Concluding year, Apple tree introduced the Apple Carte du jour, a titanium credit card with a virtualized counterpart on iPhones and other Apple devices. Apple Card in turn uses the Apple Pay service, a user interface for existing credit cards such as Visa, MasterCard and American Express and now likewise for the Apple tree card. What is the business concern model of these payment services? Why would Apple, which earns coin from high-end consumer computing devices, want to enter the payment manufacture? In this weblog we present the business models of Apple Pay and Apple card and speculate on the strategy backside this movement. A companion White Paper gives more detail.

The assay in this paper is based on public information found on the web. If you call back we have misinterpreted the information that we institute, or that we missed important information, delight contact u.s. at info@thevalueengineers.nl.

Apple Pay: the payment infrastructure

The basic scenario that whatsoever payment scenario supports is that a customer buys a production (a concrete expert or an intangible service) and pays for it. In the simplest case, the client pays with greenbacks. But if the customer uses Apple Pay, a complex payment infrastructure comes into play. The next diagram shows the core stakeholders in this infrastructure.

In add-on to the Apple tree Pay services, a credit menu association such as Visa or Mastercard is involved. The merchant has an business relationship with an acquiring bank, which processes its credit card transactions, and the cardholder with the issuing bank, the bank that issued the card. Issuers and acquirers may outsource processing tasks to other companies, and some credit cards, such as American Express, are issuers themselves. Simply we ignore these complexities here as they are not needed to empathize the business model of Apple Pay.

Apple Pay: Payment services

The payment infrastructure provides several services to the chief stakeholders, the cardholder and merchant, as illustrated in the following diagram.

The issuer, card associations, and acquirer are role of the standard credit card infrastructure that provides the post-obit services.

  • The issuer provides credit to the cardholder and authorizes payment requests depending on the credit status of the cardholder. It also transfers the money to the merchant business relationship at the acquirer.
  • The acquirer processes payments for the merchant.
  • The credit carte du jour associations provide a trusted make recognized by cardholders and merchants, and a network through which issuer and acquirer substitution messages and payments. This is called network access and make usage (NABU). In addition, if a merchant accepts cards of a brand, then this attracts customers.

On meridian of this traditional payment infrastructure, Apple Pay provides convenience to the cardholder and security to the issuer. Cardholder can browse their credit card with their iPhone, which tin then securely stored in an iPhone, Apple tree Watch or other Apple device. Instead of remembering a PIN or having to evidence a photo ID, cardholders place themselves with fingerprint or face up ID. If the iPhone is lost, it tin can exist locked or fifty-fifty wiped with Detect-my-iPhone functionality.

Apple tree Pay: Turn a profit model

These services cost money, shown in the next diagram.

For the service of delayed payment, the cardholder pays interest. For the services of the payment infrastructure, the merchant pays fees to the issuer, card association and acquirer which tin add up to 2 – three%. In other words, the cardholder pays the toll plus interest and the merchant receives the price less the fees. The divergence is revenue of the infrastructure businesses.

Part of the interchange fee is passed on by the issuer to Apple tree Pay, because the toll of fraud and theft of credit cards will be lower when cardholders utilise Apple Pay. Apple tree takes 0.fifteen% of the transaction in the USA but much less in Europe, because the interchange fee in the Eu is much lower than in the USA. A reasonable gauge is that globe-wide revenue of Apple Pay is about U.s.$1B in 2020. This is peanuts compared to Apple'due south net acquirement of US$55B in 2019. So why would Apple tree want to offer Apple Pay?

Apple tree Pay: Strategy

We could identify four strategic reasons for Apple to move to Apple Pay.

