Apple Card Uncovered-Top 10 Q&A

Recently Apple announced “Apple Card” as a credit card designed to be used with Apple Pay on Apple devices. Obviously, this is a very…

Mar 26, 2019

Recently Apple announced “Apple Card” as a credit card designed to be used with Apple Pay on Apple devices. Obviously, this is a very interesting topic for banks and issuers and the announcement raised several questions on how the product works, what the technology behind it is and if Apple is now becoming a bank.

In the 24 hours after the announcement, we did our research to answer the top 10 questions that have been raised on this topic. We intend to update this blog post as we learn more and as more information becomes available.

1. What type of card is it?

Apple Card is a Mastercard credit card digitally held in the Apple Wallet. It will be supplemented by a physical Mastercard titanium card with an EMV chip for card acceptance environments without any support of contactless (NFC) technology at the POS (where Apple Pay can not be used).

Based on our current interpretation, the Apple Card offering contains different (virtual) card numbers and tokens to serve all payment use cases:

Virtual Apple Card: Virtually available card in the Apple Wallet, can be used for eCommerce transactions where a card number, a CVC2 security code and expiry date is needed. This card number is linked to the payment account at Goldman Sachs.
Physical Card: Physically available card with a second card number linked to the same payment account at Goldman Sachs.
Mobile Pay (Apple Pay): Token of the virtual Apple Card used for iPhone initiated contactless card present transactions or Apple Device initiated ApplePay eCommerce transactions (where EMV security is used instead of CVC2/Exp. Date).
Wearable Pay (Apple Pay): Token of the virtual Apple Card used for Apple Watch initiated contactless card present transactions.

Due to the fact that all generated tokens are linked to the virtual card number and all card numbers are linked to a single payment account at Goldman Sachs, this set-up enables a holistic view on all transactions and enables the announced features around flexible payment plans and dashboards of spendings for cardholders.

It is not possible to know the exact set-up at this point in time but here is what we gathered from a screenshot of the ad video:

Our interpretation of account and cards set-up

2. What makes Apple Card unique?

Like other Apple products, they focus on simplicity and user experience. Apple Card is different from other credit cards in a way that it is a “digital first” card, with a strong focus on digital payments and tokenization technology behind it. The titanium physical card only comes as a fallback solution wherever Apple Pay is not available.

Apple Card comes with some interesting features such as easy onboarding, analysis of spending as well as an estimation of the interest to be paid by the cardholder (US specific).

We think one of the cool features of Apple Card is the real-time fraud protection that notifies a cardholder about suspicious transactions and ask for feedback on the flagged transaction.

Additionally, by using machine learning, Apple will translate confusing merchant names and codes into meaningful insight so that the cardholder can recognize the merchant and the transaction. We have to admit that while this is a very useful feature, it is not totally new and some challenger banks like Monzo or fintechs like Contovista are also already doing it.

3. Is Apple a bank now?

No, Apple decided to partner up with Goldman Sachs bank in the USA to issue Apple Card. This business model is widespread in the payments market (often used by retailers and airlines) and usually called “co-branding”. The entity issuing the card (means holding the Mastercard license, holding the regulatory required licenses, maintaining the payment account and being the contractual partner of the cardholder) is Goldman Sachs only. Apple is used as a sales channel, a technology provider and as a pass-through wallet provider (Apple Pay) but is never involved in the transaction process and/or the flow of funds.

4. Is there revolutionary technology behind?

No, all the features used by Apple and Goldman Sachs already existed in the market but Apple obviously did a very good job puzzling together and leveraging technology of Mastercard and other solutions available in the market.

Backbone of the product is Mastercard Digital Enablement Service (MDES) to allow the card issuer Goldman Sachs to tokenize a card number and therefore “multiply” a single card number to many tokenized card numbers.

Not printing the card number and the CVC2 on a physical card but to show them only in the Apple Wallet App is as well nothing new and already in use with several card issuers offering so called “virtual cards”.

5. Can I get an Apple Card?

So far the product is announced by Goldman Sachs and Apple for the US market (and US cardholders) only. Due to the fact that card issuing is subject to corresponding licenses in most markets, globally it will be interesting to watch if Goldman Sachs will work on a global roll-out or if Apple is going to partner with other banks/payment institutions for markets outside the US.

In addition, it seems like it is a premium product, not only because of the card being made from titanium, but also it seems like Apple has quite tight credit score checking and they are targeting the high-end customer category. Most likely iPhone users who can afford to spend way over 1000 USD for an iPhone XS with fall into the eligible category ;-)

6. Will it come to Europe any time soon?

Apple Card will be available this summer in the US. It seems that the whole solution is tightly integrated with the processing platform and operations of Goldman Sachs. Therefore, we think that it won’t be easy to bring the same setup to other countries soon (e.g. the US payment market works on a single message system, the european market on a dual message system). In the announcement, it was mentioned that Goldman Sachs was a good choice since they were mainly an investment bank with a very limited retail customer base (recently launched Goldman Sachs digital retail bank “Marcus:”). Therefore, the partnership can be seen as a win-win for Goldman Sachs and Apple. However, it is unlikely to be a winning case for banks with existing retail customers.

Looking at the Apple Pay Cash Card as an indication, which was launched in partnership with the Green Dot Corporation as a US-only product in late 2017, there is no solid information if an when this product will be available in other countries.

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7. How does this all relate to Apple Pay Cash card?

