From Grubes:

Hugh Son, writing for CNBC:

Within the industry, the deal is widely perceived as one that’s risky for a bank to take on. Citigroup was in advanced negotiations with Apple for the card but pulled out amid doubts that it could earn an acceptable profit on the partnership, according to people with knowledge of the talks.

No [surprise] they’re going to make less money than cards that charge fees and higher interest rates. But they’re going to make money — I’ll eat my hat if Goldman and Apple don’t turn a profit on this card. CNBC’s headline — “A Goldman Sachs rival pulled out of the Apple Card deal on fears it will be a money loser” — makes it sound like they’re going to lose money, which is ludicrous. They’ll make money on each transaction and they’ll make money charging interest on any cardholder who carries a balance. Arguing that they won’t make enough money is just usurious greed.

I don’t use the word lightly, but it’s evil to argue against the software Apple is releasing to help cardholders avoid debt and pay down what debt they owe quickly.

Interesting take. More interesting is that Citigroup would pull out instead of submitting a proposal that wouldn’t be accepted. That is, it looks much worse now, imo, that they intentionally pulled out than it would’ve if they’d simply lost the bid.

Why worse? It’s not because they wouldn’t make money. I think Gruber misses the point. It’s because Citigroup can make more money per dollar invested doing something else. Their limiting reagent isn't "I've run out of activities that create more profit", but "I've run out of capital this fiscal year to spend on the highest profit activities we can find".

I might make money buying items from meh.com, waiting for them to arrive, packaging them back up, and selling them on eBay.

I bet I make more money per hour spent going to work as a software developer. I don't have the time to do both and stay sane. Therefore, I am a software developer. (Let’s ignore that the meh-resell business sounds like torture for the moment.)

That is, Citigroup felt it would make significantly less profit putting resources into Apple's card that it could make elsewhere.

And Apple’s own rates aren’t exactly low:

Variable APRs range from 13.24% to 24.24% based on creditworthiness.

But Citigroup does have credit cards! This shows you how absolutely essential to Citigroup’s bottom line fees are.

From the same page on the Apple Card:

We want to make it easier to pay down your balance, not harder. So Apple Card doesn’t have any fees.⁴ No annual, cash‑advance, over-the-limit, or late fees.⁵ No fees. Really.

⁴Variable APRs range from 13.24% to 24.24% based on creditworthiness. Rates as of March 2019.

⁵If you miss a payment, we won’t charge you a late fee or apply a new high-interest penalty rate. However, you will continue to accrue interest on your balance at your regular interest rate.

Insane. Apple wants to charge you interest on a loan, and they’ll stop at that. INSANE, I TELL YOU.

(Aside: I wonder what sort of return that really breaks down to on the "average" credit card. That is, you'll have defaults, and you have to pay for support staff, debt collectors, e/mailings, actually paying the merchants, etc. Is there an 100% markup on overhead, let's guess? I'd love to make 6.62-12.12% on my cash right now. The point being that Citigroup must be making mad cash elsewhere...)

The question becomes if it's fair to say, "Arguing that they won’t make enough money is just usurious greed." Is that right? Why don't we believe Citigroup is just trying to turn the highest profit, bless their hearts? That people knew what they're getting into and still opened the credit card? That if what Apple does is better for consumers, that people will use it?

This is perhaps the most interesting thought experiment -- how low a credit rating can you have and get this "above board" treatment? Can the Apple Card become the card of the masses, the card you see most in McDonald's and Wal-Mart? Because my guess is that it should.

I tend to agree with Gruber -- Is that a Citigroup logo (he said tongue in cheek… he hopes) on that title loan storefront?Does that make sense? If fees are what make credit cards most profitable, which means "what takes the most (or let's just say "significant") money out of consumers' pockets", and someone removes those fees, it's going to be significantly cheaper for those consumers to use that fee-free service.

At the same time, that's the country we live in. His line, ultimately, is a political one: Should we pass laws to restrict trade in the case of credit card fees so that we can better protect the consumer from themselves? Gruber's answer, whether he realizes it or not, is likely yes.

Or, if the market truly balances itself out, we’re going to see a crapload of Joe Six-Packs with an Apple Card in their wallet really soon.

Labels: apple, business, gruber