Apple is joining the buy now, pay later craze with Apple Pay Later
Apple recently confirmed a long-standing rumor that it is launching a buy now, pay later (BNPL) service that will be known as Apple Pay Later. It is part of the next version of iOS 16 which is expected to debut in beta form next month and more broadly in early fall.
According to the company’s press release, Apple Pay Later will allow users to split eligible transactions into four interest-free installments to be paid over six weeks. No fees of any kind will be charged. The announcement notes that Apple Pay Later will be available wherever Apple Pay is accepted online or in the app. This includes an important (and subtle) clarification. Most in-person Apple Pay transactions won’t qualify for Apple Pay Later, at least initially.
The lack of in-person availability is surprising since Apple Pay is compatible with the vast majority of physical payment terminals. Its scale is much more limited online and through apps. Major buy now, pay later players such as Affirm and Klarna have started partnering with online and app-based retailers and are rolling out plan-linked debit cards installments that extend BNPL’s reach wherever debit cards are accepted. I expected Apple to offer a BNPL service with such a broad scope.
Instead, Apple is starting relatively small
For now, Apple Pay Later looks like a loss leader to boost Apple Pay usage. In 2021, seven years after its debut, Apple Pay was used in only 6% of eligible transactions, according to PYMNTS.com.
When an iPhone user pays with a credit card linked to Apple Pay, Apple would receive 0.15% of the transaction price. Because Apple Pay Later won’t assess interest or fees, the economy will likely become less favorable as they will have to account for late payments and defaults. Unlike Apple Pay, which is only an intermediary, there is credit risk associated with Apple Pay Later. Interesting way, Apple assumes this credit risk itself, unlike Apple Card, which outsources this risk to Goldman Sachs. And that’s just one of the risks that Apple and other BNPL suppliers face.
BNPL investors run for the hills
BNPL was a hot industry in 2020 and 2021 as the pandemic drove an e-commerce boom, but things got tumultuous, to say the least. As of June 8, shares of Affirm were down 77% since January 1. And the private company Klarna, which is currently looking for a new fundraiser, seems to have has lost about a third of its value over the past year. E-commerce growth has slowed, borrowing costs are rising and the CFPB is asking difficult questions about the business model of the BNPL.
“Buy Now, Pay Later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but also gets the debt immediately,” said the CFPB director. , Rohit Chopra, in a statement. “We have ordered Affirm, Afterpay, Klarna, PayPal and Zip to submit information so that we can report to the public on industry practices and risks.”
Because it won’t charge interest or fees and only offers short-term financing, Apple Pay Later could escape the worst of scrutiny. But you might be surprised at how much trouble some people can have with BNPL. NPR recently aired a fascinating (and terrifying) profile of a 20-year-old college student who quickly got in over her head with a series of seemingly innocuous BNPL purchases. Spending $50 here and $50 there on exercise equipment, clothing and other impulse purchases peddled by social media influencers quickly put her in debt.
You could say the same about credit cards, of course. There’s a reason people say they’re like power tools: potentially very useful, but also potentially very dangerous. On the positive side, credit cards are much more regulated than BNPL. On the other hand, they often represent larger and more open lines of credit.
BNPL’s target market
Many see the BNPL as a tool for young people without much credit and without much money. This is still mostly true. I think BNPL works best when used to isolate a specific large purchase. For example, I could see the benefits of paying for a $1,000 couch or TV in installments, especially if you’re able to take advantage of a longer-term plan with low or no interest.
Both Klarna and Affirm offer payment plans that last for several years, although interest rates can vary wildly, so it’s important to check the fine print. Your rate could be 0% or 30% or something in between. If you can get two years interest-free, you’ll be paying less than $42 a month for that $1,000 item. In contrast, someone who pays off a $1,000 purchase over two years at an average credit card APR of 16.68% will incur $182 in interest charges.
How Apple Pay Later could evolve
I think Apple Pay Later should expand to these longer-term plans. And besides standard clothing, electronics, and furniture, I see a lot of potential for funding various types of services. This could include everything from medical, dental and vet bills to travel and more. But these higher prices will require repayment periods longer than four payments over six weeks.
Adding an in-person component could be very lucrative, although it may be too tempting for some consumers. For example, Klarna has a partnership with Chevron and Texaco which allows customers to pay for gas in four interest-free installments spread over six weeks. I know gas is expensive, but it seems like robbing Peter to pay Paul. If you can’t afford gas now, how can you say things will be different six weeks from now? And you’ll probably have to refill your tank – probably several times – before you’re done paying the first wave of installments.
Kicking the road this way is like a payday loan, even though it’s an interest-free loan. Keep in mind that credit cardholders who pay in full already have an interest-free grace period ranging from a few weeks to a few months, so it seems like this is aimed at an indebted audience who could easily fall behind on payments.
The bottom line
Of course, it is not for the BNPL industry to make moral judgments. They offer financing tools and consumers can use them as they wish. However, I think the CFPB should regulate these products like the loans they really are.
Yet despite its current challenges, BNPL could live long and thrive. It’s smart for Apple to have some skin in the game. The company is slowly building a financial ecosystem that also includes mobile payments, credit card, and peer-to-peer transactions. BNPL is a nice addition to the toolbox.
In its current incarnation, however, Apple Pay Later seems like a relatively tentative first step. I’ll be interested to see if and when it expands to more merchants and offers longer payment cycles encompassing a wider range of purchases.
Have a question about credit cards? Email me at [email protected] and I would be happy to help you.