Best Use Of Apple's Cash: An Apple Credit Card

| About: Apple Inc. (AAPL)

Analysts are predicting the next iPhone will have an NFC chip, perhaps also an RFID chip and by the end of the year iPhones will be sold by all three huge Chinese mobile phone businesses (nearly a billion potential customers) plus T-Mobile in the USA. That means that the iPhone will do everything that the Google (NASDAQ:GOOG)/Android phones are starting to do with what is called "Google Wallet", only more so because of the inclusion - besides an NFC chip - of an RFID radio chip and, of course, Siri, Apple's (NASDAQ:AAPL) artificial intelligence personal assistant.

Envision this: (1) walk up to a vending machine, (2) tell Siri that you want a Coke, (3) the iPhone establishes wireless communication with the vending machine, (4) the iPhone sends your credit card data to the vending machine, (5) the vending machine goes through its authorization process, and voila (6) the vending machine spits out a Coke.

Using RFID chips attached to individual consumer product packages, your iPhone will wirelessly recognize each item in your grocery cart. Your iPhone will list each to-be-purchased item and display your invoice on the iPhone screen complete with a total tally and via its NFC chip will transfer the invoice total to the retail store's computer, charging the bill to your credit card after the authorization is made. Visa (NYSE:V) is already working with smartphones to do this.

Apple's iPhone users could have two big advantages; allow me to explain. First, no phone tapping or code entry would be required because Siri could complete the transaction that you request with an audible instruction. Second, and the biggest game changer of all, after experiencing and perfecting the system in its own retail stores using your iTunes account credit card for payment, it makes sense for Apple to issue its own iPhone-enabled credit card to hundreds of millions of iTunes customers.

Apple's $100 billion cash could thus be used to pay Apple and all vendors other than Apple, just like banks now use their money to pay vendors with plastic credit cards. Apple could stimulate acceptance, distribution and use of its own credit cards by offering Apple product buyers a 1-2% discount if their Apple purchase is made using an AppleCard and also waving an annual fee for customers who spend at least $500 in an Apple store each year.

Why should Apple be doing this?

  • Because Apple is already starting to make it happen in its own retail stores using its iOS iPhone app.
  • Because Apple already has hundreds of millions of iTunes customers making purchases using credit cards linked to their iTunes account.
  • Because Apple is only getting 1-3% on the $100 billion that is invested in CDs, money markets and treasury's. Like other credit cards, Apple credit cards will be collecting fees of 10 - 20% on unpaid balances. Creating the Apple credit card will instantly allow Apple to increase its take from 1-3% to 10-20%.
  • Because, being a credit card company, the 2-4% fees that vendors pay to credit card companies will be collected by Apple instead.

The amount of money that Apple could earn will be enormous...tens of billions of dollars each year, growing to $100 billion annually within 5 - 10 years. Take for example, just purchases made of Apple products. Assume Apple has sales of $160 billion in one year. Let's say that conservatively $100 billion of those sales are made using an AppleCard. By issuing its own credit card, Apple doesn't have to pay the 2% vendor fee to a credit card bank. It keeps the money. That's a no-brainer extra $2-4 billion in Apple's pocket. And remember, that's the rationale behind Sears (NASDAQ:SHLD) invention of the Discover card (NYSE:DVS) in 1981.

But that's only the beginning. The AppleCard will be accepted by other vendors, just like other credit cards are. How many hundreds of billions of dollars worth of transactions will be made throughout the world each year using Apple credit cards? That number could easily be $500 - $1,000 million. That translates to another $10 - $40 billion in revenue from vendors accepting AppleCards.

And the bucks don't stop there. Remember, most people don't pay 100% of their credit card bills each month. Apple will be collecting 10-20% interest on the unpaid balances of hundreds of millions of credit cards. Let's be conservative, let's say half of the people pay off their credit card bill every month and the other half has an average unpaid AppleCard balance $1,000, assuming 300 million Apple card holders, Apple will collect another $15 - $30 billion annually (50% X $1,000 X 300 million X 10 - 20%).

In summary, that means that the AppleCard (iCard?) business translates to $27 - $74 billion dollars added to its coffers each and every year just because people will be using their AppleCard-equipped iPhone to pay for retail transactions throughout the world. And that, I suspect is just the beginning of this conservatively estimated process. Doesn't it make more sense to use the cash to capitalize an AppleCard business than to collect only 1-3% on that $100 billion sitting in low interest rate CDs and treasurys?

Disclosure: I am long AAPL.

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