Can Apple Card's early success translate to sustainable profit?

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The Apple Card had the most successful credit card launch ever, according to Apple CEO Tim Cook — but achieving profitability depends on several variables that are still shrouded in mystery, experts say.

Apple extended $10 billion of credit in its first two months, August and September, according to the card's issuer, Goldman Sachs. Previously, the most successful card launch was considered to be the AT&T Universal card, which booked 1 million accounts in the first month after its launch in March 1990 by promising rewards available for the first time with no annual fee, a novel offer at the time.

By all available measures, Apple Card’s launch captured the largest amount of potential credit in the shortest span of time of any credit card to date, said Robert Hammer, CEO of longtime credit card analysis firm R.K. Hammer.

Apple Card’s total number of accounts is unknown at this point, but Hammer estimates $10 billion in credit lines could mean Goldman has approved between 5 and 10 million accounts in its first two months, far exceeding AT&T Universal, which signed up 4.5 million consumers over its first nine months.

“Apple Card is probably five times more successful through its launch phase than the most successful credit card 30 years ago,” Hammer said.

But success can be fleeting. What’s more important than the initial signup number is profitability, which will be determined over Apple Card’s first year, analysts said.

“Success must be measured over a longer horizon than two months, and it’s too soon to guess what that will look like when entering a 60-year-old business with world-class players like American Express, Chase, Bank of America and Citi well established in the card rewards game,” said Brian Riley, director of credit advisory at Mercator Advisory Group.

Key metrics are the level of available credit users tap, and the average interest rate on those outstanding loans, Riley said.

Profitability requires developing a base of customers with strong ongoing purchase volume who revolve a credit balance by paying the minimum amount due each month, driving revenue from interest rates, according to Riley.

Analysts note that Apple Card will earn some revenue from interchange or merchant swipe fees, which average between 1% and 3% of the transaction. This will most likely go toward funding Apple Card’s rewards, which include 3% daily cash back on Uber, Walgreens and Apple purchases.

The cost of funding credit card rewards programs cuts deeply into card issuers’ profits. Since the first quarter of 2015, the U.S. credit card industry’s total expenses for credit card rewards increased 84%, according to a recent industry report by the Consumer Financial Protection Bureau.

Apple Card’s profits will rely heavily on transactors and revolvers, because the card has no annual fee to contribute to its revenues, Riley suggested. Transactors — those who pay off their balances each month and reap the rewards — drive purchase volume and interchange, but they’re a drag on profits, he added.

“A big question is whether Apple attracts revolvers or transactors, and what the card’s bad debt looks like after the initial rapid sign-up pace slows down after the first six to eight months,” Riley said.

Another key variable is the APRs Apple sets based on each customer’s credit score at the time of application.

Transactors tend to be in “superprime,” because they generally don’t tap the maximum credit available to them — and thus aren’t highly profitable. To earn profits, Apple Card needs to develop a healthy portion of customers with relatively higher APRs who routinely revolve a card balance.

“Opening $10 billion in credit lines doesn’t tell us much about how the portfolio will season over time,” Riley said.

Currently U.S. credit card issuers have extended about $4.3 trillion is total credit lines, and most of that is unused credit tied to superprime consumers, according to a recent industry report from the Consumer Financial Protection Bureau.

In the last few years, purchasing volume has grown faster than outstanding balances, which means more consumers are paying off their balances, the bureau said.

However, among those who are utilizing credit lines, consumers with lower credit scores are increasing their debt at a faster clip than prime consumers, and those with lower scores also have increased their average number of credit cards, according to the bureau.

If Apple Card captures a significant number of credit-hungry consumers, they will be on track for profitability, analysts agree.

Apple Card’s all-digital application process could work in its favor here too.

Last year was the first time more consumers applied for credit cards via mobile devices than via desktop computers, the bureau said, adding that mobile application rates also skew higher among consumers with lower credit scores.

“We will soon have the hard fact on the portfolio, such as the type and number of accounts Goldman has covered with $10 billion in credit lines,” Riley said.

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