Apple's credit card plans -- JD Power VP sheds some light on the move

JD Power's vice president of banking and credit card services, Jim Miller, provides insights into the potential for Apple's Goldman Sachs partnership.

Apple, iOS, iPhone, Goldman Sachs, Eddy Cue, Showtime, Apple services, banking, fintech
Serhii Mudruk / Getty Images

Apple will announce new streaming services and is also expected to share details concerning its forthcoming credit card plan in conjunction with Goldman Sachs at an event today. JD Power’s vice president of banking and credit card services, Jim Miller, shared a few thoughts on these plans:

Why is Apple interested in the credit card business?

“Credit cards can provide Apple with a new revenue stream, further diversifying beyond iPhone sales. Credit card balances are at an all-time high and credit losses remain low, so the economics are very good right now. Goldman Sachs will take the credit risk and incur most of the costs for the credit cards. Financially, Apple isn’t taking much of a risk.”

What sort of add-ons could the partners provide to make the service sticky?

“This is the challenge for Apple and Goldman Sachs. 

“They need to provide features that are different from other credit cards, or at least are easier to use. Tools that help customers manage their money have been offered for years and consumer adoption is relatively low. If the service could eventually eliminate the need for paper receipts, that would appeal to many customers. If the receipt could be stored in the Apple Pay app, then customers wouldn’t need to save their receipts, so would be one more way to eliminate paper.

"Location based offers/deals could be well received as long as they are not intrusive. Getting a relevant offer based on your history while in a store would be a good service as long as they can stay away from the creepy factor.”

Beyond the U.S., what about emerging economies, particularly Africa?

“In the emerging economies, one of the greatest challenges for the financial industry is competition from outside the industry. 

“Regulation and the payments system in the U.S. make this less of a concern. In Africa, mobile is giving people access to “bank accounts” that they have not had in the past. This puts cell phone providers in a unique position to offer banking services. It also creates opportunities for startup companies that come from outside of traditional banks. Payments in China are dominated by Alipay and WeChat, which is shifting the economy from cash based towards cashless. Banks have the advantage of trust and existing customer relationships, but as we have seen, if they don’t innovate, competitors can easily move in, especially were they are not protected by regulations.”

Is Apple becoming the ultimate challenger bank? 

Apple is partnering with a bank on this new credit card and already partners with banks on Apple Pay. Apple probably doesn’t want to get too far into banking, which is a heavily regulated industry. Because of their brand and technology, they will continue to find willing bank partners who will take on the risks and manage the regulations. Other technology companies are probably in a better position to directly challenge banks. Amazon also partners with banks (for example with Chase on the Amazon Prime Card). Amazon already has made billions in loans to small businesses in their marketplace. Bankers generally worry about Amazon more than Apple.”  

Apple has a reputation for being a premium brand. What sort of ideas could it re-invent to build business at the top end of this market? 

“For years, some credit cards served as a status symbol. Pulling out an American Express Platinum Card showed a certain level of wealth. The Chase Sapphire Reserve Card is made of metal. As more in-person purchases are made by phone, the status of an individual card disappears.

“Carrying an Apple product, or the latest version, is also a status symbol. If Apple and Goldman Sachs can find a way to make their service a status symbol, that would help both of their brands. Some type of recognition, either in-person or through social media, might support the brand image.”

Apple Pay is often described as delivering under expectations, yet in some countries (such as the U.K.) almost every iPhone user has at least tried it. To what extent are consumers becoming more prepared to adapt to a cashless society? 

“The move towards a cashless society varies dramatically by geography and generation. It has been reported that fewer than 10 percent of Norwegians use cash. In the U.S. millennials rarely carry cash, but that is not the case with older Americans. There are still some merchants who only take cash, which is slowing the elimination of currency.

“The U.S. also has a large percentage of unbanked people. They may not have the credit to qualify for a checking account and have to resort to expensive alternatives or stick with cash. Some industries are still cash based. In states where marijuana is legal, almost all transactions are done in cash, as banks are reluctant to provide service to an industry that is still illegal at the federal level. Cash is also used to avoid taxes or conduct other illegal activities, serving as an obstacle to going cashless.”

What are the risks of a cashless society? 

“One of the greatest risks is making life difficult for the poor. A society can’t go cashless without a solution for the entire population. One of the reasons Scandinavia is the closest to going cashless is that they have fewer people living in poverty and more government welfare.

“A second risk is the loss of privacy. Cash is still anonymous, unlike most electronic transactions (with a few exceptions). Some people may not be willing to give up their privacy to eliminate the need for cash. There may be some legal and illegal transactions where people don’t want to leave a digital footprint.

"There may also be unintended consequences. What will be the impact of people who make a living on tips? Some tips could be done digitally, but the amount could decline. How much are tips influenced by social pressures to be seen putting money in a tip jar? How will tips be made to door men (or women) and hotel staff?

“Eliminating cash could hurt some of the lowest paid professions.”

What risks does Apple face if it executes badly or is hampered in service delivery by its partner?

“Apple will have new risks because of its partner relationship. An Apple customer might be denied a credit card due to credit issues. They might be charged late fees or fall behind on their credit card payments and face debt collection. General customer service problems are bound to happen. These are all risks for Apple.

“Fortunately, credit card satisfaction is very high, and the card issuers are very good at dealing with problems. But there will be unhappy customers and some reputational risk. On the other hand, Apple customers will earn rewards on their credit card purchases, so that can create more Apple fans.”

What kind of cutting-edge service ideas exist that Apple could use? 

“A few credit card issuers are allowing cardholders to finance a large purchase at a lower fixed rate. Basically, it uses some of the credit line on the credit card to fund an installment loan without going through a separate application process.

"This would be great to use for purchasing Apple products. If a customer has a $10,000 credit limit, they could spend $2,000 on Apple products and pay it off over time without the high interest rate a credit card normally carries. It can all be done in minutes on the mobile app. 

“For most credit cards, it takes a while for transactions to show up. Capital One can send alerts virtually in real time. Since Goldman Sachs is building the infrastructure from scratch, they could offer real-time alerts for transactions. This gives cardholders a sense of security, since they immediately see whenever their card is used.

“Apple could build some innovative features so that parents can manage the card usage of children that are authorized users on their card. Ideally parents could set spending limits, amount spent in a day/week/month, restrict certain types of purchases. The parent could get the instant notification of the card. Not only would this appeal to parents, but it would get children/young adults used to using the Apple card and then many would get their own card when they qualify.”

We’ll learn much more about how Apple plans to deliver cutting-edge financial products later on today. And while focus will inevitably be on the company’s new streaming media services, it would be unwise to ignore the consequences of Apple’s credit card deal. Please check my live feed once it goes online later on.

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Copyright © 2019 IDG Communications, Inc.

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