Why The Apple Credit Card May Never Be Profitable

Filed Under: Credit Cards

In late March we learned the full details of the Apple Credit Card, which will be launching this summer.

The basics of the Apple Credit Card

The Apple Card isn’t actually that great for anyone looking to maximize credit card rewards, though the card will no doubt have widespread appeal given Apple’s loyal following, and given some unique features on the card.

Here are the basics of the Apple Card:

  • The card has no annual fee
  • The card offers 3% on all purchases made directly with Apple, including at Apple Stores, on the App Store and for Apple services, 2% when using the Apple Card with Apple Pay, and 1% on physical and card purchases made outside of Apple Pay
  • The card will have no fees, including no late fees, no foreign transaction fees, and no over-the-limit fees

The Apple Card will be offered from Goldman Sachs, which surprised many of us, since we assumed Amex, Chase, or Citi, might want in on the action.

So that brings us to some interesting updates on the card.

Citi almost issued the Apple Card

It’s being reported by CNBC that Citi was apparently in advanced negotiations with Apple for the rights to issue the card, though they pulled out over concerns that they wouldn’t be able to make money on the partnership.

Apparently other banks, including American Express, Chase, and Barclays, also had discussions, though none got in the negotiations as Citi did.

Some may remember that Citi took over the Costco contract from Amex a while back, which was an outrageously costly contract for them to win. That’s because they had to make the terms so good for Costco in order to steal them from Amex, and at this point many wonder if that was even worth it. Market share is great, but if you can’t make money on card members…

Could the Apple Card lose money for Goldman Sachs?

Apple will no doubt be making big bucks from their new co-branded credit card. Nowadays it’s generally the co-brand partner that benefits most from credit card agreements, as they can shop around and put card issuers up against one another.

Surely just about every card issuer wanted to work with Apple, so Apple had a lot of leverage in the terms of their agreements.

Now it’s making rounds that an employee at the card department of a competitor texted the following to someone at Goldman Sachs:

“Dude, if that portfolio ever makes money, I’m buying you a beer.”

I’m not sure why that text specifically got picked up for news stories, though it perhaps does very well reflect the concerns about the profit potential of this card.

In general card issuers make money from credit cards in a few ways:

  • Merchant fees, which are the fees the cut they’re getting on every purchase
  • Fees charged to card members, including annual fees, late fees, and other similar fees
  • Financing charges

What’s interesting in the case of the Apple Card is that it’s not actually that lucrative. You earn 1-3% cash back, and in general I tend to think this card will be most popular with those who are loyal to the Apple brand, rather than those truly looking to maximize rewards.

So why is there a fear that this card won’t make money?

  • The Apple Card won’t have an annual fee, so there’s no money to be made there
  • The Apple Card will have virtually no fees otherwise, so that also limits the upside for the issuer
  • While it’s possible some people will finance charges, some of the card features minimize the odds of this happening, and they also promise that they’ll have among the lowest interest rates in the industry

In other words, it sure sounds like the Apple Card will mostly be relying on the average merchant fee being higher than the average rewards to make the economics of the card work, and that greatly limits the upside for Goldman Sachs.

I’m sure this card will work great for Apple — they’re presumably getting some kind of cut, and this will encourage people to use the Apple platform as much as possible. But one has to wonder how Goldman Sachs hopes to make money here.

Bottom line

In many ways the credit card landscape is changing. While plenty of people are still financing credit card charges, increasingly we’re seeing people get better at maximizing credit card rewards, and that also limits the upside for card issuers.

For example, Chase has said that they’re not sure they’ll ever make money on the Sapphire Reserve. People are spending a lot on dining and travel (where they’re having to award triple points), and aren’t financing charges as much as they expected.

Even for the Apple Card, which isn’t especially rewarding, it seems like the upside may be limited. Most of the money will have to come from merchant fees, and after the 1-3% in rewards, that really wipes out the margins.

This will be an interesting one to watch over time…

  1. People will use the Apple card to finance Apple purchases. Even at “low” interest rates relative to other credit cards, Apple swag is costly, and those finance charges will add up. Don’t see it making a killing for GS, but I would actually be surprised if it doesn’t make money.

  2. GS needs to reach “regular” consumers to expand, and this card gives them a positive way (no fees, customer friendly policies, etc.) into consumer’s minds and wallets. I imagine they see it a bit as a lost leader.

  3. Soon, Goldman will be issuing mortgages, offering brokerage and wealth management and offering checking to “normal” customers. This card will give them plenty of useful data as they enter those markets. It is a foot in the door for their Marcus business.

  4. @Jason

    I find more value in these posts (did not know that the Apple card was 0% financing) and the posts by Tiffany with tips and recommendations from her travels than yet another paint by numbers review of a reverse herringbone seat on an airline that 99.5% of us will never fly (hello RwandAir).

    I am glad Lucky is mixing up his posts.

  5. Supposedly US consumer revolving debt is at an all-time high. Those of us maximizing rewards with high information, and not carrying balances, really do live in a different dimension than the general population.

    I’d love to see any intel surrounding what types of card products these balances are carried on. Based on just the anecdote of Chase getting flat-footed with CSR being unproftable, I’d suspect they skew towards basic airline co-branded cards (gotta get that family trip to Disney) and subprime products.

  6. Apple probably made the argument in their negotiations that payments using Apple Pay will reduce fraud, and they probably have a pretty good dataset of Apple Pay transactions that backs up that claim. If a lower percentage of the per-swipe fee goes to fraud risk mitigation, they may be able to make more money per-swipe than a competing 2% cash back card (e.g. Citi DoubleCash or Fidelity Visa).

