As contactless payments become more popular in the US, card issuers should beware of Apple Card

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.

BrandIssuer
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

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.

How popular is Apple Pay?

In Q1 FY 2020, Tim Cook revealed that Apple Pay transactions doubled year over year and reached a run-rate of 15 billion transactions a year. Loup Venture estimated that 95% of the US top retailers and 85% of US retail locations adopted Apple Pay.

Source: Loup Ventures

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.

Image
Source: Pulse

Disclaimer: I own Apple stocks in my personal portfolio

Weekly readings – 14th November 2020

What I wrote

My reaction to Biden’s win

My thoughts on DoorDash’s S-1 filing

Business

Loup Ventures on Apple Pay

CBInsights has a long helpful piece on ByteDance, the owner of TikTok

Is advertising a new source of revenue and profit for big box retailers?

Apple’s transparency report which includes data on how often it complied with requests from authority

Technology

A couple of reviews of Homepod Mini by The Verge and WSJ

Apple executives talked to The Independent about the new chip M1 and how they were surprised at their breakthrough. Safe to say, there won’t be Macs with touchscreens any time soon.

Autonomous vehicles are hard. Really hard. Uber now wants to offload its autonomous vehicle arm to Aurora.

What I found interesting

The EU is about to relax regulations on encryption, a move that can threaten user privacy

Why Democrats lost Latinos in South Texas

Less screen time and more sleep critical for preventing depression

Apple’s latest move to increase services revenue

Yesterday, Bloomberg reported that Apple made a very interesting acquisition of Mobeewave, a fintech startup, for an alleged amount of $100 million. From Bloomberg

Mobeewave’s technology lets shoppers tap their credit card or smartphone on another phone to process a payment. The system works with an app and doesn’t require hardware beyond a Near Field Communications, or NFC, chip, which iPhones have included since 2014.

The Cupertino, California-based technology giant paid about $100 million for the startup, one of the people said. Mobeewave had dozens of employees, and Apple has retained the team, which continues to work out of Montreal, according to the people familiar. They asked not to be identified discussing a private transaction.

What does Mobeewave do?

Mobeewave is a Canadian startup whose technology enables merchants to accept mobile-based contactless payment by just tapping customer contactless credit/debit cards or wallets such as Apple/Samsung Pay on the back of an NFC-enabled device such as iPhone. In partnership with Mobeewave, Samsung launched Samsung POS in Canada in 2019. Participating merchants only needed to download the Samsung POS app onto their phones and go through a quick sign-up process for immediate use of the service. Here is how Samsung POS works:

Benefits from this kind of service include secure payments, reduced costs for merchants and enhanced user experiences. These benefits are particularly attractive to micro merchants such as street artists, small restaurant owners, flee market vendors or delivery drivers to whom every saving is critical. As contactless payments become increasingly popular around the globe, there is a lot of adoption opportunity for technology like Mobeewave’s. In June, Visa report that excluding the US, 60% of global face-to-face transactions were tap-to-pay. In the US, Visa had 190 million tap-to-pay credit cards with the goal of having 300 million by the end of the year. From the merchant side, 80 out of the top 100 enabled tap to pay. Covid-19 aided the adoption of contactless payments and even when the pandemic blows over, I can see that the new trend will be here to stay.

In Canada, Australia and European countries, contactless payments are capped. In Canada, the cap amount is around $CAD 250 while that in Europe is usually €50 EUR, according to Mastercard. In Europe, banks are required to prompt a PIN request when 1) after a customer has five contactless payments or 2) payments total €150 EUR. Though the requirements are aimed to bolster security, they present additional user experience, investment in hardware and security challenges.

What to expect from Mobeewave in terms of security

Mobeewave’s solutions do address the security challenges across markets, including EU. But the most innovation and exciting solution from the startup is the Mobeewave Limitless, which leverages 3D Secure 2.0, a new security standard used for online transactions. With Mobeewave Limitless, a cap on payments as well as a PIN entry are removed. Also, the chargeback and fraud liability are shifted to card issuers, away from merchants.

PIN entry on a consumer off the shelf (COTS) device can present a number of issues when needing to make a high value purchase. Our Mobeewave Limitless™ solution eliminates all of these while shifting the liability of the transaction away from the merchant. With Mobeewave Limitless™, we combine risk mitigation best practices of both card not present and card present technologies…

Eran Hollander, EVP Product at Mobeewave – Per Financial IT

What does it mean for Apple?

Personally, I had some difficulties with Apple Pay at stores in Omaha in the past. For whatever reasons, my attempt to pay with Apple Pay sometimes failed and it wasn’t a nice experience, especially when you left your credit card and wallet home thinking that your iPhone should be sufficient. The acquisition of Mobeewave, I think, will not change much the flow of how a customer uses Apple Pay. If anything, I hope that the technology will make every NFC-equipped device a more reliable POS than the current hardware available on the market.

