Additionally Apple and Goldman Sachs make money from the interest rate. The average Annual Credit Card Interest Rate in the US is 17.67% and Apple gives you a rate between 13.24% to 24.24% based on your creditworthiness if you read the fine print is here.
You can find the complete list of interchange rates for the US market on the Mastercard website here. And a good report on the Annual Credit Card Interest Rate here.
And these are just the standard scheme fees and distribution. Apple and Goldman Sachs have decided not to make money from a few standard fees that are usually collected from the cardholder.
No annual fees. No cash‑advance fees. No international fees. No over‑the‑limit or returned‑payment fees. And best of all, no hidden fees.
No annual fees. A yearly service charge for owning a card.
No international fees. Percent markup (usually %1.5 to 2.0%) on top of the spot exchange rate when there are currency conversations. Revolut was the first company to offer 0% fx fees for currency exchange which made their prepaid card popular with international travelers.
No over‑the‑limit. This is an extinct fee that is very uncommon on the market today.
Returned‑payment fees. These are usually refunds and they are charged to protect from currency fluctuations. Since these card will have zero international fees, it makes sense to have this at 0.
ATM withdrawal fees. It’s still not clear whether Apple will charge cash withdrawal fees.
So at the end of the day, Apple can play with the math and decide how to make money that isn’t directly obvious to the consumer. Today, their strategy is mostly to gather money from the merchant discount in the form of interchange rates, and make the card as attractive as possible with no charges for consumers.
10 predictions for its future
Now that you know the high-level components of the card payment value chain, let’s look at the most likely strategy for Apple Pay.
1. Focus on the US market only for at least 3 years
It will be unlikely to see the product outside of the US market in the next 3 years. Even if we assume that Apple will be using the global presence of Goldman Sachs outside the US, Apple needs to start handling multi-currency wallets and expand beyond US dollars. Especially given the volatility of some strong currencies in the Forex markets during the time of Brexit and the Trump administration.
2. Unlikely to become a business card in the next 5 years
The value proposition of Apple Card might make sense to existing consumers who spend a lot on Apple product and/or purchase at stores or websites that accept Apple Pay. But outside the consumer specific benefits, Apple will need to develop a new value proposition focused around solving specific business problems.
3. There will be privacy concerns, because .. oh wait, risk scoring is about your data in the past
Apple promises that “All of the spending tracking and other information is stored directly on the device, not Apple’s servers. And Goldman Sachs will never sell your data to third parties for marketing and advertising” Great. The company is fast to tackle the privacy question upfront and focus on new data that you are about to generate with Apple. But nobody tells you how you will get scored for a credit card. The credit card market is all about existing data to evaluate your creditworthiness. Guess who has a lot of data for you... Makes sense?
4. You will pay
The production of a metal card carved with your name and bearing a premium Mastercard logo, shipped to your address will come at a price. If you are paying today $9.00 for the audio jack adapter on the left, my guess is that you will pay at least $19 per year for a plastic card, and $29 per year for a metal card. And a super premium golden card at $39. The virtual credit card stored in your Apple Wallet should come at $0.
5. It’s going to be great but without a contactless chip
Contactless chip is a pretty standard feature that works with NFC to make payments without requiring you to present your card. But Apple Card doesn’t come with a contactless chip. You will be forced to use your iPhone or Apple Watch that comes with NFC to make a payment. And if you are out of battery, well… you will be “using it wrong”.
6. The life of Fintech startups as we know it today will change
The recent revelations from Spotify and it’s controversial experience with Apple brings a lot of questions on the table. There are hundreds of startups that allow personal finances, card management, and other card relation operations outside the Apple Pay wallet. The temptation of changing the App Store policies for rivals will be just a whim away.
7. More restrictions for other cards to be in Apple Pay
If you want to scan your existing card and make it work with Apple Pay, you have to make sure that your bank is participating in Apple Pay. There is a strict process and fees associated with participation in this program for banks, and it’s likely that restrictions won’t be relaxed for new banks to enter. Here is a comprehensive list of banks working with Apple Pay today.
8. The innovation won’t be on the card itself
The card is a viable product but that is pretty much it. Cashback, no fees, no name cards, personal spending planning and tracker, expense management — all of these are already existing on the market. And if you are working with an external Issuer and its processor, there isn’t much room for innovation. You should try to innovate on the value-added activities complementing the card.
9. Apple will handle authorization processing within 2 years
The authorization or not decision of Goldman Sachs will most likely be a binary choice as simple as “Is your credit limit reached or not?” The real innovation can come if Apple starts to handle the actual authorization requests and adds an intelligence layer on top of it. This way Apple will be able to apply business logic and make a card that follows your rules like Hey Siri, don’t allow Merchant X to charge my card anymore.
10. Cashback is not a long-term strategy
Apple will give you 3% cashback on Apple products, 2% cash back if you pay with Apple Pay and 1% cashback for merchants that don’t accept Apple Pay. Apple Card will get traction given the scale of its Apple-lovers community. But cashback is more of a marketing gimmick rather than a long-term strategy. The main source of the cashback is coming from the interchange received through the Card network from the merchant discount fees. Why? If a product costs $100 at retail and given a 3% merchant discount rate charged by the Acquirer for collecting the payments, the merchant will only receive $97. If cashback starts to become the norm in the industry, the market will easily inflate prices to cover for the additional costs and burden on top of the business. It’s a zero-sum game.
If you want to hear more internal stories from the Payhawk team, remember the ABC of blogging — Always Be Clapping.