Apple's Credit Card Program with Goldman Sachs

Apple's flagship credit card program, the Apple Card, was initially launched in partnership with Goldman Sachs. However, Goldman Sachs has faced several challenges with the program, including:

• Incurring losses on the Apple Card portfolio
• Regulatory scrutiny over its credit card practices
• Higher-than-expected delinquencies and defaults on the Apple Card loans

Potential Move to JPMorgan Chase

Due to these issues, Apple is now in discussions with JPMorgan Chase, the largest credit card issuer in the U.S., to take over the Apple Card program. The key points about the potential deal include:

• JPMorgan is seeking to pay less than face value for the $17 billion in Apple Card loans due to elevated losses
• JPMorgan aims to discontinue the "calendar-based billing" feature of the Apple Card, which causes a surge in customer calls at the start of each month
• The negotiations are still in the early stages, and the deal could fall apart over pricing or other terms

Goldman Sachs' Retail Banking Strategy

Goldman Sachs' decision to pivot from its ill-fated retail banking strategy, which included the Apple Card, has limited Apple's choices for a new credit card partner. The article highlights the following points:

• There are only a few card issuers in the U.S. with the scale and appetite to take over the Apple Card program
• Goldman Sachs' retail banking project, known as Marcus, failed to gain traction
• The elevated losses and regulatory scrutiny on the Apple Card portfolio contributed to Goldman Sachs' decision to exit the retail banking strategy

Credit Quality Concerns

The credit quality of the Apple Card loan portfolio has raised concerns among potential issuers, especially in light of the uncertain economic conditions. The article mentions:

• JPMorgan is seeking to pay less than face value for the $17 billion in Apple Card loans due to elevated losses
• Sources close to Goldman Sachs argued that higher-than-average delinquencies and defaults were due to the accounts being new, and losses were expected to ease over time
• However, questions around credit quality have made the portfolio less attractive to issuers amidst concerns about a potential economic slowdown

Impact on Apple Card Features

If JPMorgan takes over the Apple Card program, it may lead to changes in certain features of the card. Specifically:

• JPMorgan is seeking to discontinue the "calendar-based billing" feature, which means all customers receive statements at the start of the month instead of staggered throughout the period
• This feature, while appealing to customers, causes a surge in customer service calls at the beginning of each month

Limited Options for Apple

The article suggests that Apple's choices were limited when Goldman Sachs decided to pivot away from its retail banking strategy. The reasons mentioned include:

• There are only a few card issuers in the U.S. with the scale and appetite to take over the Apple Card program
• The Apple Card program had saddled Goldman Sachs with losses and regulatory scrutiny
• Apple's options were further constrained by the credit quality concerns surrounding the Apple Card loan portfolio

Regulatory Scrutiny

The article highlights the regulatory scrutiny faced by Goldman Sachs regarding its credit card practices, which contributed to its decision to exit the retail banking strategy. Specifically:

• Goldman Sachs faced regulatory scrutiny over its credit card practices related to the Apple Card program
• This regulatory scrutiny, along with the losses incurred on the Apple Card loans, played a role in Goldman Sachs' decision to pivot away from its retail banking strategy

Potential Obstacles and Uncertainties

While Apple is in discussions with JPMorgan Chase, the article emphasizes that the negotiations are still in the early stages and could face several obstacles, including:

• The deal could fall apart over pricing or other terms related to the Apple Card program
• Key elements, such as the price JPMorgan will pay for the loan portfolio and the continuation of certain features, are yet to be decided
• The uncertain economic conditions and concerns over credit quality may impact the negotiations and the attractiveness of the Apple Card portfolio

Role of Credit Card Issuers

The article highlights the importance of credit card issuers in the financial industry and their scale and appetite for taking on significant credit card programs like the Apple Card. Key points include:

• JPMorgan is the largest credit card issuer in the U.S. by purchase volume
• There are only a few card issuers in the U.S. with the scale and appetite to take over a program like the Apple Card
• The limited number of suitable issuers has constrained Apple's choices for a new credit card partner after Goldman Sachs' exit