Apple’s Project Breakout finally broke out a week ago today at Apple’s WWDC. It was then that Apple confirmed what was probably one of the worst kept secrets in payments: it would enter the buy now, pay later (BNPL) space with its own product, Apple Pay Later.
It didn’t take long for the media to spin into a Pay Later frenzy, with headlines suggesting that the FinTechs in the space — namely Affirm, Afterpay and Klarna — are more or less toast, that Pay Later is (Afterpay owner) Block’s and Affirm’s biggest nightmare.
Somehow even Amazon got clumped into the category of biggest losers as a result of Pay Later. So did PayPal, which of course has had its own BNPL product since the acquisition of BillMeLater in October 2008. Its stock dropped nearly 10% last week.
I’m not sure that any of them have much to worry about from this latest entry into the BNPL space.
In fact, the so-called ‘nightmare’ may end up being Apple’s.
The Pay Later Particulars
Apple, with Pay Later, has the distinction of being about the 80th such player, globally, to vie for a piece of the very hot Buy Now, Pay Later space, not counting what the card networks and FinTechs are doing to activate issuer BNPL options at the online and physical POS.
I’m not exaggerating about being the 80th new entrant — this time last year we were at 67 and counting. Even with consolidation, the number of BNPL schemes globally has skyrocketed over the last two years, including a number of EU BNPL FinTechs that have moved recently into the U.S. market. Add to that the many use-case-specific schemes — for healthcare, travel, home repair, even veterinary services — and installment payments has become the hottest thing in payments since cash-back rewards.
Pay Later will be broadly available to iPhone users in September as an automatic part of the iOS 16 upgrade, accessible to those who satisfy its underwriting requirements and want to use it and Apple Pay to make purchases online or in-app.
Like many FinTech BNPL offerings, Pay Later loans will have a $1000 cap to start, payable in four zero-interest installment payments over six weeks. Goldman Sachs is enabling the issuance of the virtual cards used to pay the merchants which will ride Mastercard’s debit rails. Loan repayment is in the form of automatic withdrawals from a Pay Later accountholder’s checking account via their registered debit card credentials.
Apple plans to lend from its own balance sheet through a separate company, Apple Financial Services. It has a pretty healthy balance sheet from which to lend, which makes the economics of its BNPL proposition attractive, at least in theory. Reportedly at $73 billion last quarter, one could say that its Pay Later “credit facility” is more than 1.5 times the market cap of Block (which owns Afterpay) and 15 times that of Affirm.
Underwriting those Pay Later loans will leverage all of the Apple ID datapoints Apple has amassed from most iPhone users and has access to — analytics related to the behaviors of the billion or so Apple ID users, including their registered payments credentials.
Hold that thought.
The acquisition of U.K.’s Credit Kudos in March of 2022 will also give Apple’s risk teams access to bank data on customer payments flows to further assess creditworthiness in real time. Pay Later loan amounts will be based on Apple’s assessment of the borrower’s credit risk.
Apple may have a big cash cushion to lend from — but my guess is that it’s probably not enthusiastic about losing a pile of money to the Pay Later experiment, so it will likely proceed with caution. It’s where the decision to go it alone could get a little tricky, especially as the market for credit tightens and consumers feel the inflationary pinch even more — and turn to credit to alleviate those pressure points.
We already see that happening.
The number of credit card revolvers is reportedly back to 2019 levels as consumers spend down their savings and put more of their expenses on cards than they are able to repay with their monthly cash flow.
Of particular concern to Apple might be Pay Later’s $1000 spending cap — it could turn off iPhone users who are generally a good credit risk and might be willing to give Apple Pay Later a try. It could also attract those who might not be on such solid financial footing, and for which Apple has little experience underwriting.
According to PYMNTS May 2022 BNPL research, roughly 8% of all online BNPL users earn more than $100,000 a year and use installments as a way to manage payments for higher-end purchases that average $2,460.
Nearly 16% of online Apple Pay users earn more than $100,000 a year — the initial Pay Later proposition isn’t relevant for their high-end purchases.
The BNPL users who fall within the current Pay Later lending limits and who have also used Apple Pay online fall into a different camp. They are largely lower income (earning less than $50,000) Gen Zs and middle- to upper-middle-income millennials ($50,000 to $100,000 a year) who also say they live paycheck to paycheck. Their online retail BNPL purchases average $555 and $1,064, respectively.
The Pay Later Point-of-Sale Pivot
At launch, Apple Pay Later is unavailable for use at the physical point of sale, where most retail purchases are still made. This is probably for two good reasons.
The first is that Apple Pay, overall, has been a real bust in-store.
Pay Later’s September 2022 launch date coincides with the eighth anniversary of the launch of the “groundbreaking” payment alternative to plastic cards Apple execs said Apple Pay would become in-store.
PYMNTS has been tracking Apple Pay adoption and usage in store consistently and methodically since it launched in 2014. Nearly eight years later, the best thing anyone can say is that Apple Pay’s growth in-store is stagnant.
Ninety-four percent of Apple Pay users who could use Apple Pay to make a purchase — meaning they have an iPhone and are in a store that accepts it — don’t.
According to PYMNTS’ May 2022 Consumer Digital Payments Study, 37 times more consumers used debit cards, 29 times more consumers used credit cards and about twice as many consumers used PayPal instead of Apple Pay to make a retail purchase in the store in the last 30 days. Pymnts