I think this is a play to increase the Total Addressable Market (TAM) and services revenue for Apple. Reportedly, there are 25 million micro merchants and 5 million merchants in the world. There will be a small cut for Apple for providing this technology to merchants. Even at 0.01% of a transaction value, millions of transactions can result in a nice additional revenue source for Apple. While big name retailers can be a potentially massive market, there are a few operational challenges and quirks to figure out. I don’t expect Apple will reach this kind of market any time soon. If how Apple usually rolls out its products, services and updates teaches me anything, it may take one or two years before we can see Mobeewave available in countries.

Even though Mobeewave technology is available on Android, I won’t be surprised that in the future it will not be. Restricting the technology to only iOS will contract the TAM, but making it available to other app stores presents some challenges: 1/ will Apple create an app that works well on every both iOS, Windows and Android, and maintain it? and 2/ Apple is notoriously known for wanting to keep an iron grip on total user experience. Lending Mobeewave’s technology to other phone manufacturers may not make sense from this perspective.

Apple’s M&A success is something that, in my opinion, goes under the radar quite a bit. They have been pretty successful so far as CNBC noted:

Cook bolstered his point: “An example of that was Touch ID. We bought a company that accelerated a Touch ID at a point.”

There are other examples, too: In 2017, Apple bought Workflow, an automation app, which is now the Shortcuts app built into iPhones. In 2018, it bought Texture, a digital magazine subscription service, which is now the basis of Apple News+. The Animoji avatars users can drop into texts came out of the 2015 acquisition of FaceShift. Siri was the product of an acquisition. Apple’s industry-leading mobile chips are a direct result of the 2008 purchase of P.A. Semi.

Other deals were for companies that are closer to being competitors to Apple. In 2017, Apple bought Beddit, a hardware sleep tracker from Finland. Apple still sells Beddits, and even updated the hardware, but they had a lot of features removed in 2019, and Apple will add sleep tracking as a feature in its latest Apple Watch software this fall.

In short, I see a lot of potential and good things out of this acquisition and am excited to see how it will pan out in the future.

Disclaimer: I own Apple stocks in my personal portfolio.

3% cash back at Nike with Apple Pay

Today, I received this email from Apple

Here’s something to cheer about: now you can save 3% at Nike every time you use Apple Card with Apple Pay. This includes all purchases at Nike retail stores, Nike Factory stores, and on nike.com and Nike apps.

It is quite a notable development. Apple Pay is already the number 1 mobile payment application, surpassing even the famous Starbucks application (Source: zdnet). Nike is one of the most popular brands in the world with more than 1,000 stores worldwide. In 2019, revenue from Nike Direct, which comprises of sales from retail stores, mobile applications and websites, reached more than $11.7 billion.

Source: Nike
Source: Nike

I did a quick search on the best cash-back credit cards. 3% cash back is among the most competitive offer for retail stores like Nike. Plus, you can earn 3% through mobile apps and websites. The extra 1% in addition to the standard 2%, and the convenience of using Apple Card through Apple Pay will surely spark consumer behavior.

It’s very interesting to see how many more major partners will join the 3% cash back list. Companies will monitor closely the popularity of Apple Pay among consumers and wonder if it will be beneficial to be left out. Once more partners join, Apple Pay will have a bigger appeal to prospective partners and more leverage. The cycle will keep going from there.

Disclaimer: I do own Apple stocks in my portfolio

Weekly readings – 5th October 2019

Grab Accounts for 73% of Ride-Share Trips in First Half of 2019 in Vietnam.

Retailer Adoption of Apple Pay Quickens. Since I was able to use Apple Pay on my phone, I have been using it as the first payment method, even in a city as small as Omaha. I have been a pretty happy user ever since.

Source: Loup Ventures

Comparison of smart digital assistants by Loup Ventures

Meet the Women Leading Netflix Into the Streaming Wars

The man who built his own Lamborghini

Dog-walking startup Wag raised $300 million to unleash growth. Then things got messy. SoftBank doesn’t seem to be the Midas that some hyped it to be with its massive checkbook, does it?

Latest memo from Howard Marks: On the Other Hand

Researchers Discover the Tallest Known Tree in the Amazon

Measuring Apple’s Content Distribution Arm

WeWork Used These Documents To Convince Investors It’s Worth Billions. A long but good article on the accounting jujitsu that WeWork employed

Thoughts on Apple Card

On Monday, Apple introduced its in-house credit card called Apple Card. Since it’s not available yet and the details are quite numerous, you can read more in these two articles on TechCrunch and The Verge or watch the presentation yourself here. I’ll just lay out my thoughts on the card below

I am convinced that Apple Card will attract a lot of sign-ups. After all, it’s Apple. The application process is reportedly straightforward and easy (we’ll see soon in the upcoming months). You can apply for the card from your Wallet app and the card will be shipped to you. If you use an iPhone 6 or later and are a fan of Apple, you will likely want to try your hands on the beautiful-looking titanium card for free, as long as you qualify for one. Plus, there are millions of installed iPhone 6 or later out there. So getting folks to sign up won’t be an issue. What about the usage for Apple Card? For consumers to use the Card, Apple has to give them a reason to, an incentive.

