter and business websites, you see all kinds of people trying to predict the performance of a stock or a business. Some do it with a breath-taking degree of condescension and over-confidence. At work, the phrase “data-driven” which refers to the practice of using historical data to back up a course of action is just overused and bores me to death. Instead, I like what Morgan proposed. Make all the predicting and forecasting good enough and then spend the unused bandwidth on something else. I don’t know, like understanding the industry, the customers or what is holding the company back and fixing it.
Shanghai emerges as China’s semiconductor highland. “In total, the market size of Shanghai’s semiconductor industry reached 250 billion yuan (US$36.95 billion) in 2021, or about a quarter of China’s total, according to Wu. The city has attracted over one thousand key industry players and over 40 per cent of the country’s chip talent, Wu added. Shanghai’s relative success in cultivating a big local semiconductor industry has been partly helped by the city’s preferential policies. To attract semiconductor businesses, talent and investors to the city, the Shanghai authority has rolled out a series of preferential measures, from government subsidies to tax breaks. Even during the city’s draconian lockdown in April and May, the local authority gave priority to semiconductor businesses to resume their production and operations as soon as possible.”
The Oldest Restaurant in Kabul: Where Tradition Trumps Rockets. “During the four decades of war that Afghanistan has been through, the Broot family never left the country. They kept their restaurant open and continued serving chainakito the hungry people of Kabul as rockets rained on their neighborhood, bombs exploded, and regimes changed.“
Macy’s CEO, a department store veteran, fights to fit in the Amazon future of retail. Macy is an interesting case study in which its online presence is so valuable that activist investors want it to be publicly traded alone, separate from the physical stores. “Of the company’s 5 million new customers that came in over the second quarter, more than 40% came to Macy’s digitally, Gennette said on the earnings call. In an effort to capitalize on its most valuable customers — those who shop at Macy’s both in-person and online tend to spend three times more than those who only shop at one or the other — Macy’s has invested in data analytics so it can follow when and what they shop, then tailor incentive programs and product messaging to them.”
Airlines Are Rewriting the Rules on Frequent-Flier Programs—Again. “The airline will make it possible to earn elite status without taking a single flight starting in March. Credit-card miles will count more toward status than ever before. Those who are true frequent fliers will get some added benefits, and business travelers who aren’t taking as many trips will be able to boost their status with their spending. Small-business owners and others who use their credit cards a lot now can be a top dog at American before they ever lift the buckle on a seat belt. Delta says it will automatically roll over status that SkyMiles customers have this year to 2022. In addition, it will pool qualifying miles earned this year and next together toward 2023 status requirements. Delta is also offering bonuses to qualify for elite-status tiers faster and is counting the flying that members do on award tickets toward status levels.” Another change that was encouraged by the pandemic. What doesn’t kill you makes you stronger, I guess.
New Zealand’s 180-million-year-old forest.“While most petrified forests are far removed from the modern forests that grow near them, Curio Bay’s petrified forest, which is a representation of an ancient Gondwana forest of cycads, gingkos, conifers and ferns, still has its descendants in the present-day forests found here. About 80% of New Zealand’s trees, ferns and flowering plants are native having evolved in isolation for millions of years.”
One of the World’s Poorest Countries Found a Better Way to Do Stimulus. “In Togo, a nation of about 8 million people where the average income is below $2 a day, it took the government less than two weeks to design and launch an all-digital system for delivering monthly payments to about a quarter of the adult population. People such as Bamaze, with no tax or payroll records, were identified as in need, enrolled in the program, and paid without any in-person contact.”
In this post, I want to discuss Apple Pay & Apple Card
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 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
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)
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.
Launching a credit card product is similar to putting together a jigsaw. There are many pieces: how to appeal to customers, which customers are an issuer’s likely target, what a good experience looks like, how an issuer can make money and how a card can compete with existing products on a market. In this post, I’ll go over my thoughts on the economics of a credit card, the main credit card types that I see on the market (excluding those debit cards that have credit card functions), the appeal of Apple Card and how different cards compare to one another.
Economics of a card
An issuer essentially generates revenue from three main sources with a credit card:interest paymentwhen customers don’t pay off their balance, fees (late fee, annual fee, cash advance fee, balance transfer fee, foreign transaction fee and others) and interchange. Interchange is a small percentage of a transaction that a merchant pays to a card issuer whenever a customer uses a credit card to pay. The more spend is accrued, the more interchange issuers generate. Interchange rates are determined by networks such as Visa, Mastercard, Discover and American Express. The exact rates depend on a lot of factors: the industry or category that a merchant is in, what type of card (high end or normal) is being used, regulations (Europe imposes a limit on interchange rates, unlike the US) and how a customer uses the card to pay (swipe, chip, mobile wallet, online, phone..).
