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Does the Apple Card Signal Apple’s Plan to Ultimately Disrupt the Payments Industry?

Posted  April 3, 2019
By Jeffrey I. Shinder

Apple made big news last week when it announced its entry into subscription services, ranging from news to video streaming services.  Antitrust commentators, justifiably, expressed concerns that Apple might exploit the market power it enjoys via its dominant platform to undermine competition in those industries.  Obscured by the mainstream press attention regarding Apple’s foray into subscription services was Apple’s plans in the credit card industry.  This announcement merits more scrutiny as it raises many questions for competition in payments.

Apple is coming to market with a cobrand credit card, dubbed the Apple Card, issued by Goldman Sachs.  This program will be Goldman’s first foray into consumer credit cards.  Applicants will receive an immediate virtual card along with a physical card that will be accepted everywhere MasterCard is accepted.  The front of the card, however, will bear only the Apple logo and the cardholder’s name.  The rewards component on the card (3% cash back for Apple purchases, 2% for Apple Pay purchases outside of Apple, and 1% in physical stores using the physical card) is designed to accomplish two objectives; move consumers to digital rather than physical transactions and in the process encourage them to shop within the Apple walled garden.  While that configuration is somewhat unique, in many ways this looks and feels no different than a traditional cobrand card, which have been a mainstay in the payments industry for more than 30 years.  For that reason, many commentators in the payment space shrugged once the full details of this program were unveiled.

That ignores a few factors that merit further discussion.  Apple Pay has the capability to introduce meaningful new competition to Visa’s and Mastercard’s dominant networks.  As we have discussed before, Apple, to date, has shown no signs that it is prepared to disrupt the status quo in payments.  Look closely at the video from Apple’s announcement (see minutes 24-38) and you will see the first signs of Apple moving beyond its unusually passive approach to payments.  Look first at Apple’s claim that Apple Pay is now accepted at 70% of merchant locations.  While that figure seemingly conflates contactless functionality with Apple Pay acceptance, and is therefore misleading, it is the talk track of a company that views itself as a network.  Then look at the physical version of the Apple Card.  Do you see the Mastercard logo?  This is the design of a company that views the current payment network infrastructure as a necessary commodity (for now), to buried from consumer view.

That being said, there are lingering and troubling signs that Apple has no intention of disrupting the entrenched network-issuer payment scheme.  Apple receives interchange from issuers and is therefore invested in the perpetuation of that anticompetitive system.  Apple could offer consumers more robust ACH functionality and has chosen not to do that.  Apple could facilitate direct links between issuers and merchants that would be beneficial to consumers and has chosen not to do that either.

Against this somewhat contradictory backdrop, Apple Card will challenge Apple’s already complex relationship with issuing banks.  Tim Cook was remarkably brazen during the presentation last week, admitting that Apple has leveraged the data it has received from Apple Pay to configure its strategy to compete with its issuing partners.  Those partners were already skittish about Apple Pay.  They don’t like sharing their interchange revenue with Apple, and they have historically liked the prospect of being separated from their customers even less.  The banks followed Visa’s and Mastercard’s lead and agreed to a devil’s bargain with Apple that is now coming home to roost.   Whether this will cause them to question their adherence to the network model will be one of the interesting outgrowths of Apple’s strategy (if it is successful).

One last thought that screams out of the Apple video.  Look at what Apple characterizes as a groundbreaking innovation.  A card that empowers the cardholder to understand what they are paying.  A card that provides basic reports on spending to the cardholder.  If such basics are cutting edge, then, the credit card industry is really lacking in competition.  On that we agree with Apple.