In the four years since Apple Pay was launched, major banks and retailers around the world have allowed customers to use their iPhones to make payments.
On 25 March, Apple went one step further and announced its plans to release a digital-first credit card, Apple Card, partnering with global payments network MasterCard and investment bank Goldman Sachs.
With Apple Pay about to hit 10bn transactions in 2019, Apple’s thrown down the gauntlet to banks by launching its own credit card, which threatens to disrupt the lucrative payments business for banks.
Apple Card uptake will be driven by three key factors: 1) a frictionless application process that allows customers to sign up from their iPhones, 2) brand trust that is built on a successful ecosystem of products and services with a continuing focus on data privacy and security, and 3) integration with Apple’s wide device ecosystem thereby enabling a familiar and seamless user experience for consumers.
With more than A$4.5bn in credit card revenues at stake and Apple Pay being the most popular non-bank mobile payments app in Australia, there is significant potential for a disruptive new entrant or a neobank to partner with Apple and launch Apple Card in Australia.
If the Apple Card takes off, we could see other tech giants follow Apple’s lead and launch their own credit card. While this could prove to be disruptive to banks, the bigger risk is that consumers use mobile wallets like regular bank accounts thereby circumventing banks and cutting off their cheapest source of funding (ie retail deposits).
While fintechs and tech companies get all the media attention, Telcos could prove to be dark horse in the race to disrupt the big banks. Orange in Europe has already made successful forays in mobile payments and now banking services.
“A new kind of credit card”
It’s Show Time
Apple Inc. has long sought to reduce its reliance on hardware revenue by building a services ecosystem that leverages its compelling products across the smartphone, computer, tablet and wearables segments. At its March 25 event, “It’s Show Time”, the world’s largest company by market capitalisation unveiled the next phase of its transition into a tech-focused services company, introducing a slew of services including a premium news subscription service, a subscription video-on-demand service and a game subscription service.
Arguably of greatest interest, however, is the announcement of a digital-first credit card offering, Apple Card, for launch later this year in the US. Apple Card is marketed as being designed to help consumers lead a healthier financial life and offers several consumer-centric features such as spend tracking, interest forecasting and no fees. In this report, we look at Apple Card and its features, how it compares with the credit cards already on offer and potential implications for the big banks.
Figure 1. Apple Card – features and customer proposition
SOURCE: Apple, Venture Insights
Apple Card – it’s good but is it good enough?
Many of Apple Card’s selling points are neither unique nor novel in the US credit card market. For example, several credit cards provide customers with attractive cash rewards and mobile payment support. Others offer no annual fees or low interest rates. But Apple has taken a unique approach by combining some of the best features across the credit card landscape into a single package, to deliver a potentially tempting proposition compared to the incumbents.
Figure 2. Comparison of credit cards from major US banks
In addition, Apple Card offers three key points of differentiation that could potentially drive uptake:
Ease of application – customers can sign up for Apple Card on their iPhone through the Wallet app, be approved in minutes, and start using the card immediately. This compares favourably with traditional credit cards, which usually involve an extensive online application and long credit approval process followed by a substantial wait for a physical card to be mailed to them.
Focus on privacy and security – Apple is the world’s most valuable brand and has consistently ranked highly on customer satisfaction across its product lines, leading to strong and persistent brand loyalty and trust. Traditional financial services providers, on the other hand, have suffered poor perception particularly since the Global Financial Crisis, while disruptors, such as neobanks, have yet to build a robust brand reputation and suffer from relatively lower consumer awareness. Furthermore, its continued focus on user privacy and data security is in stark contrast to the approach taken by other tech giants. In a world where regulators are increasing their scrutiny of tech giants and their data practices, Apple’s approach could potentially be a key selling point for customers worried about how their data is being used.
Familiarity to consumers – Apple Pay has rapidly grown into a leading mobile payments service, with an estimated 38mn users in the US. Apple Card seamlessly integrates into the familiar Apple Pay setup, while offering additional advanced features, such as purchase geolocation, tracking and categorisation within the Wallet app that Apple Pay users are already familiar with.
