Citibank did the most expensive credit card deal ever up to that point when it wrestled the Costco co-brand away from American Express. Early reports on the performance of the deal were poor.
Whether they wanted to avoid the missteps of Costco, or simply had less of an appetite for risk, word is now out that Citi pulled out of advanced negotiations with Apple to be the new issuer of a co-brand card that will now launch from Goldman Sachs this summer.
According to a report “J.P. Morgan Chase, Barclays and Synchrony, also bid on the business.” Barclays was the incumbent issuer of the Apple card, and Chase is in the midst of their 10 year deal to lease Visa’s network giving them fixed processing costs and an advantage going into any negotiation to push incremental charges through the network.
One bank staffer is said to have texted a Goldman Sachs executive, “Dude, if that portfolio ever makes money, I’m buying you a beer.” I hope it wasn’t a Chase staffer, when they’re likely losing money on Sapphire Reserve.
The product’s final list of features including “no fees of any kind, software that actively encourages users to avoid debt or pay it down quickly, and potentially lower interest rates” make it difficult for an issuer to make money. Clearly Citi’s bet with Costco is that they’ll make up for the high cost of the deal on consumer revolve. If Apple insisted on reducing the chances for significant revolve that would cut significantly into the model.
Card companies make money on interchange (merchant transaction fees), interest (APR), and fees (annual fees and other). Out of that pool of money they pay rewards (and fees to the brand whose name is on the product), service the card (collections, chargebacks, other customer service), and absorb losses on unpaid debt. At the end they’re betting there’ll be enough leftover to profit.
Goldman Sachs predicts the new Apple Card could attract as many as 21 million customers (whether or not those customers are profitable). It’s unclear how much spend the card will generate, especially since it’s only lightly connected to the Apple brand. There are no real benefits to Apple customers, like early access to products or insider events.