Goldman Sachs' partnership with Apple could move it a step closer to being a 'bank branch in your pocket'

AP

Apple CEO Tim Cook is teaming up with Goldman Sachs.

• Apple and Goldman Sachs are preparing to launch a co-branded credit card later this year, the Wall Street Journal reported last week.
• The card will be tied to new iPhone features, the newspaper said, leading experts to surmise that this is the computer giant's most aggressive move yet into financial services.
• By designing the credit card with Goldman Sachs from the ground up, Apple can ensure that the card works as seamlessly and with as little friction as possible within its digital wallet, they said.
• Business Insider spoke with five experts in credit cards, mobile banking and payments to find out what it will take to make the partnership succeed.

Goldman Sachs can't redefine the credit card, but it can go along for the ride as Apple reimagines the digital wallet.

That's the consensus of five experts across the spectrum of credit cards, mobile banking, and payments interviewed by Business Insider after the Wall Street Journal reported last week that the companies would be launching a co-branded credit card later this year that will sync with an iPhone app. The experts gave informed speculation and said they didn't have any inside knowledge about the product.

"There are only two things you can do with a card: spend your own money and spend the bank's money," said David Robertson, publisher of industry newsletter the Nilson Report. "So there are a finite number of bells and whistles on any payment card product. There will be no re-inventing the wheel."

Not in terms of the card agreement at least. The Goldman-Apple card will offer the rewards that many users have come to expect, or about 2% cash back on most transactions, with the potential for more on Apple products, according to the report. It added that the companies have no interest in offering more or entering into the hyper-competitive rewards war fueled by Chase's Sapphire Rewards card.

Breaking new ground

If the Goldman partnership is successful and drives millions more to Apple's digital wallet, it could be the beginning of something much more interesting: the forging of some of the closest ties yet between Wall Street and Silicon Valley. Tech giants like Apple, Amazon and Google have been eyeing the financial services industry, looking for ways to offer banking products without subjecting themselves to onerous regulations.

"Every line item business of a traditional financial institution will end up intermediated by a mobile phone," said Brett Winton, head of research at ARK Investment Management, a $7 billion asset manager that makes bets on emergent technologies. "The idea of a bank branch in your pocket is an incredibly valuable spot to be."

That would put Apple on similar footing as Paypal's Venmo app and Square's Cash app, he said.

The key is minimizing friction, from account signup to wallet usage to managing balances and repayment, industry experts said. Apple already allows users to place their preferred cards into its wallet via ApplePay, but the practice can be cumbersome at times. No credit-card company yet allows instant approval. And most credit card issuers aren't offering credit on demand or flexible payments.

Apple "needs to own the entire user experience," Winton said. "As the friction to transact gets reduced and reduced you end up with the wallet as the front end for all of the goods you buy."

Reducing friction

There are three critical areas where the collaboration could help make it easier for consumers to apply for, and use, the credit card.

For one, Apple and Goldman should be able to offer instant issuance. The iPhone's fingerprint scanner and two-factor authentication, coupled with the identities for hundreds of millions of users, gives it a massive advantage, according to Crone Consulting LLC's Richard Crone. That should allow Goldman to more quickly and accurately approve new offers with less risk of fraud, he said.

"No one has instant issuance inside a mobile banking app, let alone a mobile wallet," Crone said.

That process could be aided by machine learning and artificial intelligence techniques, with the accumulated data becoming an asset that improves "like a bodybuilder that gets stronger and stronger with every exercise," Crone said.

A second opportunity would be in offering different types of credit, say loans with customized repayment terms. Fintechs like Affirm already offer near-instant approvals for point-of-sale financing and American Express offers an option to move revolving balances onto a fixed payment plan. Goldman already offers installment loans with flexible repayment through its digital lending arm, Marcus.

Read more: Goldman Sachs' retail bank Marcus took over £5 billion in UK deposits in just 3 months

"What would appear to everyone to be a saturated and declining market, private label credit cards, may really be camouflage for offering customized credit," Crone said.

The card could also allow consumers to choose a debit card or credit card option, maybe even with the swipe of a button on the iPhone's screen, Robertson said. Mastercard, the card's payment network, would have to enable that type of functionality, said Patricia Hewitt, an advisor to payments companies.

The wallet might also offer some type of financial tracking and even offer encouragement for good financial habits, Winton said. Apple is considering new features for the wallet that would nudge users into managing their account or paying down balances, the WSJ reported.

"Apple's interest is in further locking its customer user base into its ecosystem," Winton said.

Goldman to reap benefits

Having Apple encourage uptake of the card should allow Goldman to significantly lower the cost of acquiring customers, which it now does through direct mail. Each new iPhone could come preloaded with a credit card offer, or loaded with other features that encourage users to apply.

But it the companies can make this product work, it would become of the biggest steps yet in Apple's reimaging of the digital wallet. Eventually, consumers may go to there first to begin transactions like ordering Uber or paying at Starbucks, Winton said. WeChat, the Chinese messaging and e-commerce app, uses about half of its screen real estate for e-commerce, he said.

In the beginning, Apple and Goldman may need to incentivize users to use the card within the wallet. One way to do that would be to offer additional rewards in return for using the card in Apple's digital environment or managing your account, Robertson said.

"The issue is consumer inertia," he said. "They have to give you a reason to switch."

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