Today, the Wall Street Journal is reporting that Apple will, later this year, launch an Apple-branded credit card in partnership with Goldman Sachs. While this may only add a fraction of a percent to revenue in the next five years, what’s most significant is Apple’s push to combine services and hardware to create new user experiences. This will be one more feature that will distinguish Apple among crowded smartphone and payments markets. Some other takeaways:

• We believe Apple’s revenue from the service will start slow and grow to $1.4B in high margin revenue by 2023. This would add about 0.4% to Apple’s 2023 revenue and 1.8% to earnings.
• As a point of reference, we believe Apple Pay will generate $988M in revenue in CY19, growing to $4B by 2023. We estimate the card would add 35% to Apple’s payments revenue in 2023, bringing total payments revenue to $5.38B
• The WSJ reports the card will have a generous 2% cash back incentive, which will be helpful to attract new sign-ups. More importantly, the Journal expects “extra features on Apple’s Wallet app, which will let them set spending goals, track their rewards and manage their balances.”
• The most compelling aspect long-term is the way in which Apple will use its hardware and software to create a new user experience around existing activities. If they apply the same elements they did with fitness tracking on Apple Watch to the new card and accompanying service, it could create a more compelling way to manage spending and personal finances. We also expect Apple to leverage these same competencies in the healthcare market among others in the coming years.

Apple’s Likely Economics

The Apple card will likely charge merchants 2.5%, which is comparable to what more generous rewards cards like American Express charge merchants. The Wall Street Journal is reporting that the card will have 2% cash back, which leaves 50 basis points to be divided between MasterCard, Goldman, and Apple. Mastercard’s network fee will likely be 10 basis points, so we will assume, for simple math, the remaining 40 are split evenly between Goldman and Apple. Apple’s potential 20 basis point transaction fee is roughly consistent with the 15 basis points that we believe Apple gets from Apple Pay transactions.

Outlining Revenue Potential

The next question is how many people will actually use the card. We will assume an Apple card has a similar adoption rate as Apple Pay and captures a quarter of US iPhone owners (about 47M users) within five years. If those users spend an average of $15,000 per year (equal to avg. annual spend on Amex cards), then Apple would earn about $1.4B in high margin revenue in 2023.

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