Goldman Sachs Likely to Lose Money on New Apple Credit Card

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Both Citi and (soon) Goldman Sachs need to offer 0% financing deals to get people using the cards (and from their perspective carrying balances past the financing period). I have a Costco card, and despite there being things at Costco that I could see using 0% financing deals for, I’ve never seen one. I could buy a new stove at Costco, but why should I when I can get one from Best Buy at 0% interest with their card (which, by the way, is through Citi)? The same will be true for the Goldman Sachs card. 3% back at Apple is a nice incentive for people intending to make purchases from Apple (for iTunes purchases, subscriptions, etc. this is a nice perk but not earth shattering). The big cash back comes from purchases of Apple hardware (except, presumably, making payments through Citizens Bank for the upgrade program). However, 3% cash back isn’t going to induce anybody to make a purchase at Apple for a product they’re not already looking for. It’s only going to be a nice bonus for customers already looking to make a purchase. 0% financing would bring in customers who weren’t otherwise looking to shell out the money. I know Barclays did it, but I think it was only as a sign-up offer? (Don’t really know, never had an Apple card despite owning half an Apple store practically). So far, I haven’t heard of Goldman Sachs offering anything like that with the Apple card.

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