Apple Card Repayment Rates Weigh Down Goldman Sachs

Is this why Apple wants to get into the financial business itself?

Apple's Apple Card is promoted as an easy way to get and use a credit card. While there have been some controversies about how credit limits are assigned, it's a fairly easy card to get. There's even a commercial about a person eating a chocolate bar in line before paying, realizing they forgot their wallet, and applying and receiving an Apple Card on the spot.

That wide acceptance is having a negative affect on Goldman Sachs, the bank that operates the card for Apple.

Credit card issuers report what is called a "charge-off" rate. If you miss payments for 6 months, your balance goes into he "charge-off" category. It's basically money the bank accepts they may or may not see again. CNBC reports that Goldman had a charge-off rate of 2.93% in Q2. That's in the subprime range, and Goldman is not targeting subprime customers.

Is that bad? Well, Bank of America had a record low charge-off rate of 1.60% and JP Morgan's is 1.47%. Capital One, which intentionally targets riskier customers, is also lower than Goldman at 2.26%. So it's not as simple as "the economy."

But the Apple Card has been a success for Goldman. Its' the largest contributor to Goldman's 14 million credit card customers and loan balances are expected to reach $30 billion by 2024.

So why the bad repayment rate? One reason is that the card is young. It was just launched in 2019, so most customers have had it for less than two years. Charge-off rates tend to be highest in the first two years a person has a card. All the other card issuers have been doing this for decades, so the majority of their customers have had time to adjust or drop out. Whereas pretty much all of the Apple Card customer care in that two-year shakeout period.

But another reason is that, even though Apple doesn't target risky customers like Capital One, Apple does go after a wider section of the public than most card issuers.

28%% of Goldman's card loans go to people with credit scores below 660. That's close to 30% for Capital One. By comparison, JP Morgan is at 12% and Bank of America at 3.7%.

Apple has a history of being willing to operate sections of its business at a loss if it believes it will raise up other parts of the business. Apple TV for instance, is an example of that. Could that be why Apple is reported to want to bring the banking element in house?

Goldman's CEO, David Solomon is under fire from investors for lots of things. Partly because he moonlights as EDM DJ, "DJ D-Sol" on the international festival circuit, including at this year's Lollapalooza.