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Should Apple Buy Discover Card?

Apple is probably saving a few surprises for its next iPhone launch. Could one of them be mobile payments - through buying a bank?

August 8, 2012

There's a big hole in the , and it's just about the size of a credit card.

Yesterday's has suddenly heated up the race to find ways to pay for things with your phone, which has been stalled for a few years now because banks, credit card processors, and wireless carriers can't agree on the distribution of the spoils. A few Sprint phones have ; everyone else is waiting for , a vaporware mobile payment system backed by the other wireless carriers.

But when Apple unveiled iOS 6, it signalled that it might be ready to break that logjam. iOS 6 includes Passbook, a feature that collects boarding passes, loyalty cards, Starbucks cards … and other cards you would use to pay for things, though Apple didn't come right out and say that. The next iPhone is widely expected to contain NFC, which is often associated with mobile payments as it allows you to tap your phone on a reader to pay for goods.

Square's danger to Apple is that it's cross-platform. While has a long association with iOS, it's also available on Android, neutralizing any Apple competitive advantage. If Square picks up and Isis actually appears, Apple may feel a need to find a way to "pay better" - or rather, to keep people within the Apple ecosystem as they move into mobile payments.

Yes, There's An Apple Bank
Apple could just buy a bank. Sure. There's an Apple Bank. It would be very funny if Apple bought Apple Bank. But Apple doesn't want to run a retail bank with teller windows.

A true Apple bank would be a virtual affair with investment and credit card issuance branches, letting Apple invest its own huge cash hoard while integrating with an existing payment infrastructure.

Discover Financial Services fits the bill. Discover Cards are widely accepted, and more importantly, they're primarily issued by Discover. That means no negotiations with potential competitors that may see Apple as a threat. Sure, Apple could buy Visa or Mastercard, but Discover's a lot cheaper and less complicated.

Apple currently offers financing on its products through Barclaycard, as well as offering an iTunes Rewards Visa card. The company could bring these products in house, and extend financing to broaden sales of no-contract iPhones. Virgin Mobile's iPhone 4S is $649.99; Apple financing could turn that into $50 per month for a year, plus $50 up front.

Buying a bank to enable mobile payments and invest its earnings wisely is a relatively easy move for Apple. The really daring stretch would be if Apple wants to change the way we bank and offer some sort of online, retail banking component like ING Direct.

There's money in this - moving money from an Apple bank account through an Apple credit card to the Apple store avoids third-party transaction fees. But Tim Cook and company may decide that pure financial services are too far from Apple's core business, which is making and supporting technology products.

TheStreet says Discover is currently worth about $18 billion. That's a big purchase, but easily within Apple's piggy bank. Apple could also spin off any parts of the Discover empire it doesn't feel like maintaining, such as home loans and student loans.

I'm not going to pretend I have any knowledge of what's going on inside Apple. I have no sources on this. This is just a thought experiment, but I think it makes sense. What do you think?