On average, some categories such as Airlines, Restaurants, Quick Restaurant Services, Hotels or Transportation have an interchange rate somewhere between 2% – 3%. Other categories such as Gas and Grocery, especially at Walmart, Target or Costco usually yield a very low interchange rate around 1% – 1.4%. Any credit card that offers higher than 3% in cash back in a category likely loses money on that category as the interchange cannot make up for the reward liabilities. Issuers are willing to offer 3-5% cash back, knowing that they lose money on that front, because they are banking on the assumption that the money that they make up from other sources will offset that loss. Specifically, they are likely to make money on categories with 1%. For instance, if you buy clothes or pay for a subscription online or buy something from a Shopify store, your card issuer is likely to make at least 1% in interchange, after they give you 1% in cash back. Additionally, issuers that offer a rich reward scheme usually impose an annual fee to offset the reward liabilities and the signing bonus that they use to acquire customers.
Hence, cards with no annual fee offer a cash back between 1.5 – 2%. They can’t afford to go higher than that because the maths would unlikely add up. Cards that have an annual fee often come with high rewards and a big bonus. While a big bonus can be an attractive tool to acquire customers, it incentivizes short-term purchase bursts and unintentionally attracts gamers, customers who receive the bonus, cash it out and either become a ghost, if they don’t have to pay an annual fee, or close out the card for good. There are a lot of gamers and gamers aren’t profitable to issuers. However, issuers still dole out a big bonus and attractive rewards because they think that there are customers that stay for a long term and can provide the interest income and fees that issuers need.
Three essential types of credit cards
I call the first type of cards the “Everyday Card”. Examples of this category include Blispay and Citi Double Cash Back. These cards offer a standard rewards rate on every purchase category (1.5% to 2%) with no annual fee. There is usually a 3% foreign transaction fee and there is no signing bonus. What makes Everyday Card appealing is that customers do not need to remember the complex rewards structure. They can just “set it and forget about it”. It earns them respectable rewards on every purchase, even at Walmart.
The second type of cards is the “No Annual Fee With Bonus”. Examples of this category are Discover It Cash Back, Freedom Unlimited or Freedom Flex. These cards’ highest reward rate is usually 5% on a certain pre-determined category that tends to yield a high interchange rate. In some cases, this 5% rate can rotate every quarter, keeping it interesting for customers and making them locked in if they want to activate a preferred category. There is a signing bonus for new customers. Some cards reward customers with a few hundred dollars in a statement credit if they spend a certain amount in the first 90 days. This mechanism is designed to make customers locked in early. The issuers bank on the assumption that once customers earn their signing bonus, they will stick around to keep those rewards points alive. However, it’s not uncommon for customers to cash out their rewards and become inactive afterwards.
Discover’s signing bonus is designed to keep customers active during the first calendar year. They promise to match the cash back rewards at the end of the first year, but the bonus is a one-time occurrence and doesn’t repeat. This mechanism may keep customers active longer than what an outright statement credit does, but customers can always leave after the first year.
The last type of cards usually comes with an annual fee. Examples are Chase Sapphire Preferred or Bank of America Premium Rewards. Cards in this category come with a signing bonus after qualifying conditions are met and with a rich rewards structure. To offset expenses, issuers impose an annual fee. Customer acquisition may not be an issue with cards in this category, but will customers stay around after the signing bonus? Or are customers happy enough to pay a high annual fee every year? Also, these cards’ reward rate is high only in categories with higher interchange rate such as travel or dining. The rate is pretty light (1%) in other categories. While this approach appeals to a specific segment of customers, for customers that want “to set it and forget it”, does it still carry that same appeal though?
If you find credit cards complex and confusing, that’s normal because they are usually designed that way
Most credit cards can be pretty complex and confusing to customers. Let’s start with rewards. A tiered reward structure forces customers to mentally remember all the combinations of categories and rates. If customers have multiple cards in their wallet as they often do, it’s not an easy ask. Of course, there are folks that make a living in maximizing rewards, but that doesn’t work for the rest of us. In addition, it’s not always clear to customers how to categorize merchants. Merchants are categorized by Merchant Category Codes. These codes help issuers set up rewards and help networks determine interchange rates. MCCs are known in the banking industry, but to an ordinary customer, they don’t usually mean much. In some cases, issuers provide a list of qualifying merchants, but they can’t list all the available merchants and the practice is not ubiquitous.