Figure 3. Apple Card – tracking purchases by location
Historically, Apple has derived the majority of its revenue from hardware sales with iPhone device revenues accounting for 61.5% of Apple’s total revenue in Q1 2019. With hardware sales and revenue growth plateauing in recent quarters, Apple’s made a big push towards diversifying its revenue by increasing its focus on services such as Apple Music, Apple News and Apple Pay.
Apple Card – allowing the fox into the henhouse
The Apple Pay model relies on Apple taking a cut of the merchant fee paid to the card’s issuing bank, thought to be approximately 0.15% of the transaction value in the US. This can certainly translate into a substantial revenue stream as mobile payments scale up but is nonetheless a small proportion of the roughly 2.2% fee that US issuing banks receive from merchants.
With Apple Card, by providing the customer user experience and the card’s branding, Apple has the potential to claim a much larger share of the transaction fee pie. While the fee breakdown across the payments value chain is presently unclear, Apple will likely be taking a substantial cut of the 2.2% fee that the issuing bank (in this case Goldman Sachs) would typically receive. This would be compounded where Apple Pay is used as the method of payment, which Apple has incentivised by offering a higher 2% cashback to consumers for Apple Pay purchases.
We believe Apple Card is part of a broader strategy to increase customer stickiness and loyalty and lock customers into the Apple ecosystem.
Apple Card in Australia
The launch of Apple Pay in late 2014 signalled the beginning of mainstream adoption of mobile payments. Since then, mobile payment use has grown exponentially. Case in point, in mid-2018, Apple reported that Apple Pay processed over 1 billion transactions globally in the three months to June 2018. At their recent March 2019 event, less than 9 months later, Apple suggested that Apple Pay was on track to process an estimated 10 billion transactions in 2019. The Commonwealth Bank of Australia finally enabled Apple Pay for its credit and debit cards in January 2019 and signed up 500,000 customers in its first two weeks to take its total mobile payments user base to 1.5 million. This strong uptake of mobile payments is reflected in our own data. Venture Insights’ mobile payment survey in late 2018 showed that 57.5% of consumers had used their mobile to pay for products and services in the past, 56% of which were doing so at least weekly, with Apple Pay emerging as the most popular non-bank mobile payments app.
Figure 4. Which payment app do you mainly use?
SOURCE: Venture Insights mobile consumer survey September 2018 (n =1,005)
Apple Card’s potential Australian partners
Australian banks are amongst the most profitable in the world and comprise a greater proportion of national GDP than any other developed country. This has been built on the growth of the Big four banking oligopoly, which has led to an intense concentration of all banking activity in Australia to less than a handful of players. CBA, NAB, ANZ and Westpac together account for over 80% of home loans and around 90% of total banking sector profits.
As a result of this market concentration, the incumbents have been slow to adopt third party digital wallets, driven by an unwillingness to forgo part of their hefty transaction fee revenue. For example, Apple Pay has been shunned by Westpac and NAB over long-standing disputes regarding the cut that Apple would take from each transaction, while CBA and Bendigo Bank resisted for some time before relenting to consumer demand.
The hunger that Australia’s tech-forward consumers have for mobile payments, as well as the already-strong uptake of Apple Pay in Australia, would suggest that a digital-first, tech-branded credit card such as Apple Card would likely be successful. This provides an opportunity for an Australian bank to partner with Apple to bring Apple Card to the Australian market.
To contextualise such a discussion, it is important to note that Australian banks suffer from a significantly constrained transaction fee structure compared to the US, totalling approximately 0.85% from each transaction including payments to transaction processors and acquiring banks (vs approx. 2.75% in total for transactions in the US). This makes losing a share of the transaction fee to Apple less appealing and given the reluctance of the major banks to give up a much smaller cut to implement Apple Pay, it appears unlikely that one of the Big 4 banks would partner with Apple. However, the size of the prize at stake remains large – Australian banks generate about A$4.5bn in credit card revenues every year through credit card fees and merchant service fees.