    Goldman is also new to consumer finance, so they likely were able to bid lower to get into a new market.

  7. I think most purchases will be at 1% which is very profitable. Very few places take Apple Pay and Apple purchases would be a small % of most people’s spend, unless they just use other cards for that.

  8. Here’s on the flip side: “Card not present” transactions have a higher merchant fee due to the risk associated with the type of transaction. If transactions are processed through ApplePay, depending on the merchant processing agreement, they may have a higher fee, which is what GS may be counting on when offering the additional rewards on the back end.

  9. Only tangentially related, but the NYC subway system is about to start accepting Apple Wallet which I imagine will go a long way towards keeping the staying power of digital Wallets in the city (and I imagine some will reload their subway passes via Apple’s card).

  10. Can someone tell me whether the merchant fee (for a specific merchant) is the same for all VISA cards or does it depend upon the actual VISA card used and its rewards structure. For example does the merchant pay a higher fee for a purchase using a card that pays back 5% than a card that pays back only 1%.


  11. DATA DATA DATA … what you buy and when and how will be analyzed to death by GS and Apple If they overall make 1% on everything charged at the end of this, they will sell the data of the person for ADS on apple phone

  12. @neil – They’re different. A Visa Infinite card (such as the Chase Sapphire Reserve) is more costly for a merchant than a Visa Signature which is more expensive that a “regular” Visa. However, the card issuers have an “accept all cards” policy which means if you accept Visa, you have to take all of them. It’s a point of contention between merchants and card networks.

    The exact amount varies by the merchant type and to some extent the specific deals a large merchant (ie, Walmart) can negotiate.

  13. @neil @Daniel

    They vary but in the US Infinite and Signature both have the same rates is my understanding, contrary to much folklore. You can see the rates for Visa here:https://usa.visa.com/dam/VCOM/download/merchants/visa-usa-interchange-reimbursement-fees.pdf

    Again, these are the prices the banks pay Visa. Depending on which credit card processor a merchant uses, they may or may not see any differences at all. For example, if you are using a Square system off the shelf you pay a flat rate and Square takes the risk/reward of the card mix.

  14. Another way to interpret those quotes is competitor sour grapes vs. Goldman.

    The Fidelity & PayPal 2% cash back cards have “worse” terms for the issuer (and better terms for almost all holders) than does the Apple card. They seem to be doing just fine.

  15. Goldman through their Marcus retail banking operation has been looking to get more exposure to the retail banking landscape; this move makes a ton of sense to me and I also get why existing credit card issuers were disinterested. The effective cross-branding makes sense as Apple skews to a middle-class and above demographic. I certainly agree with other comments that this will enable Goldman to cross-sell savings accounts, checking accounts, and loan products to a targeted demo of now existing clients. Through the inherent demand that Apple will generate Goldman won’t have the growing pains and huge marketing costs they would have otherwise trying to offer their first mainstream credit card if they’d gone for it on their own.

  16. Since Apple Pay skims 0.15% fee on every transaction, and they don’t make much out of it as overall income( it’s not like people are using Apple Pay to pay stuff in the hundreds or thousands dollar transactions), they might be passing some or most of that 0.15% to GS. Apple main focus is to keep people locked on Iphones.

  17. What does this have to do with travel? Are you going to write about underwear next, on the grounds that (most of us) wear it when traveling?

    Please stick to the promise of this blog: that it is about travel. Start a new one if you want to blog about banking.

  18. As others have pointed out, I believe Goldman sees this as a way to get a Rolodex of customers that would not have traditionally been marketed to by Goldman.

  19. I personally don’t see why the worry about Goldman Sachs.

    a. 1% cashback for general case is the base of the cashback card these days.
    b. the higher reward rates (2% for Apple Pay and 3% for Apple products and services) both have sizable profits for Apple, which they can share with Goldman Sachs. And remember, it’s Apple we are talking about, not some random Chinese brands with razor thin margin.

    Frankly, I am surprised that they couldn’t do better. Mind you, Target card gives 5% discount/cashback, and Target is merely retailer.

    Hmm, this probably only proves that Apple is a terrible brand. I mean, not only they charge premium on their customers, if Goldman Sachs actually worry about profit, Apple probably stiffs them too. Oh, and I heard they freaking charge their employees for gyms. How penny pinching can a company be? What a terrible terrible company.
    You are worrying over nothing.

  20. @magice

    Oh, and I heard they freaking charge their employees for gyms.
    BUT BUT BUT, I heard they gave gym allowance instead so you could use that to either pay Apple or pay your local gym. Even better in my opinion.

    Apple might be a greedy company but they are definitely not a terrible company.
    P.S. Vote with your wallet. As long as people are throwing money at an overpriced fruit (that is not even fresh as someone already took a bite) company, they are probably doing something right.
    Full disclosure: iDon’t own Apple products and iThink only …. (dumb, smart, old, chic, whatever) are overpaying for technology. iStill don’t get it why people buys the crap they are selling post Steve Jobs. After Jobs era, Huawei, Samsung, hell even Microsoft are way more innovative than Apple. iSuggest Apple fans thank Donald Trump for trying to kill off Huawei for Apple.

  21. Citi will make a lot of money out of Costco. That cobrand was paid and financed by the winning card brand, not the bank. If you notice, that is almost the only portfolio with that card brand Costco carries in the US.

    Banks almost always win with a cobrand (except gas and telecomm–which are avoided by issuers). Apple/GS might not be as profitable as AA/Citi, but it will make some money and will give GS access to a database of “possible” clients for them to expand.

    Oh, and Lucky, yes, Chase is making money out of their Infinite product!

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