Moreover, reward redemption can be a time-consuming process. Points or cash back earned in this cycle have to wait at least till the cycle ends before they are available for redemption. It can take longer in some cases, especially when it comes to signing bonuses. Here is a list of how long it takes for points to post at different issuers, compiled by Creditcards.com
How long it takes to redeem the signing bonus?
How long it takes to redeem spending rewards
8-12 weeks after a customer hits the spending requirement
When the current cycle ends
At the close of the billing cycle when the minimum spend is met
When the current cycle ends
Within 2 cycles of when the spending requirement is met
Up to 2 cycles
Up to 6-8 weeks after a customer hits the spending requirement
When the current cycle ends
8-10 weeks after a customer hits the spending requirement
When the current cycle ends. With Citi Double Cash Back Card, it can take a bit longer if customers don’t pay in full
Within 2 cycles after a customer hits the spending requirement
When the current cycle ends
Up to 2 billing cycles after a customer hits the spending requirement
When the current cycle ends
Up to 2 billing cycles after the qualifying period
When the current cycle ends
Figure 1 – How long it takes issuers to let customers redeem rewards
The final point in rewards is that issuers tend to deceptively inflate the rewards by posting numbers in points, instead of dollars. Understandably, 100 points sounds much better than $1, even though they have the same value. Nonetheless, it creates an unnecessary level of complexity for customers to mentally convert points into cash, especially when the reward value is big.
Rewards aren’t the only source of frustration for credit card customers. Credit cards are essentially loans on which you may or may not have to pay interest. However, issuers hope that customers will incur interest and fees (as long as they don’t charge off). How often are fees prominently and clearly marketed as rewards? How often do you see in advance the potential interest payment if you don’t pay off your balance? Here is a study by Experian on the concerns that consumers have about credit cards
Apple Card is designed to do something different
Apple launched Apple Card in August 2019 in collaboration with Goldman Sachs. Customers can apply for an Apple Card right from the Wallet app, which is pre-loaded on an Apple device. The preloading is a significant advantage as customers don’t need to either load another bank app or search for a website and apply for a card. As soon as an application is approved, customers can use their Apple Card immediately either by holding your device near an NFC-enabled reader or paying online. With Apple Card, cardholders earn 3% cash back on purchases at Apple and strategic partners such as Exxon, T-Mobile, Walgreens, or Nike, 2% cash back on others purchases using Apple Pay and 1% cash back using the titanium physical card. The 2% cash back on other purchases can be appealing, but not every offline or online merchant allows Apple Pay.
The biggest selling points of Apple Card are transparency and simplicity. Take their no-fee structure as an example. There is no fee involved with Apple Card. No annual fee, no foreign transaction fee, no over-the-limit fee and no late fee. While Apple remains coy on cash advance fees, their special clientele may not use the mainly virtual Apple Card for this specific reason much.
The simplicity also goes into their daily cash back. Typically, cash back earned through a credit card can take weeks to be registered and redeemed. Points or cash back earned this cycle must wait at least till the cycle ends before they are available for redemption. With Apple Card, cash back is earned daily in Apple Cash. As long as transactions are posted, customers can see the earned amount reflected in their Apple Cash. In real money term not in points. This takes away an unnecessary step for customers to mentally convert points into cash. Furthermore, Apple Cash can be used at any time, either in a person-to-person transaction, in a deposit back to a checking account or to pay back the outstanding balance in Apple Card.
In terms of transparency, Apple Card tells customers how much interest they are paying when making a payment. And their APR is on par with other issuers’. In the Wallet app, customers can determine how much of the outstanding balance they want to pay. Depending on the amount, Apple will let customers know in advance their interest so that they can make an informed decision. It is in contrast to what almost all other issuers do.
Apple Card only works with iOS devices and Apple Pay can be a challenge for elderly or less tech-savvy customers. Nonetheless, no card is perfect for everybody and the transparency and simplicity can teach us a lesson on how to craft a good customer experience. Despite being available only in the US and all restrictions above, Apple Card’s portfolio balance grew from $2 billion in March 2020 to $3 billion in September 2020 and roughly $4 billion at the end of 2020. Not bad for a portfolio with one card that is restricted to iOS devices.
