March's launch event at Apple Inc.'s (AAPL) headquarters in Cupertino, CA, was supposed to be all about the hardware maker's deeper dive into media and entertainment, and it was.The company announced a new gaming subscription platform (Apple Arcade), a more robust streaming content platform (Apple TV+), and a new premium subscription platform (Apple News+). The surprise announcement, however, was the Apple Card, a new form of Mastercard that Apple will be offering to users in August in partnership with Goldman Sachs Group Inc. (GS). This takes the hardware maker deep into financial services while capturing its 1.4 billion users in its ecosystem forever. As Oprah Winfrey said at the event, "There in a billion pockets, y'all!'
Apple offered the card to a select group of users on August 6th, and plans a wider release later in the month. The Apple Card will live on your Wallet App and be available across all of your Apple devices. It will track your spending with details like vendor names, payment due dates and monthly spending. There are no late fees, annual fees, international fees, over-balance fees, or higher interest fees if you are late with payments. There was no mention of the APR rate at the press conference, but if you followed the fine print, you'll see that it is somewhere between 13.24% 24.24%, based on credit worthiness. While the low end is low, customers with that kind of credit may be hard to find. The high end is standard and in line with other rewards cards.
According to Apple, the rewards for using the Apple Card are very competitive: "...Every time customers use Apple Card with Apple Pay, they will receive 2 percent Daily Cash. Customers will also get 3 percent Daily Cash on all purchases made directly with Apple, including at Apple Stores, on the App Store and for Apple services." Get it? 2 percent on all purchases, but 3 percent for buying more Apple services. That's sticky. If you can roll your Daily Cash into more games on Apple Arcade or to pay off your Apple TV+ charges, why wouldn't you? The cash rewards are delivered daily, and made available to you very quickly on your Apple Cash card balance.
But Apple does not want you to wind up in the vortex of credit card debt, which is at an all-time high in the U.S., according to the Federal Reserve. Apple won't be charging late fees, remember? But it will use machine learning to track your spending and suggest ways to manage your debt. Like the iPhone usage tracker users get every week, Apple wants you to be aware of your habits, as long as those habits are tied to its devices. Bailey put it much nicer at the event:
“Apple Card is designed to help customers lead a healthier financial life, which starts with a better understanding of their spending so they can make smarter choices with their money, transparency to help them understand how much it will cost if they want to pay over time and ways to help them pay down their balance.”
Apple's Services business, which includes iTunes, the App Store, and Apple Pay, is one of the fastest growing segments within the company, but it is still dwarfed by hardware sales. Services pulled in $10.9 billion in sales in the fourth quarter of 2019, compared to $73.4 billion for products. Apple doesn't break out iPhone sales anymore, but they were down 15%, according the company. Some analysts think Services could be a $100 billion business annually some day soon, and the Card might be the platinum ticket to take it there.
Big Tech moving into financial services is nothing new. Amazon.com Inc. (AMZN) offers the Amazon Prime Card with Visa, and it makes it hard to do anything outside the Prime jungle if you are a member. The Apple Wallet and Apple Pay were the Cupertino company's foray into digital wallets and payments, a multi-trillion dollar business. But it lacked a more versatile payment product that had a wider range of options and gave its users no reason to pay with anything else. Apple Pay is still not universally accepted, but Mastercard is.
Why Goldman Sachs
Forget the fact that Goldman bankers may be among the few who can afford the new iPhones anymore. The storied financial institution has been trying to crack into retail banking for several years. In 2016 it rolled out Marcus, its commercial bank, with a similar mission to Apple Card:
"Marcus personal loans and online savings accounts help people find ways to be smarter with their money. We're about helping customers do better now and in the long run."
Like Apple, Marcus offers no-fee personal loans to customers, and is relatively competitive with its checking and savings accounts. But Marcus has yet to establish its brand outside of Goldman Sachs' legacy. It is just starting to do that with some bold marketing moves in major cities, but the tie-in with Apple, the ultimate marketer and brand name, should help a little bit.
“Simplicity, transparency and privacy are at the core of our consumer product development philosophy,” said David M. Solomon, chairman and CEO of Goldman Sachs in Apple's press release. “We’re thrilled to partner with Apple on Apple Card, which helps customers take control of their financial lives.”
There is that 'control' word again. In March's media show in Cupertino, several executives from Apple kept mentioning that users don't want to jump around from app to app and device to device, to enjoy their experiences. They want convenience and they want it in their hands. Apple has revolutionized the way we use our hands over the past decade. With the average user touching their phone hundreds of times a day and spending as many as four hours looking at it, the iPhone is the stickiest of products. The new Apple Card just made it even more so.