Apple AAPL announced earlier this year that they would be offering a credit card in partnership with Goldman Sachs GS. Users are able to sign up for the credit card through their phones and access the card in just minutes. Apple issues their card holders a sleek titanium card for instances when an institution doesn’t accept Apple Pay.
The new card is a step into uncharted territory for both companies. Apple is trying to develop a new revenue stream beyond its hardware products, and Goldman Sachs is continuing its push into consumer financial products with the Apple card. However, skeptics point to how mobile payments has not caught on in the US like it has in other countries. Let’s take a closer look into the card and the obstacles it will have to overcome to succeed.
Putting the Pressure on Wireless Carriers
The tech giant’s move into banking could enable it to provide customers with financing on new iPhone models. If Apple were to reach this point, it would break off its relationships with wireless carriers like Verizon VZ and AT&T T. Wireless carriers sell expensive new phones to consumers in installment plans that are added to their monthly bill. The customers are then locked into the carrier until the phone is paid off. The Apple card paired with the SIM technology can make it easier for customers to switch between wireless carriers.
On top of all that, the card pays 2% cash back on Apple Pay transactions, 3% on direct Apple purchases, and 1% on purchases made with the physical card. Apple emphasizes privacy and security on the card; Apple does not know what you bought, how much you paid, or where you bought it. The analytics for spending are done on the device, not in Apple servers. Furthermore, Goldman will not sell purchase data to third parties.
Apple Pay is accepted by more than 70% of US retailers and is projected to work in more than 40 countries by the end of 2019. Additionally, Apple CEO Tim Cook stated that “Apple Pay will work in the mass transit systems of Portland, Chicago, and New York later this year.”
Mobile Payments Have Struggled in US
Despite increasing smartphone dependence, most Americans are still not using their smartphones to pay for things. This isn’t the case for countries like India and China where they are experiencing a massive increase in mobile purchases. In China, smartphone payments made up more than 80% of all purchases in the country in 2018. The US had adoption rates of mobile payment apps of less than 10%. Experts see the lack of interest in mobile payments and other rewards cards as major headwinds for the Apple credit card. The lack of mobile payments is an anomaly, as over 81% of Americans own a smartphone.
A major reason phones became the go to payment option in China and India is because cash was the only other, far less attractive, option. Both countries were cash dependent economies and mobile payments provided people with a much more convenient method of payment. India’s government encouraged digital financial transactions in order to stimulate tax revenue, as cash payments often happen under the table. In China, tech giants like Alibaba BABA and Tencent TCEHY began battling for consumers’ wallets and eclipsed banks during the skirmish. The US is a different ballgame for mobile payments, as the credit and debit card system is well established and widely used.
Conventional paying methods have still dominated the landscape, with credit cards making up more than 80% of purchases in 2018; Apple Pay made up only 9%. PayPal (PYPL) was the most popular non-bank option at 40% adoption.
Apple’s newest services initiative is an innovative method of expanding its revenue streams. The product definitely has some appeal with the cash back it offers for Apple payments, and the convenience of having your card within your phone at all times. However, the lack of mobile purchases in the US and the saturated market for credit cards are both headwinds for the Apple credit card. If Apple can successfully commercialize the credit card, then it opens many doors for the tech giant, but it first must figure out a way to conventionalize mobile purchases in the US.
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