Annual fee or no annual fee? Appealing and complex or straightforward and simple?
A good practice in positioning is to use a 2×2 matrix. In this case, I’ll look at Apple Card and the three main credit cards mentioned above through whether they are easy to use and whether they have an annual fee.
Let’s look at the positioning chart above. On the top right corner, we have an ultra-luxury card such as The Platinum Card from Amex. This card’s annual fee runs up to $550 and while rewards rate can range from 1x to 10x, it is not easy to remember all the details or to redeem rewards. On its left side, we have cards such as Capital One Venture and Chase Sapphire Preferred. These cards’ annual fee is $95, lower than the Platinum Card’s. Similarly, the complexity of cards such as Chase Sapphire Preferred is still high. Capital One Venture has 2x rewards rate on every purchase, making it less complex to use for some users, but it’s still time-consuming to redeem cash back.
Moving further left, there is Capital One Quicksilver. This card’s annual fee stands at $39 and it offers 1.5x on every purchase. It’s in the middle of the spectrums. On the “no annual fee” side, we have two groups. The first group features cards such as Freedom Flex and Discover It Cash Back. These cards offer a 5x reward rate, but it rotates every quarter and to some customers, that can add some complexity. The other group features cards such as Citi Double Cash Back and FNBO Evergreen. These cards have no annual fee and offer 2x on every purchase. Nonetheless, they still have a complex fee structure and a reward redemption process that can be improved.
The point here is that it’s very competitive on the top half of the chart. All these cards have their own unique selling points that appeal to different customer segments. What they do have in common is that their fees and reward redemption are pretty complex.
On the other side of the x-axis, there are Apple Card and Upgrade Card. Even though it’s straightforward to use Apple Card as there is no fee and cash back is earned daily, the use of Apple Card depends much on whether customers have an iPhone and whether merchants enable Apple Pay. 40% of mobile users in the US don’t own an iPhone and as discussed above, older and less tech-savvy customers may not find Apple Pay comfortable. Without Apple Pay, the titanium card itself earns customers a paltry 1% cash back.
Not all traditional credit cards charge fees. However, creditcards.com’s 2020 Credit Card Fee Survey found that the average number of fees per card is 4.5. For example, the 2019 U.S. News Consumer Credit Card Fee Study found that the average annual fee (including cards with no annual fee) is $35.23, the average late fee is $36.34 and the average returned payment fee is $34. 01. The Upgrade Card charges none of these fees. Over 90 percent of cards charge balance transfer fees and cash advance fees. The Upgrade Card enables you to transfer cash from your Personal Credit Line to your bank account with no fees.
With Upgrade Card, customers earn 1.5% cash back on all purchases as soon as customers pay off balance. The 1.5% cash back rate is lower than what Apple Card customers earn using Apple Pay, but on the other hand, Upgrade Card is device-agnostic and doesn’t rely on any mobile wallets. Hence, it is more accessible. However, Apple Pay allows customers to earn and use rewards daily while Upgrade Card only allows customers to redeem rewards after they make full payments.
According to the book The Anatomy of The Swipe, medium sized banks are essentially unregulated and can charge a higher interchange rate than big regulated banks. Hence, it’s very likely that Upgrade Card’s interchange rates are higher than those of cards issued by the likes of Chase or Capital One. The higher interchange rates can help offset rewards liabilities and generate revenue.
In fact, I am surprise to find no product like Upgrade Card from big banks. I suspect it would take a huge investment in infrastructure by legacy banks to offer the Daily Cash feature that Apple Card has. But legacy banks can essentially waive all fees like Upgrade Card does. While the likes of Chase, Discover or Capital One have more expenses than a smaller platform like Upgrade, they also have more popular brand names than Upgrade; something that would help tremendously in customer acquisition.
In summary, the credit card world is highly competitive. If an issuer follows the conventional way of launching a credit card, it will surely have a lot of competition and little to differentiate itself from competitors. In the upper half of Figure 4 above, I do think all the concepts and variations of rewards and economics have been tried. To be different, an issuer has to think differently and appeal to customers more with a superior customer experience (easy and simple to use) and less with complex features.
