Apple Card fortifies the digital model, and that's trouble for banks

Apple's massive user base, fully digital enrollment system, merchant reach and partnership with Goldman Sachs threaten retail banks on multiple fronts.

Apple's model allows its card to support credit, prepaid, P2P, and debit through a single mobile wallet. That's on top of the features that held the spotlight in Apple Card's March announcement, which demonstrated the potential to combine incentive marketing and streaming entertainment to provide services beyond banking.

Issuers that are already under pressure to adjust to support open banking, faster payments and contactless cards may have to accelerate those plans given Apple's capability to use existing and new technology to flood the market with Goldman-affiliated banking products.

David Paul Morris/Bloomberg

This quick strike comes through Apple Card's unusual application and activation process. Consumers can apply for the card at any time by opening an app that comes pre-installed on their phone. If they request the physical card, they never have to call an 800 number to activate it; instead, they simply tap the card's packaging on the phone. It's a decidedly different process — but also very familiar to any consumers who ever paired Apple's Airpods to an iPhone.

"The application and onboarding process does indeed appear to be fully digital, intuitive, with a quick decision, and some interesting innovations," said Zil Bareisis, a senior analyst at Celent, adding Apple Card flips the typical model by making a mobile-first play with a card as a companion, rather than placing the card first.

The difference between mobile banking and "mobile-first banking," as Celent puts it, is a lot of the behind the scenes work work such as enrollment and establishing a digital account for one-off and recurring transactions on a connected device is already done.

Any banks that want to duplicate the Apple Card platform wouldn't need to start from scratch. After about 18 months of secretive development with Apple and Goldman Sachs, Mastercard is bringing the same technology to other issuers.

Its platform carries over many of the features that Apple Card users will get, according to Chris Reid, Mastercard’s executive vice president of cyber intelligence and data services for North America. Reid spoke at SourceMedia’s annual Card Forum in May.

“This is digital first. This is, all card details are only available in the digital environment. Yes it comes with a physical card if you want it — if the consumer wants it — but in that physical card, it’s not going to carry the 16-digit PAN, it’s not going to carry the CVC, it doesn’t need to carry the customer service number or the expiry date,” Reid said, referring to primary account numbers and card verification codes.

Reid attributed that to the secrecy surrounding the platform’s development under Apple’s strict nondisclosure agreements. Any bank that wants to launch a card on this platform can do so in six months, he said.

Apple did not return a request for comment on its card or a product road map. But Apple's Wallet app has direct access to checking account credentials such as routing and demand deposit numbers to pay Apple Card balances through ACH. In theory this would allow Apple to offer decoupled debit, competing with card brands, card-issuing banks and card brand rivals such as PayPal.

Decoupled debit draws funds directly from bank accounts, avoiding interchange fees that usually come with card payments.

Apple's leg up for decoupled debit is its platform, which automatically accumulates pre-authenticated demand deposit credentials, said Richard Crone, a payments consultant, adding other attempts to remove interchange by taking control over enrollment — such as the Merchant Customer Exchange, Zipline, Tempo Payments or Mobility Networks — did not have this type of platform at scale.

There's an additional opportunity for Apple to place pressure on Walmart, one of the few remaining large retailers that does not support Apple Pay. Walmart is formerly the main backer of the Merchant Customer Exchange, which did not succeed in building a merchant-led rival to the card networks. Walmart is now reportedly trying to address this challenge by patenting its own cryptocurrency technology.

"Apple Card with Apple Pay combines a platform for igniting both issuance and acceptance in one," Crone said, adding that Apple can eventually use FedNow, the government-backed faster payments rail, to avoid clearing delays and settlement risks of the automated clearing house. "Unbeknownst to them, the community banks and credit unions pushing the Federal Reserve to offer this service to compete with the big banks will have empowered a far greater threat to their relevant survival."

Apple Pay has more than 250 million global users, according to MacRumors, and since the Apple Card is integrated with Apple Pay so tightly, that gives Apple an ability to sell security as a counter to the rise of account-opening fraud. Apple uses multifactor authentication to manage identity for Apple Pay and a system similar to the card brands' SRC buy button to shield transactions.

"It will be harder for other financial institutions to compete without a partner that brings pre-validated users who apply only after being authenticated on multiple levels," Crone said.

Additionally, Apple Card does not support contactless mobile payments, but Apple Pay obviously does. This puts pressure on banks to ramp up contactless payment adoption.

With a few exceptions, banks are incrementally deploying contactless cards. As the device-centered Apple Card ramps up, that will drive up overall usage of contactless payments.

"Banks will have to move to contactless quickly," said James Brown, CEO of Smart Communications. "A lot of merchants still don't use contactless payments but that is changing."

Writing for PaymentsSource, Brown has previously suggested banks are falling behind fintechs by not adequately supporting mobile payments. Apple Card ups the ante, he said in an interview. "Apple has an enormous following and is bringing Goldman in with them."