ANALYSIS: How Apple Card is poised to accelerate Apple’s payments business (AAPL, SQ, PYPL, MA, GS)

Confirming months of rumors, Apple unveiled Apple Card — its first proprietary card product — at its event on Monday. Customers can apply for the card on their iPhones beginning this summer and, if approved, begin spending anywhere that accepts Apple Pay via a virtual card housed in Apple Wallet within minutes. Apple Card, which will be issued by Goldman Sachs and Mastercard-branded, will also include a companion physical card.Michael Short/Getty Images

Here’s our first take on its impact:

• The new card and features could give Apple Pay a boost. Apple Pay launched in the US in 2014 and has been adding users, but growth has been coming largely from international launches rather than US-market gains. The new Apple Card product provides features and incentives that we think could increase the utility of Apple Pay and accelerate its momentum in the US market, including a rewards structure that incentivizes using the virtual card over the physical card, as well as favorable terms and money management tools.
• It could be a hit with younger consumers. Digital money management features, rewards, and flexible payment options are especially popular with younger users, and could introduce transparency and simplicity into a market that consumers can perceive as opaque.Apple
• Despite a few hurdles, we think that it will be a success. To be successful, Apple will have to convince customers that Apple Card is a better option than existing products that reward users equally or better for Apple Wallet and plastic purchases and overcome reputational risks from its partner Goldman Sachs, though the bank’s other consumer-facing products, like Marcus, have been well received. But we think that the card presents a unique and enticing option for millennials, Gen Zers, and any digital-savvy customers, positioning it for a strong launch.

The card offers three key features: 

• Cash-back rewards that incentivize digital spend. The card will offer a flat 2% cash back on purchases made with the digital card, whether in-store, online, or in-app. For Apple-specific products, like Apple News+, the rewards rate will increase to 3%. But purchases made with the physical companion card will only garner 1% cash back, incentivizing users to opt to pay with their phone. Rewards will be disbursed daily as cash, rather than points, within the Apple Wallet app.
• Consumer-friendly digital money management tools. Apple Card will bring a new suite of digital money management services to its customers. It “automatically organizes and totals purchases” so that customers can see where and when they’re spending, both within Apple Wallet and in Apple Map. It also tracks insights in spending by category. And to protect user privacy, insights will only be derived from intelligence on the device, rather than on Apple’s servers; the tech giant won’t have access to what, where, or when users are spending. Users can also access immediate support within iMessage.
• Consumer-friendly fees and rates. Apple Card will be fee-free and won’t charge an annual fee or for late payments, international transactions, or over-limit purchases. Though Apple didn’t provide numbers, the goal is to provide customers with lower interest rates than competitors, and the product will calculate interest in real time. And customers can pay flexibly, scheduling payments more frequently than monthly, as a way of improving overall financial health.

More to Learn

In the latest annual edition of The Payments Ecosystem Report, Business Insider Intelligence unpacks the current digital payments ecosystem, and explores how changes will impact the industry in both the short- and long-term. The report uses forecasts, case studies, and product developments from the past year to explain how digital transformation is impacting major payment processing industry segments and evaluate the pace of change. 

Here are some key takeaways from the report:

• Behind the scenes, payment processes and stakeholders remain similar. But providers are forced to make payments as frictionless as possible as online shopping surges: E-commerce is poised to exceed $1 trillion — nearly a fifth of total US retail — by 2023.
• The channels and front-end methods that consumers use to make payments are evolving. Mobile in-store payments are huge in developing markets, but approaching an inflection point in developed regions where adoption has been laggy. And the ubiquity of mobile P2P services like Venmo and Square Cash will propel digital P2P to $574 billion by 2023.
• The competitive payments industry landscape will shift as companies pursue joint ventures to grow abroad in response to geopolitical tensions, or consolidate to achieve rapid scale amid digitization.
• Fees, bans, steering, or regulation could impact the way consumers pay, pushing them toward emerging methods that bypass card rails, and limit key revenue sources that providers use to fund rewards and marketing initiatives.
• Tokenization will continue to mainstream as a key way providers are preventing and responding to the omnipresent data breach threat.