  • Apple is still primarily a hardware company. The convenience of Apple Pay may cause more consumers to purchase an iPhone, Apple Sentry or other Apple device. And it volition motivate their existing users to go on using an iPhone.
  • Merchants volition display the Apple logo on a point-of-sale terminal next to credit menu logos. This turns Apple into a payment brand equally strong every bit that of the credit card associations, recognized by both Apple tree and non-Apple users.
  • In improver to gaining the hearts and minds of consumers, Apple Pay has gained Apple tree a identify in the fiscal ecosystem consisting not only of consumers, merchants, banks and card associations, but also of standards organizations, regulators, hardware providers and data processing providers.
  • Within this ecosystem, Apple has gained leverage over issuers. Apple tree Pay provides security to issuers by encrypting ("tokenizing") the bill of fare on the iPhone. Without this, Apple Pay cannot exist used. This gives Apple the leverage to demand the 0.fifteen% fee that issuers have to pass on to Apple tree Pay.

Apple Pay is a first step into the payment ecosystem that opens the door to much more.

Apple Bill of fare: Payment services

In a cooperation with Mastercard and Goldman Sachs, Apple introduced Apple Card in 2019. This is a major extension of the presence of Apple in the payment infrastructure, as shown past the following value network.

Apple card bug a credit carte, using the online depository financial institution Marcus by Goldman Sachs. Marcus is a digital platform for online consumer cyberbanking started by the investment bank Goldman Sachs. Apple is a non-bank credit card issuer similar many others, such as AT&T, General Electric and Ford. Information technology offers special discounts (called "cashback" in the USA) if you purchase Apple products or use Apple Pay. Still, the Apple card can too be used as physical card without Apple tree Pay.

Apple Carte du jour uses the Mastercard network. This is not visible to the consumer, because the titanium Apple card only displays the Apple logo and the consumer proper name.

Apple tree Card: Profit model

Apple Carte du jour'due south profit model is similar to that of other issuers.

Interest on consumer credit provided to consumers is non different from what other issuers charge, viz. xiii-24% depending on credit condition and payment behavior. The Apple tree Card cashback scheme is similar to that of competitors likewise. An early on speculation on the revenue for Apple tree estimates that Apple card will generate US$1B in 2020, increasing to The states$5B in 2022. Some of this will accept to be shared with Goldman Sachs.

Marcus past Goldman Sachs pays Apple Card US$350 for every new Apple Carte du jour customer only has some revenue sharing organisation for transactions performed with Apple Menu. We are not aware of revenue sharing arrangements with Mastercard.

What could exist the strategy of these three key players behind Apple tree Card?

Apple Card: Strategy

Goldman Sachs is currently non interested in Apple Card's profitability simply in growing a loyal consumer base for its startup, Marcus. Using the Apple tree brand and the appeal of the sleek titanium menu with the Apple logo and consumer name, Apple tree Card attracts an affluent consumer base of operations to which it tin offer other products later on. Apple has promised not to collect whatever payment data of consumers, but Marcus does have the data and can analyze it for its own employ.

The Apple card generates more traffic for Mastercard. Since Visa supports the Amazon card, it makes sense for Mastercard to motility with the flow of tech companies entering the payment ecosystem.

Apple tree Bill of fare keeps Apple users even more glued to their Apple devices than they already are. True to form, Apple offers a superb interface in which users can see on Apple tree maps at which merchant they used the Carte du jour, where this merchant is located, and when they used the card. As a useful side effect, all merchants that have Appel card must register themselves on Apple Maps.

And information technology offers fiscal management software by which users tin encounter how much they have spent, on what products, and what they should pay to Apple earlier which deadline.

Apple tree is at present a competitor with other credit cards in Apple tree Pay's wallet. This gives information technology fifty-fifty more leverage on other issuers. Convenience may steer users to use Apple Card rather than the other cards.

Gaining experience with Apple tree Card also prepares Apple for other financial products, such every bit debit cards and airplane tickets, and all other tickets that yous use a physical wallet for. Integrating this with Apple tree Maps and its home appliances, this creates a gluey ecosystem of currently about 1B users that covers their behavior at abode, on the road and in shops. If all of these would use Apple bill of fare, this would put information technology in the same league as Visa (iii.4B cards). At the aforementioned time, because Apple guarantees incompatibility with Android devices, this creates a stable market place for Apple devices.