This piece tells a story about how Utah uses collaboration and human touch to create policies that help foster the state’s equality and economy. Two quotes stand out to me
Utahns seem strongly committed to charitable works, by government, alongside government or outside government. Whatever tools used are infused with an ethic of self-reliance that helps prevent dependency . . . when there’s a conflict between that ethic and mercy, Utah institutions err on the side of mercy
Betty Tingey, after seeing the news coverage about the Utah Compact, wrote to the Deseret News, “I don’t know much about politics except the sick feeling I get inside when there is constant arguing. . . . I don’t know how to settle debates, but I know a peaceful heart when I have one. I felt it when I read the Utah Compact.”
This clip about an 86-year-old baking master in Greece gave me mixed feelings. On one hand, I admire his work ethics, but on the other, it can be a condemnation of a system that forces old people to work this late in their life
Costs and benefits of a credit card from an issuer perspective
Issuing a credit card is a business and hence, it comes with risks, expenses, revenue and hopefully profits. A credit card issuer’s revenue comes from three main sources: interchange, fees and finance charge. Finance charge is essentially interest income or the interest on outstanding balance that users have unpaid at the end of a cycle. Fees include late fees, cash advance fees or annual fees, just to name a few. Interchange is what an issuer receives from merchants on a transaction basis, according to a rate agreed in advance and usually dictated by networks such as Visa or Mastercard. There are a lot of factors that go into determining what an interchange rate should be, but for a consumer card, it should not be higher than 3% of a transaction’s value.
As an issuer thinks about which credit card product to issue, it needs to balance between the benefits of the card, the expenses and the profitability. For instance, nobody would be paying $100 in annual fee for a credit card that has a standard 1.5% cash back without any other special benefits. That product wouldn’t sell. Likewise, an issuer would flush money down the toilet if it issued a card with a lot of benefits such as a Chase Sapphire without a mechanism to make money on the other side, like an annual fee. The art of issuing a credit card is to make sure that there is something to hook the users with and a way to make money.
The dynamic between a brand and an issuer in a Cobranded credit card agreement
In addition to having cash back or rewards on generic categories such as Dining, Grocery or Gas, an issuer can appeal to a specific user segment by having a special benefit dedicated to a brand. That’s why you see a Co-branded credit card from Walmart, Southwest, Costco or Scheels. These brands work with an issuer to slap their brand on a credit card. What do the parties in this type of partnership get in return?
From the Brand perspective, it offers to an issuer Marketing Assistance and an exclusive feature to appeal to credit card users. To the fans of Costco, a Costco credit card with 5% cash back; which should be very unique, is an enticing product to consider. Why saying no to extra money when you already shop there every week without it already? Moreover, a Brand can also be responsible for rewards at or outside their properties. For instance, Costco can pay for rewards at Costco stores or on Costco website or purchase outside Costco or the combination of all. It varies from one agreement to another.
From the Issuer perspective, it has to compensate the Brand in the form of Finder Fee, which is a small fee whenever there is a new acquired account or a renewal, and a percentage of purchase volume; which you can consider it a tax. The issuer, of course, has to take care of all the operations related to a credit card such as issuing, marketing, customer service, security, regulatory compliance, fraud, you name it. In return, issuers have an exclusive benefit to appeal to credit card prospects. They will also receive all the revenue, net the compensation to the Brand, as I described in the first section. Therefore, the longer a customer stays with an issuer and the more he or she uses the card, preferably revolves as well, the more profitable it is for the issuer.
What to offer
– Marketing Assistance & brand appeal – Rewards
– Finder fee (a fixed fee for every new account and/or a lower fee for every renewal – In some cases, issuers fund rewards as well – All operational needs related to a credit card – A percentage of purchase volume
What to gain
– Finder fees – A tactic to increase customer loyalty – A percentage of purchase volume from the issuer
– An exclusive feature to appeal to credit card users – Revenue, net all the compensation to the Brand
Typical credit cards
Based on my observations, there are three main credit card types on the market which I assign names for easier reference further in this article:
The Ordinary: cards that have no annual fees, but modest benefits such as 1% or 1.5% cash back on everything. These cards are usually unbranded
The Branded: these cards are Co-Branded credit cards that are issued by a bank, but carry a brand of a company. These cards can come with or without an annual fee, but they reward most generously for purchase at the company’s properties, such as 3-5x on every purchase. Then, there is another reward scheme for a generic category such as 2-3x on dining/gas/grocery/travel. Finally, there is a 1x on everything else
The Premier: these cards are often accompanied by a high annual fee. To make it worthwhile for users, the issuers of these Cards hand out generous benefits and/or signing bonus. For instance, a Chase Sapphire user can get 60,000 points after spending $4,000 the first 90 days.