We believe there is potential for a new entrant or smaller player to partner with Apple to bring the Apple Card to Australian shores.
With much lower market penetration, these companies would be more willing to sacrifice their transaction fee margin in order to tap into Apple’s large and established customer base. This has been the case in Apple’s US partnership with Goldman Sachs, a fledgling player in the consumer banking space that is looking to expand its presence. Interestingly, neobanks could stand to benefit most from such a partnership, being better able to withstand fee erosion due to their lower fixed costs compared to traditional banks, while leveraging the Apple brand name to reach mainstream acceptance and build market share.
Are other tech giants waiting in the wings?
We believe it is only a matter of time before other tech giants follow in Apple’s footsteps. Google has in the past briefly experimented with a debit card for its short-lived Google Pay predecessor, Google Wallet, while Amazon offers a physical Visa card with additional rewards for members of its Prime subscription service. Globally, the payments industry is a US$100+ trillion market in terms of transaction value with many large and small companies competing fiercely for retail, cross-border, peer-to-peer and e-commerce transactions.
With the launch of Apple Card, Apple has gotten a head start over the other tech giants and particularly so because of its captive customer base. In addition, its emphasis on security and privacy is diametrically opposed to the data-driven business models of companies like Facebook and Google that rely on leveraging user data for the purposes of targeted advertising, or Amazon which depends on user data to increase sales across its many complementary businesses. Apple has stated that user purchase data will never be sold to or shared with third parties, and the tokenisation feature of Apple Pay precludes tracking of an individual’s spending since a different transaction-specific payment code is used for each purchase. This may prove critical in influencing uptake, especially in light of recent scandals around user data and privacy on social media platforms.
An interesting case study can be found in China, where tech companies have come to dominate the mobile payments space. Here, credit cards, and banks for the most part, have been bypassed by a system where leading Chinese tech companies such as Tencent and Alibaba have digital wallet functionality within their app platforms which allow users to pay for products and services and also deposit funds like a normal transaction account. These funds can then be used for online and brick and mortar purchases, as well as P2P money transfers, without any need for a bank. These platforms arose in the mid-2000s as a result the emergence of online shopping, which combined with low debit and credit card penetration in China, necessitated a payment system that would be accessible to people across the country.
We believe mobile payments, driven by technological advancements, digitalisation of goods and services and increasing social acceptance, are well-positioned to bypass the traditional banking model by allowing consumers to pay for goods and services using a non-bank solution. In the near term, with more than A$500bn of card payments processed, there is more than A$4.5bn of revenue at risk for Australian banks. However, we believe a much greater risk could be the threat that consumers start to deposit their savings in a mobile wallet to make payments, thereby circumventing banks and cutting off their cheapest source of funding (i.e. retail deposits).
Post Script: Could telcos replicate Apple’s strategy?
It’s not just the fintech startups and tech companies that are going after big banks and their revenues; Telcos are also attempting to replicate the strategies of startups and tech giants. We believe the owners of communication networks and tech companies are well placed to disrupt the big banks and deliver services at scale. One successful example is that of Orange in Europe. Following the model of fintech startups and tech companies, Orange has successfully built its financial services business with Orange Money in Europe and Africa, and Orange Cash electronic wallet and contactless payment system in Spain, in partnership with MasterCard and, in France, with Visa. Orange Bank, which was launched in France about a year ago, is going to be rolled out in other European countries starting with Spain in 2019. Orange expects its banking foray to break even in France within six years and is actively looking at other synergies in the telco and financial services space. Orange also expects its banking revenue to increase 4x by 2022.
For Orange, it’s all about client retention. Converting subscribers into combined telco and bank customers by bundling in payments and banking services should increase customer stickiness and loyalty. In addition, the combined location and spending data (through mobile phones and banking respectively) could potentially help telcos cross-sell other products as well. Venture Insights will be publishing a report on telcos and their fintech strategies shortly.