Security & Privacy

Security & Privacy is a big sell from Apple and it’s no different in this case. Apple Card comes without the stuff that makes credit card fraud possible from the physical card perspective. Plus, the way Apple sets it up makes credit card fraud significantly more difficult

Because of the way it is set up, every purchase with Apple Card requires biometric identification aside from purchases with the physical card. In the case of a non-Apple Pay transaction online — you must get your card number from the app and that is unlocked via Touch ID or Face ID, so biometrics are still in the path. And, for Apple Pay transactions, they are authenticated at the time of transaction. I personally think it would be cool to optionally require a confirmation from your phone to let a charge go through as well, but that is likely a v2 situation.

From TechCrunch

In other words, somebody needs to steal your card, your phone and either your thumb(s) or your face to make an unauthorized purchase.

Apple claimed that it wouldn’t know anything about consumer purchases using Apple Card. Plus, Goldman Sachs won’t sell data to marketers. If you care about privacy, it is attractive. Now that I work in the credit card industry, I can tell you that the level of privacy intrusion by banks is crazy. It is entirely possible to track the location of a cardholder to a store, know whether a purchase is made and if a purchase is not made, use the user data to run ads offline and online to motivate spending. If Apple and Goldman Sachs can do what they claim, this is an appealing feature, but I doubt it will be the dominant one.

No fees

According to Apple, you won’t be charged with late fees or penalty fees. You will just incur interest on your late payments. A nice feature, but from my perspective, it is not a hugely attractive one, especially if you are like me who isn’t late on credit card payments. After all, late payments will affect your credit score and consequently future APRs.

APRs

Pretty in line with the industry standard. Nothing special about this as far as I am concerned

Visibility into purchase details

Apple claimed that users could see more details on what a purchase was and where it happened from the Wallet app, instead of the user-unfriendly lines you see from your balance statement or mobile app. Once again, a nice feature that won’t be a dominant one.

Cash back

Above is the cash back policy for Apple Card and Apple Pay. 3% on Apple-related purchases is nice, but it is not a daily event, given how expensive Apple items are. 1% cash back with the physical card is nothing special. It’s even less attractive than many credit cards out there on the market. The interesting one is Apple Pay

From Creditcards.com

Because other credit cards offer two percent cash back or more on certain categories only, two percent cash back on every category by Apple Pay is more beneficial to users. According to Apple, Apple Pay will be available in 40+ countries at the end of this year. The number of merchants that accept Apple Pay is impressively high in some countries. Here is what Apple reported on the presentation

There are cases in which Apple Pay will not be competitive. For instance, if you have a card that gives back 4% cash back on dining, it sure is a better alternative than Apple Pay, even if Apple Pay is an available option. Or if you have a co-branded credit card such as a hotel or airline co-branded credit card, there is a switching cost as you want to increase your rewards points.

But using a physical credit card isn’t as convenient as a contactless option such as Apple Pay, nor is it as secure. So which payment option works in a situation depends on what situation that is and what kind of credit card user you are. If you care a lot about rewards and cash back, as well as have the time and mental fortitude to remember all the details, using multiple cards is the way to go. Nonetheless, if you are like me, a “one guy, one card” type, I would prefer something simple and easy to use/remember. Then I can see the appeal of Apple Pay. Contactless, fast, secure and decent cash back.

A push for Apple Pay

I believe that Apple Card is another push for Apple Pay to make it the “iPhone” equivalent of payment methods. Since Apple Pay is not ubiquitously available, the Card offers the connection between Apple Pay and merchants who don’t accept the service yet. If you use the Card, you’ll earn cash back that can be, in turn, used for Apple Pay. As explained above, Apple Pay can seem to be an attractive payment method to a certain type of users. According to Apple, they are on their track to meet the goal of 10 billion transactions on Apple Pay this year. If you are already satisfied with Apple Pay, I suspect that you will get more hooked when Apple Card is launched.

It makes sense to push for Apple Pay as I think Apple will earn more revenue from the service than the Card. After all, whatever revenue from the Card will have to be split with Goldman Sachs as well.

To recap, I think that this is a push for Apple Pay from Apple, an attempt to thread a delicate line between getting into the financial world and not suffering from the regulatory headaches that come with actually getting in there. Personally, I don’t think it is a “winner takes all” situation. I suspect that users will carry multiple options around and that each type of credit card user will display different levels of love towards Apple Pay and Card. I am excited about the future updates from Apple for the Card, regarding features and benefits. After all, this is just their first iteration.