Apple’s credit card mantra, “created by Apple, not a bank” probably missed the mark on credit fundamentals. Perhaps there should have been a banker or two on the design committee. Good credit card managers are not as fun as Californian marketers, but they can surely keep you out of trouble with their Type-A view of credit cards. Ask anyone at American Express, Chase, Citi, or Capital One. Credit cards are a high risk, high reward business. Before realizing a profit, plenty of blood, sweat, and often tears go into the process.
The WSJ reported that Apple snubbed Goldman Sachs, their business partner, with their provocative claim, dismissing the fact that Goldman invested plenty of money into the startup.
- That imbalance was on display in its partnership with Apple to launch a credit card, Goldman’s first. The cost of beating out other banks was accepting a number of demands from Apple, which is famously design-obsessed and exacting in its dealings with partners, according to people familiar with the matter.
- Goldman agreed not to charge late fees or sell customer data, trading away two key ways that credit-card issuers make money.
- Apple wanted control over the monthly statements sent to cardholders, pushing for jargon-free disclosures and its own signature font. Goldman’s lawyers warned that veering from standard industry language could invite regulatory problems, but the bank compromised. Apple got its font and Goldman trimmed the fine print.
And on pricing, here’s the difference between a tech company’s perspective and a financial institution. Hmm. Think about that. FICO scores of 620 getting the same deal as FICO scores of 760. Not for me, kemosabe.
- Apple initially wanted to charge everyone the same interest rate, regardless of their credit scores, people familiar with the matter said. On this point, Goldman pushed back. The card currently charges rates between 13% and 24%.
And the cost: big bucks.
- Even beyond the roughly $300 million Goldman spent to build it, the Apple card was a drain on the firm’s resources. When early testing of the software this spring revealed a security vulnerability, Goldman reassigned thousands of engineers from around the firm to patch it, people familiar with the matter said.
Now, if Chase won the deal, or perhaps Citi, you’d say the business had sufficient experience to be a winner. But don’t forget Apple’s first stab at a credit card with BarclaycardUS was a flop. Now we bring in Goldman Sachs with minimal retail banking experience.
- Goldman’s new consumer bank, which operates under the brand Marcus, has lost $1.3 billion since launching in 2016. It spent heavily on buying startups and cloud-storage space, hire hundreds of techies, and build call centers in Utah and Texas. Loans have gone bad at a higher rate than that of rivals.
Oh, someone forgot to build a collection department? Remember, credit is about safety and soundness! Think OCC!
- Marcus launched without a collections team to chase down delinquent borrowers, resulting in early loan losses, people familiar with the matter said.
- Meanwhile, the kind of loans Marcus offers are the first to go bad in a recession and aren’t backed by collateral, as home mortgages are. Goldman pulled back on consumer lending this year after losses were higher than expected, people familiar with the matter said.
Wait until the Apple card is 180 days old, and the initial writeoffs begin to hit. That will be a wakeup call.
Apple’s Tim Cook said Germany is on the horizon, according to Apple Insider. That will be interesting to watch as Germans tend to be more conservative about credit, operate under the EU PSD2 provisions for low cost operating structure, and are provincial about their banking system. And the acquisition costs are high. US Apple Card will be in the red through 2024, a lifetime in this business.
- Potential partners have a hefty amount of outlay to pay if they do sign up with Apple. It is claimed Goldman Sachs is spending in the region of $350 per Apple Card signup, with the investment bank not expected to make a profit on the user until they have been a customer for an average of four years.
As to the mantra “created by Apple, not a bank” it looks like the venture is off to a rough start.
Next time, bring the bankers. They are not as much fun but tend to be more pragmatic.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group