Apple has announced that they will begin offering a branded credit card this summer. For US consumers, this really doesn’t sound like news of note, beyond the “Apple said it” effect. The current articles on the card have focused on the consumer features of the card or opened the question that the product looks like it won’t make money for Apple. Analysts then expound on how Apple doesn’t need to make money on this card. I think they’re missing the point. They are focusing on the consumer features, not the back office. Apple Card has suffienciently good consumer features to not have a problem competing.

Disruption is Starting in the Back Office

Credit cards, as I understand it, have a fairly fixed formula of costs and financial drivers. Apple can’t fix or modify most of these, but there are some key changes they can make. They also have a partner who has no existing infrastructure and can roll out a completely green-field operation. Examining what makes up a credit card we find:

  • Marketing: Branding, recognition, incentives to apply.

    Apple spends a lot of money branding and creating recognition. Like with Apple Pay and Google Pay we should expect to see merchants and others rush to offer free advertising about how they accept the Apple Card. More importantly though, Apple has restricted the audience of possible consumers to those who own an iPhone. They can carefully target this audience at a lower cost than a traditional provider who has to “target the world.” I also suspect that iPhone ownership correlates highly with credit-worthiness making a higher percentage of the target audience actual potential customers. As my uncle once told me, it’s the difference between selling cars and RVs. Almost everyone who walks on to the lot of an RV dealer can afford to buy.

  • The financials associated with lending money and fees.

    Neither Apple or Goldman Sachs can change the equation here. A strong partner like Goldman Sachs has just prevent Apple from needing to become a bank or build a finance division. I also suspect that Goldman Sachs has modest profit needs and doesn’t want to be too heavily invested in the consumer finance business. I would also not be surprised to see Goldman Sachs leverage the infrastructure being built to support Apple Card for new offerings targeting their traditional customer base.

  • Support for card customers and merchants.

    Apple is setting the rules here. All customers will use the cheaper support option. Apple can probably staff out support using its existing support operation as a base. Sure, Apple or Goldman Sachs will still need to run traditional support operations for merchants and other non-consumer actors in the transaction, however, this cost should still be lower for Apple Card than other players.

  • Processing fees for transactions.

    This card, like all US cards, relies on the the interchange fees charged to merchants. Apple, however, will benefit from more of those fees coming to it than to third-party processors because the card is designed to incentivize the use of Apple Pay. This should also have an add-on effect of increasing the overall adoption amongst Apple Pay users. This should allow Apple to have lower costs than the average industry player, and even make more money as adoption rises overall. Less than half of iPhone users are using Apple Pay, and this number simply has to be raised.

  • Statements, websites and other backoffice operations.

    Here is another area where Apple will save more money than average. Goldman Sachs should have no significant legacy systems investment or linkages needed for this whole new line of business. Apple’s technical talent should allow them to quickly build the web and back office infrastructure required as they have no technical debt like legacy players. Additionally, Apple is fixing several costs and eliminating a bunch of others. There is only one due date, the end of the month. Staffing and compute time can be planned and thanks to large providers, like Amazon Web Services, bursting has become cheaper than maintaining capacity in a lot of cases. It is unlikely that paper statements will be an option and all consumers are signing up for a new experience, therefore Apple can eliminate unnecessary cost drivers, even customary ones, from day one with no transistions or expensive customer retraining required.

Overall, I think that in a small margin game, excluding financing, like credit cards, Apple Card is going to set a new cost standard that legacy banks will be unable to compete with. This may show in higher reward costs as Apple pushes more banks to up their reward programs at a loss. If successful, the business model will stress legacy players or they will have to get creative in order to retain customers with what would not be substandard reward programs. Ultimately, this may be enough to start to disrupt the entire industry and finally succeed in up-ending banking. Others, like Walmart, have tried but not succeeded as they started at the Checking/Current account side of the equation. Apple has effectively started their battle from the credit card, and with Apple Cash is ready to compete on the banking side when they are ready.