I’m oversimplifying things today (gosh where’s my coffee?!?) but to give cash back higher than what you charge, is like those startups that give away more than they charge. If the business model involves giving away someone else’s money, eventually that money will run out.
I know I oversimplified because what Credit Card companies (or Banks) charge isn’t simply the transaction fee - and here lies the crux of the issue - there’s a significant amount of money they make from what might be considered usurious interest rates.
I’ll break down the CC customers into 3 groups:
1. businesses who pay fees
2. customers who pretty much always pay the full balance on time
3. customers who have paid interest for more than one month in a row, more than 3 times in 5 years (arbitrary figures, but for the sake of discussion)
If the credit card companies only had group 1 and 2, and they ran on zero margin, then the maximum sustainable amount would be what they charge group 1, give or take the interest they earn in the time delay from when they pay group 1 and when they collect from group 2.
So paying more than 2.9% cash back requires they either print money or have group 3.
So the sustainability of > 3% depends on whether the group 3 customers are a sustainable group.
I would argue that, at the current interest rates of between 19.99% and 24.99% percent per annum, it’s worse than my mortgage (43% of the initial loan).
For those who actually need to fund basic living off their credit card (those who have disposable income tend to fall into group 2), they’re going to be stuck with paying back far more interest than they even borrowed.
The result is the group 3 customer either goes broke, sacrifices something else vital (ie healthcare or eating properly), or bands together with all the other group 3 customers and starts a revolution (most of them are very bloody). None of those outcomes is sustainable business model.
This is why I think if Apple Card actually offers a significantly lower interest rate, a few things will happen:
- they’ll significantly help out the group 3 customers, to the tune of freeing them from slavery
- they’ll piss off the banks and Wall Street and Visa and powerful companies
- they’ll actually be an incredible force for good, and that will change all groups of customers perception toward paying them, and being their customer