Apple's (NASDAQ:AAPL) foray into the credit card industry is almost here. The Apple Card, unveiled in March, is expected to launch at some point this summer, and Apple is hoping to help its users better manage their finances and debt. The company is decidedly not looking to compete with premium rewards cards like the Chase Sapphire Reserve, American Express Platinum Card, or CitiPrestige, among others. Instead, Apple is positioning the Apple Card as a mainstream credit card with no annual fee.
In fact, the Apple Card's terms are so consumer-friendly that partner Goldman Sachs (NYSE:GS) might not make any money on it.
Citigroup reportedly passed on profitability concerns
CNBC reports that the Apple Card could very well end up being a money-loser for Goldman thanks to all of the ways that Apple hopes to help consumers save money on things like hidden fees and interest, which represent lucrative profit centers for card issuers. There are virtually no fees, and Apple Card will proactively nudge consumers to pay down their balances in order to pay less interest.
Citigroup was in the running to be Apple Card's issuing bank but decided not to move forward over concerns about profitability, according to the report. One key difference is that Citigroup has long been in the consumer credit card business and partnering with Apple for a potentially low-margin card offering could threaten to cannibalize its existing credit card business, which generated $2.2 billion in revenue in North America last quarter.
Goldman Sachs, on the other hand, is new to consumer lending with its Marcus brand, and Apple Card will be the investment bank's first credit card. That gives Goldman a little bit more leeway to take risks, since Apple Card represents incremental expansion into new territory. "And I think what you'll find is a level of innovation that Apple is known for and that Goldman Sachs as an innovator with some technology edge," Goldman Sachs CFO Stephen Scherr said on the last earnings call. "And as [CEO David Solomon] has said, the absence of legacy technology and importantly the absence of legacy business will enable us to be and has enabled us to be innovative along with Apple as a partner."
It's worth noting that Goldman's own analysts believe that Apple Card's reward structure is relatively underwhelming, estimating that most users will only earn the base 1% reward rate that isn't particularly competitive. The bank's analysts expect approximately 21 million users to sign up for Apple Card.
What Apple is really after
If Apple Card isn't expected to be profitable, then what is Apple really after? For starters, Apple Card's reward structure incentivizes Apple Pay adoption, giving 2% cash back for contactless purchases using Apple's payment protocol compared to the 1% rate for physical card purchases. Apple Pay is part of Apple's growing services business, getting an estimated 0.15% cut of purchases. Additionally, if Apple Card becomes the primary card for many users, the offering could make Apple's ecosystem even stickier.
The bigger question will be whether Apple can get a meaningful number of users to sign up and use Apple Card as their go-to card, particularly since the overall reward structure isn't very compelling for sophisticated credit card users.