The Apple Card was a good idea when Barclaycard launched it. It showed promise when Goldman Sachs (GS) took it on. Now, it appears to be headed to Chase, where it will likely be re-engineered into a profitable card program—one that benefits the broader Chase organization, and not least of which is protecting its No. 1 position as the top U.S. issuer, even after the Capital One/Discover merger.
We will not bore you with the details of why this shift is happening; you can read about it here, here, and here. We promise not to criticize Goldman Sachs. Instead, we praise its efforts to challenge the norms in U.S. payments and its ability to maintain balance despite heavy losses. Kudos to David Solomon for making a radical decision to enter retail banking and knowing when to pull back without hurting Goldman Sachs. And Apple? Who doesn’t like Apple, except maybe Android users?
Today, the focus is on the buzz surrounding the WSJ release regarding “advance talks” about Chase acquiring the portfolio, which Reuters picked up.
The Mechanics of a Deal Like This
Chase will acquire the loan books from Goldman Sachs, limited to the Apple-branded cards. GS sold its interest in the General Motors card to Barclaycard last year.
In the world of payment cards, portfolios carry value and risk beyond the sum of their credit portfolios. With about $20 billion in book value, Chase will require a discount. Factors influencing that discount include credit risk.
Industry buzz around FICO scores, which are the standard for assessing credit quality, indicates that about 15% of Chase’s massive portfolio has scores beneath the subprime cut-off of 660. At Apple, that metric is a whopping 34% according to some sources. It’s safe to assume that Chase will apply a deep discount on the book value. The big question is: how much?
We know that Barclaycard balked at GS’s discount, but we also know that Chase CEO Jaime Dimon and Head Retail Banker Marianne Lake would love to close a deal like this. My prediction—and it is no more than an educated guess by a longtime credit card expert—is that Chase will likely carve out a 10% discount, or around $2 billion. How they book the revenue and related goods will be up to the accountants.
Also, Apple’s particular technologies were up for sale in April, and Visa was chomping at the bit to outpace Mastercard. Chase, a long-time Visa-friendly issuer, will likely lever the Visa network, but it might also exploit some of the components, like wallet integration into its broader business.
What Chase Gets Out of the Deal and What it Has to Fix
Chase is historically a conservative, disciplined lender. Consider the numbers of FICO scores discussed above. They do not lend speculatively. The first step will be to clean up risk with a broad brush. Expect marginal credit scores to drive credit line decreases. Expect a low tolerance for sloppy payments. They will also need to streamline the billing process and convert the one-cycle billing strategy to Chase’s load-level billing process, which uses 18 billing cycles. On my Apple Card, which bills only on the first of the month, this will be a relatively easy task if they let me pick my billing date. Consistent with Chase’s conservative credit policies, it would not be a surprise to see a quick write-down on some marginal accounts to clean up the portfolio further.
But Chase lands back as the top U.S. card lender. With its deep penetration of households in the U.S. market, there will likely be few new accounts, but it does protect Chase’s flank and endears its card to the iPhone.
How Does This Affects Javelin Card Bench?
Javelin Card Bench is a leading competitive intelligence tool that provides reconnaissance on credit card offers by top banks. Goldman Sachs is one of the issuers tracked, along with American Express, Bank of America, Barclaycard, Capital One, Chase, Citi, Discover, TD Bank, U.S. Bank, and Wells Fargo. Card Bench handled the GM-Barclaycard transition seamlessly and will use the same strategy to integrate Apple into Chase when the deal closes. The next step will be to replace Goldman Sachs with another leading issuer, and we will soon announce which one of the three issuers will complete the field.
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