All the three types usually work well with mobile wallets and have a delay on when rewards are posted (usually it takes a cycle). This delay isn’t particularly enticing to users because when it comes to benefits, who would want to wait?
Apple Card is a credit card issued by Goldman Sachs and marketed by Apple. The card has no fees whatsoever, but comes with some special features:
An expedited application process right from the Wallet app on iPhones
Instant cash back in Apple Cash – no delay
Native integration with Apple Pay
3% cash back on all Apple purchases
12-month 0% interest payment plan for select Apple products
2% on non-Apple purchases through Apple Pay
1% on non-Apple physical transactions through a chip reader or a swipe
Without the 2% cash back with Apply Pay, Apple Card would very much be for Apple purchases only. But because there is such a feature and Apple Pay is increasingly popular, I think Apple Card should be something that issuers need to beware. Let me explain why
With the increasing popularity of Apple Pay, Apple Card should not be taken light
Last month, the Department of Justice filed an anti-trust lawsuit against Google. Interestingly, the lawsuit said that 60% of mobile devices in the US were iPhones. That says much about how popular Apple’s flagship product is. With the easy application process and the native integration into iPhone and Apple Pay, Apple Card has a direct line to consumers. Once a consumer contemplates buying an Apple product, it’s impossible not to think about getting an Apple Card and reaping all the benefits that come with it. With the existing iPhone users, the extensive media coverage and the marketing prowess of Apple will surely make them aware of Apple Card. Therefore, other issuers are on a back foot when it comes to acquiring customers from iPhone user base. However, most people have multiple cards, so one can argue that this advantage may not mean much. To that, I’ll say: fair enough. Let’s look at other aspects.
If you compare Apple Card to the Ordinary above, Apple Card clearly has an advantage. In addition to the 3% cash back on Apple purchases, there is also 2% cash back on other purchases through Apple Pay, higher than the 1.5% offered by the Ordinary. Granted, Apple Pay’s presence is a requirement, but as more and more merchants and websites use Apple Pay, it’s no longer relevant. It almost becomes a given and this advantage Apple Card has becomes more permanent. Besides, Apple Card has no fees and can issue cash back immediately after transactions are approved, compared to a host of fees and a delay in rewards from the Ordinary.
Between Apple Card and the Branded, it’s harder to tell which has the advantage. It depends on the use cases. For on-partner purchase (purchase on the brand’s properties), Apple Card has no chance here as the reward rate from the Branded is much higher: 3-5x compared to 2x from Apple Card. However, things get trickier when it comes to non on-partner purchase. If a non-on-partner purchase warrants only 1x reward from the Branded, Apple Card has an advantage here as it can offer 2x rewards with Apple Pay. If a non-on-partner purchase warrants 2x reward from the Branded, the question of which card consumers should favor more rests on these factors:
How much do consumers care about receiving immediate cash back?
Can the transaction in question be paid via Apple Pay?
How much are consumers willing to go back and forth in their Apple Pay’s setting?
Between Apple Card and the Premier, the comparison depends on which time frame to look at. Within the first year on book, the Premier should have an advantage. No one should pay $95 for a card and does not have a purchase plan in mind to get the coveted signing bonus. In other words, savvy users should plan a big purchase within the first 90 days to receive thousands of points. In this particular use case, the Premier clearly is the better card. However, it gets trickier after the first year on book. Without a signing bonus, users now have to determine whether it’s worth paying an annual fee any more. The usual benefits from the Premier should be better than Apple Card’s, but the high annual fee and the delay in rewards may tip the cost-benefit analysis scale to a tie or a bit in favor of Apple Card.
Given my arguments above, you can see how Apple Card, provided that Apple Pay becomes mainstream, can become a formidable competitor to issuers. Apple Card may not affect the acquisition much, but it may very well affect the purchase volume and usage of other issuers’ cards, and by extension, profitability because, as I mentioned above, issuers’ revenue come partly from interchange. In other words, Apple Card should not be taken lightly as a gimmick or a toy feature at all.
According to a research by Pulse, in the US in 2019, there was around $1.3 billion worth of debit transactions through mobile wallet, $1.1 billion of which came through Apple Pay. This level of popularity will leave retailers and merchants with no choice, but to have Apple Pay-enabled readers; which in turn will gradually benefit Apple Card.
Disclaimer: I own Apple stocks in my personal portfolio