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Apple Card Is Here – Should Traditional Card Issuers Worry?

October 30, 2019
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“Apple Card is here. A credit card created by Apple, not a bank. Built for simplicity, transparency and privacy. Apply now on your iPhone, and start using in minutes.” – Apple Inc.

With much fanfare, as tends to be the case with most new Apple product announcements, Apple’s new credit card became available to U.S. consumers on August 20, 2019. Touting “a new kind of credit card,” the launch is causing traditional bank and credit union card issuers to ponder the implications of competing directly against the brand strength of the tech behemoth. In this promotional video, snippets of which have been appearing in national television spots, Apple highlights many reasons that traditional card issuers should be paying close attention:

In Apple’s own words, these are some of the card attributes and features the company hopes will resonate with consumers:

  • “A credit card created by Apple, not a bank”
  • “Simple, transparent, and private”
  • “The only credit card designed to take advantage of the power of iPhone”
  • “Works with Apple Pay”
  • “Unlike other credit cards, it helps consumers easily understand their spending”
  • Rewards – easy-to-redeem “daily cash with every purchase that goes straight to Apple Cash Card”
  • “Makes the interest paid clear and transparent”
  • “A credit card that encourages consumers to pay less interest”
  • “No fees (not even hidden ones)”
  • “A new level for privacy and security, Apple Pay technology creates a unique card number and locks it away in a secure element of the iPhone”
  • “Face ID and Touch ID allow only the cardholder to use the Apple Card”
  • Support via text message built into the app, “no waiting on hold”
  • All features reside in the Apple Wallet app
  • “Titanium, laser-etched physical card with no card number, CVV security code, expiration date or signature on the card”

Reactions to the Apple Card launch range from “revolutionary” to “it’s just a credit card.” As with most things, the reality is probably somewhere between the two extremes, and only time will tell which end of the spectrum wins out. However, traditional card issuers would be wise to understand the threat Apple Card poses and see how their current card offering and cardholders’ experience stack up.

The most obvious immediate risk to traditional card issuers is losing card market share and all the interchange revenue that goes along with it. From a longer-term perspective, a successful Apple Card may also accelerate consumer acceptance of financial services from non-traditional providers. In a recent Raddon Research Insights consumer survey, 22 percent of consumers agreed or strongly agreed that they “have conducted/will conduct financial business with newer organizations like Google, Amazon, Apple, PayPal, or Square to supplement the financial services they receive from a traditional bank or credit union.” As one might expect, Millennials are even more open to this idea; 34 percent agree with that statement.

To take it one generation further, the digital-native Gen Z cohort is even more comfortable with the notion of obtaining financial services from disruptors such as Apple or Amazon, as Figure 1 shows. One in every five (21 percent) 16- to 19-year-olds sampled in a recent Raddon Research Insights survey of Gen Z indicated they would be more likely to use an Apple credit card than a credit card from a traditional bank or credit union. The good news for banks and credit unions was that two in five indicated they would be more likely to opt for a checking account or credit card issued by a traditional financial institution. But that leaves another 40 percent who essentially see no difference between the options, representing both a risk and an opportunity for banks and credit unions.

The target audience for Apple Card is limited to iPhone users, which by most accounts now represents nearly 50 percent of the U.S. smartphone market since Apple has usurped Google Android’s previous dominance (Android is still the global leader). Raddon Research Insights data also shows that of the 50 percent of consumers who use mobile banking, nearly one-half (48 percent) are iPhone users. So although the target audience for Apple Card may be limited, the more than 100 million iPhone users in the United States represent a huge market. To quantify the risk at your financial institution, determine how many of your mobile bankers are iPhone users. Of these, how many have a credit card with you? How many have already used your credit card with Apple Pay? Consider offering incentives to this group for default card status in various mobile payment and wallet applications. To stem attrition and loss of primary card status, track changes in this group’s purchasing behavior, particularly for reoccurring payments.

Apple made its initial foray into the payments arena in 2014 with the launch of Apple Pay. Five years out, most would agree that the adoption of Apple Pay has not been as strong as initially anticipated (only 7 percent of consumers use Apple Pay according to Raddon Research Insights). Perhaps an effort to drive adoption of Apple Pay contributed to the development of Apple Card. As noted in our coverage of Apple Pay shortly after it launched, “Free perks and reward incentives can in fact influence consumer payments behavior,” as evidenced by the success of mobile payment apps from Starbucks and Dunkin’. Although Apple Card does not offer significantly richer rewards than those offered by many competitor cards, its 2 percent daily cashback on all Apple Pay transactions is double the 1 percent cashback that Apple Card users receive from purchases made with the physical titanium card. Apple Card also offers 3 percent cashback for all Apple-related purchases and purchases from other select merchants and apps, such as Uber. Will these reward incentives be enough to change people’s payment behavior?

The ease of redeeming the rewards is perhaps even more noteworthy because consumers often cite this as a pain point with traditional credit card reward programs. Raddon Research Insights data shows that of the 85 percent of credit card holders who consider one card to be their primary card (the other 15 percent show no such favoritism), the top reason cited for considering one card as primary is that the rewards are “easily accessed and redeemed.” This is an area Apple is clearly promoting in its marketing of the daily cash back.

In the financial services industry, where most products are commodities, innovation in marketing is critical. What makes your credit cards unique? Apple has very clearly laid out its value proposition, focusing on the simplicity, transparency and security, along with all the digital bells and whistles that go with it. Your card offering may check off many of the same boxes listed in Apple’s promotional video, but unless you clearly communicate the benefits of those features, consumers have no way to differentiate your card from those of competitors.

It is hard to disagree with the 58 percent of consumers who told us in a recent Raddon Research Insights survey, “Newer organizations like Google, Amazon, Apple, PayPal or Square will change how financial products and services are delivered to consumers.” This is not a negative statement; it’s simply a recognition that banks and credit unions should learn from these technology and Fintech providers and should evolve in ways that meet the changing needs and expectations of consumers. Apple did not invent the personal computer, the MP3 player or the mobile phone – it just found ways to make them inordinately better by focusing on improvements to design and process.

What can you learn from Apple Card? Is there room for improvement in your card account-opening process? What tools do you have in place to help cardholders track and manage their spending? How easy or difficult is it for cardholders to redeem rewards? How well do you communicate the security and fraud-prevention aspects of your cards? How easy is it for customers and members to contact you for support? And ultimately, how do you communicate and market all of these things?

Apple Card may end up being just another credit card. But the best way to avoid being disrupted by new entrants like Apple is to learn from them and disrupt yourself first.