Why The Apple Credit Card May Never Be Profitable

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.

Will we ever see a trip report/ airline review again?

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.

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.

@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.

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.

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.

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.

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.

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).

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%.

Thanks

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

@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.

@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.

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.

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.

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.

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.

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.

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.

@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.

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!