The Apple Pay Cash card, a virtual prepaid card issued in partnership with the Green Dot Corporation, was introduced in late 2017 in order to bring Peer-2-Peer (P2P) payment to Apple Pay.

Now with the announcement of Apple Card, people might ask how Apple Card is then different from the already available Apple Pay Cash card. The main difference is that Apple Card is an actual credit card while Cash card is a prepaid card mainly used to store money received via P2P payments. The two products will coexist and the way they work together is that the (1%-3%) cashback reward that cardholders get by using Apple Card will be credited to Apple Pay Cash card and can be spent wherever Apple Pay is accepted (in-store as well as online). Also the Cash card is still used to send and receive money via iMessage.

Considering Apple’s attention to detail and focus on simplicity, this coexistence is an unusual compromises and certainly not a great user experience. However the Cash card allows Apple to offer P2P payments all US customers, regardless of their banks support for Apple Pay. Also it allows them to implement P2P without having to rely on the P2P rails from Mastercard and Visa (‘MoneySend’ and ‘Direct’). Probably these strategic values were more important than the very best user experience. With Apple Card being available soon, it is to be seen if these two products will be merged into one at some point down the road.

8. What about security and privacy?

For the physical titanium card Apple made some interesting decisions. The card only shows the logo of Apple, Mastercard and Goldmann Sachs. No card number, no magnetic stripe, no expiration date, no CVC security code and no signature. Which means the card itself can only be used with the Chip and PIN at the POS. The card number, expiration date and the CVC will be displayed in the Apple Wallet App. We assume however that a CVC is only available for the virtual Apple Card number and not the card number that is personalized onto the chip of the physical card. By limiting the physical card to POS transactions, the fraud exposure is very low. This means that with the exception of loss and damage, there is no reason to replace the card, which makes sense considering the cost of the blank card made from titanium and the announcement that there will be no annual fee for the card.

Also the card doesn’t support contactless payments (NFC). One might assume they removed the NFC interface because cards made from metal can pose an extra challenge. Also it is possible that they have done it in order to prevent against extracting the card number via NFC, if the card is lost or stolen. However it’s way more likely that this was a deliberate decision to trigger the cardholder to use Apple Pay whenever contactless payment is available. Also the fact that for payments with the physical card there is only 1% cashback (instead of 2–3% with the virtual Apple Card) points to this direction.

While all of this together is a fresh approach, it’s actually mainly about removing features from the physical card combined with great marketing to highlight the security advantages that come along with it.

With regard to privacy, according to the information released by Apple, Apple claims that they don’t have access to transaction data and that the data is only stored on your iPhone. However, of course Goldman Sachs as the issuer will use the data to operate the Apple Card.

9. What are the limitations?

Limiting the physical card to an EMV Chip only card can still cause acceptance issues, especially in markets where not yet all merchant POS terminals are EMV capable and magnetic stripe technology is still in use. Moreover, not embossing the card number and cardholder name could limit the usage of the card in certain niche-acceptance environments like for example car rental where a lot of merchants still work with embossed card data.

The physical card also does not include contactless technology because obviously for contactless transactions the iPhone with Apple Pay technology is intended to be used. Even though this means a cardholder should always carry his mobile phone, going to a shopping trip with the physical card only is probably not a good idea.

So far, Apple and Goldman Sachs did not talk about a PIN but for the physical EMV card there will be a PIN (most likely an online and an offline PIN) for transactions at POS terminals and ATMs. The PIN and the PIN handling is expected to work like for all other cards in the market (PIN generated by Goldman Sachs and sent to the cardholder). The EMV technology and security framework does not allow for a lot of fancy features, which means an Apple Card cardholder still has to remember his PIN when using the physical card. But of course Apple can choose to also provide an option to reveal the PIN in the Wallet App, like some challenger banks do it already.

10. Is Apple Card a threat or attack on banks?

Well, yes and no!

No:

We think that the partnership with a big incumbent (Goldman Sachs) is a clear signal that Apple still believes in traditional financial institutions. Considering that the financial market is a highly regulated domain (with all KYC, anti-money laundry, cross border etc), we think that being a bank would slow down Apple and therefore is not very attractive for Apple. And if Apple really wants to be a bank, they can simply buy one. Therefore, we believe that it was a deliberate decision by Apple to focus on facilitating payments by going into a “co-branding” agreement with Goldman Sachs.

And Yes:

Apple’s move to the payment domain is an obvious attempt to lock in customers even tighter in the Apple ecosystem and can be seen as a great example of how a company can be a relevant player in the financial industry and win the customer interface without actually being a regulated bank.

On Apple Card web page, Apple is teasing banks by saying “When you want to see how much you’re spending, there’s no need to log in to a separate website or app”. We see this as a wake up call to financial institutions to start providing similar features in order to not become ‘dumb ledgers’, which is a similar threat to what the telecom operators are still facing to not become ‘dumb pipes’.

With Apple Pay and now Apple Card, Apple is actually entering into the payment channels. The features Apple Card is offering are very comparable to those of challenger banks, such as Monzo, Revolut and N26. Therefore, in the sense of attacking banks, Apple Card might affect challengers even more than the incumbents. Nevertheless, Apple’s move also clearly shows that the challenger banks followed the right path by first launching a payment product with interesting features and simple on-boarding and then evolving from there.

Regardless of whether Apple is now a threat to banks or not, we don’t believe that Apple has the intention to become a bank in the near future.

We hope that we have answered some of your questions in this blog post. Please share your thoughts and insights with us and if you found this post helpful, please share it with those who might also be interested in this topic.

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