Back in March Apple introduced their very own credit card, to the audience’s surprise.
There were virtually no rumors about Apple making a credit card and for some people the
idea didn’t make much sense.
Why would Apple, a technology company, enter the financial services market?
Well, that’s exactly what we’re going to find out.
This is Greg with Apple Explained, and I want to thank Nytstnd for sponsoring this video.
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Now although this video is about Apple’s credit card, we have to zoom out and see the
bigger picture in order to understand Apple’s strategy.
Because this is something much larger than a single product or service.
And it all started when Apple was faced with one of their biggest fears, the slowdown of
their primary source of revenue: hardware sales.
Now obviously Apple knew this would happen someday, and they took a few approaches to
prevent slowing hardware sales from eating into their revenue growth.
First, they began raising prices.
Over the past few years, the price of a flagship iPhone went up from $650 to $1,000.
The price of an iPad Pro went up from $650 to $800.
The price of an Apple Watch went up from $330 to $400.
The price of a MacBook Air went up from $1,000 to $1,200.
And the price of a Mac mini went up from $500 to $800.
Never in Apple’s history had we seen such exorbitant and deliberate price hikes across
all product categories.
And it was clear the reason why, especially when Apple decided to stop reporting unit
sales, and instead provide revenue earnings for each product category.
But that wasn’t the only way Apple planned on combatting slowing hardware sales.
They also tried establishing a stronger presence in large foreign markets like China and India
where they hadn’t seen much success in the past.
But this proved to be more complicated than perhaps even Apple expected.
Customers in China are much more price-conscious than in the US, and considering the iPhone
XS starts at $1,220 in China, it isn’t surprising that most customers consider Apple products
out of reach.
Not to mention that smartphones are tough to differentiate in China since virtually
everyone uses the same app, WeChat, as a sort’ve proxy-operating system to call, send messages,
make purchases, pay bills, find local restaurants, book doctor appointments, hail taxis, hold
video conferences, use banking services, and even access their virtual government ID card.
So for many Chinese customers iOS and Android is irrelevant when both platforms offer their
true platform of choice: WeChat.
So as you might’ve guessed, Apple was never able to make much headway in Chinese market.
And when it came to India, Apple faced a similar problem of being priced out of the market
due to import taxes.
They tried negotiating for lower tariffs and the opportunity to build Apple Stores in the
country, but India upheld their standards that foreign companies have to meet in order
to have access to the Indian market.
For example, manufacturing the products in the country and sourcing at least 30% of its
components from Indian companies.
So while their strategy of price hikes worked out as planned, their expansion into China
and India did not.
But Apple had one more idea to generate additional revenue.
Which was to aggressively expand their services category.
Because not only is it their fastest growing revenue source, but Apple can expect customers
to pay for services more reliably than hardware.
For example, if you’re an Apple Music subscriber and enjoy the service, you’ll likely continue
to pay the monthly $10 subscription for many many years until you decide to use a different
streaming service or find a different way to listen to music altogether.
But those situations are far less likely to happen compared to you buying an iPhone and
then deciding to switch to android after a couple years.
And this isn’t even considering the fact that by entrenching users in as many of their
services as possible, Apple is more likely to keep customers in their ecosystem.
If you’re using iCloud Drive and Apple News, you’re far less likely to buy non-Apple
products since they wouldn’t allow you to use most of the Apple services you’re familiar
with.
Now you probably remember the Apple Event back in March where several new services like
Apple TV Plus, Apple News Plus, and Apple Arcade were announced.
Their introduction were fairly underwhelming since many rumors leading up to the event
were spot on in predicting the services Apple would reveal.
That’s is, all expect one.
When Apple announced their own credit card, it came as a surprise and left many people
wondering why Apple decided to make it.
After all, credit cards are financial products traditionally offered by banks.
So why would a technology company enter that market?
Well, there are a few really good reasons, but I want to start off by providing a little
bit of Apple history.
Because with any new product or service Apple has released since Tim Cook became CEO, there
are people who claim “Steve Jobs would have never let that happen.”
And I heard this a lot in regards to their credit card.
But what most people don’t know is that Steve Jobs actually wanted Apple to make their
own credit card.
