Apple Card launched earlier this week to wide interest and seems to be generating more consumer buzz than I would have guessed from the reward structure (which looks average). But I’m glad the company has launched such a product because it gives me an opportunity to write about Apple, a company that holds a special place in my heart not least because I have been an Apple product user for almost 3 decades. About a decade ago, AAPL also became the 2nd stock I’d ever bought and remained a key holding until just a few years ago when it was clear that the iPhone was beginning to mature (AAPL also featured in a 5-stock paper portfolio I launched in 2001 – Had that been my professional portfolio, my career would have been sterling! Talk about dumb luck. And talk about actual human stupidity for not buying it in a live account.)
While I continue to think Apple has one of the most robust and unique business models, Apple as a company appears to have mostly spent the last few years trying to escape the iPhone’s long, long shadow to only varying degrees of success.
But it is because of this context that I find the Apple Card a highly interesting move (more interesting than Apple Pay actually!). It is getting a lot of consumer interest, but I think its strategic value to Apple is underestimated by analysts / investors largely because it looks so much like a traditional product. But because of the ecosystem it operates in, I think the Apple Card has the potential to help Apple create its own version of Alipay / WeChat Pay, something that Apple Pay itself has failed to do.
While the name Apple Pay suggests a similarity to Alipay and WeChat Pay, they are actually very different products. Apple Pay created a new way of paying for things in a very convenient package. Alipay and WeChat Pay accomplished something similar through QR codes offline and cash transfers online, but the true revolution came through Alipay and WeChat Pay’s ability to act as a bank. Easier payments is mostly a convenience factor but easier banking is a revolution (especially in the emerging markets where the vast majority of people are unbanked). Currently Ant Financial (the company that operates Alipay) runs the world’s largest money markets fund with over $100 billion of, essentially, deposits. It is precisely because of Alipay and WeChat Pay’s growing power over banking that it finally forced the Chinese regulator to step in to control their growth.
The missing key has always been the deposits. Apple Pay gives you freedom over your credit card (your Apple Pay account can be associated with likely all of your individual cards, freeing you from needing to carry all of them), but it didn’t give you freedom from your bank. It didn’t give you freedom in how to manage your money.
I think Apple Card lays the groundwork to potentially do that. Right now the two consumer-friendly features that are getting a lot of attention are analytics (e.g. Apple Wallet will keep track of your spending amounts and categories as well as provide a map to show you where you made your purchases) and Daily Cash (instead of getting your rewards paid out monthly as is traditionally done by banks, you get rewards in the form of cash on a daily basis). Daily Cash’s strategic value is highly underestimated because it essentially funds your Apple Wallet with deposits. This will essentially be a drip transfer from your bank into the Apple Wallet via your credit card. It was already possible to fund Apple Wallet with cash using the stored cards but due to the way the product was positioned it didn’t make sense to have and use cash instead of cards stored in the wallet.
Once Apple Wallet hits a critical mass with stored cash, there will be lots of interesting secondary effects. Apple Wallet could become much more of a direct competitor to Venmo as you will be able to easily send money to friends via iMessage. The only reason no one does it now is because no one has cash in the Apple Wallet, and since Apple Wallet is positioned mostly to replace your credit card, you wouldn’t want to receive cash anyway. But Apple Card adoption is likely going to be strong. People will have cash in their Apple Wallets as a result.
Regulations will need to be watched but eventually with your cards and cash in the same place with a social network (iMessage) thrown on top, it starts to look like a bank with banking rails. There are so many ways a company like Apple can take to improve the banking experience once the setup is in place.
Lastly, Apple Card looks to have a better flywheel than Apple Pay. Apple Pay adoption has always relied on consumer interest. With high consumer interest, it gets merchant attention / adoption. But at the end of the day, merchants adopting Apple Pay doesn’t strongly encourage a user to swap away from the well-habituated use of a credit card. Apple Pay has a fairly weak flywheel with weak feedback loops. But with cash in the wallet, the flywheel becomes much stronger. With cash in the wallet, a new feedback loop forms between users. Users can send money to users. That strengthens the same-side feedback loop on the consumer side. Daily Cash, as its name suggests, is received daily which may increase the frequency of using Apple Wallet and possibly Apple Pay. A stronger loop on the consumer side should continue to feed through to the merchant side, especially when taking into account the fact that merchants pay up to 3% of transaction value for credit card purchases but none for cash purchases (Apple Wallet Cash likely will carry a fee but likely much lower than on a credit card). Many merchants also offer loyalty programs. Seems like an easy route for some of these loyalty programs to eventually run through the Apple Wallet and softly encourage users to use cash instead of card.
Potentially lots of interesting things here.
Disclosures: I do not own AAPL at time of publishing and have no intention to transact in AAPL stock in the next 48 hours.