Back in 2004 Jobs tried negotiating a deal with Mastercard to create an Apple credit
card that would offer users iPoints which could then be redeemed for free music.
The project got pretty far along since there had already been an ad campaign create in
preparation of its release.
But unfortunately Jobs wasn’t able to get the terms he wanted with Mastercard so the
Apple credit card project was abandoned altogether.
Although if we go back even further in Apple’s history, we’d discover that they did in
fact release several consumer and business credit cards in the 80s and 90s.
And they came with some incredible signing bonuses, like $2,500 of instant Apple credit
when approved.
That’s about $5,500 today adjusted for inflation, which is unbelievably generous for simply
singing up for a credit card.
Now eventually Apple stopped offering these cards, but it’s important to understand
that the concept of an Apple credit card isn’t as inconceivable as it may appear.
Now let’s figure out why it’d be a good idea for Apple to offer a credit card to begin
with.
And the first reason has to do with Apple Pay.
If you remember back in 2014 when Apple Pay was introduced, Apple wanted it to become
the most common way their users made purchases.
But this didn’t end up being the case.
Adoption of Apple Pay by retailers moved painfully slow year after year, and made things frustrating
for users, who weren’t sure which stores accepted the payment method.
So half the time trying to use Apple Pay was more of a hassle than it was worth, since
it ended up not working anyway.
Apple also faced opposition from major retailers like Target, Walmart, Best Buy, CVS, and 7-Eleven
since they were already developing their own mobile payment system called CurrentC.
It’s also important to point out the privacy features of Apple Pay that retailers aren’t
happy about.
If you use something like Walmart Pay which uses CurrentC technology or even traditional
debit and credit cards, the retailer is able to create a shopper profile for each customer
that would track their spending habits and deploy sales tactics like emailing coupons
or promotions in order to encourage more spending.
But if retailers adopted Apple Pay, they’d no longer be able to do this, which is seen
as detrimental to their business.
So in an effort to push the adoption of Apple Pay more aggressively and encourage its use
among users, Apple decided to integrate their credit card with the service and offer 2%
cash back if Apple Pay is used to make a purchase.
This will incentivize users to make transactions with Apple Pay while also putting pressure
on retailers to adopt the payment method for the convenience of their customers.
The second reason why Apple made a credit card is its huge revenue potential.
Although it’s unknown what kind of revenue split Apple and Mastercard agreed to, it is
known that banks generate an unbelievable amount of money from credit card interest.
And Apple is looking to cut a piece of that pie for themselves.
In fact, the average American carries about $5,300 worth of credit card debt month to
month.
And with an average interest rate of about 17%, that’s an average of $900 a month that
every credit card user is generation for their issuing bank.
So if Apple theoretically has one million cardholders and shares 50% of their revenue
with Mastercard, they'd still be making hundreds of millions of dollars every month off of
interest.
But this huge potential for revenue isn’t the only reason why an Apple credit card is
a good idea.
It also encourages people to stay in Apple’s ecosystem by offering 3% cash back on purchases
from Apple and giving users an incredible way to track their spending and organize their
monthly payments.
Apple was in the perfect position as the creator of iOS to integrate incredible software features
that differentiates their credit card from others.
Not only is it primarily a virtual card that you can apply for through iOS, but it’s
issued to you just minutes after approval.
So you don’t have to wait on the physical card to show up in the mail before using it.
Now that may not seem impressive to young people who are used to doing everything online,
but it’s a completely new approach to credit cards that we haven’t seen any bank take
before.
And while the Apple Card’s reward program isn’t the most generous in the industry,
it is simple and straightforward.
You get instant cash back on all purchases made with the card.
No point system or waiting for your cash back at the end of each billing cycle.
So if you take a step back and look at the Apple credit card from a strategic perspective,
it’s easy to see why creating it was a good decision for Apple.
It’ll generate a large source of revenue for the company, it offers improvements and
conveniences that other cards on the market don’t, and it’ll be most appealing to
Apple’s own users which will keep them even more rooted in Apple’s ecosystem.
The card is set to be released this summer, and that’ll help us gauge just how successful
Apple’s entry in the financial market will be.
And while you may have to wait a while before getting the Apple Card, you don’t have to
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Alright guys thanks for watching and I’ll see you next time.