Apple Pay Later marked Apple’s entry into the rapidly growing buy now, pay later market, giving Apple Pay users another way to finance purchases directly within the company’s payments ecosystem. The service was designed to let consumers divide purchases into four installments over six weeks without interest or fees, putting Apple in more direct competition with established BNPL providers such as PayPal, Klarna, Affirm, and Afterpay.
Apple enters the market with significant advantages, including a highly recognizable brand, an established Apple Pay user base, and relationships with merchants that already accept its digital wallet. Integrating BNPL directly into Apple Pay could also eliminate one of the friction points consumers encounter with standalone providers: downloading another app and creating another account. However, launching a lending product during a challenging economic environment introduces additional concerns around underwriting, consumer debt, and credit risk.
Recently, Bloomberg reported that Apple employees in their retail stores were testing out their Buy Now, Pay Later (BNPL) service. This is big news from Apple who delayed the launch of the BNPL service due to technical issues last year. The service called Apple Pay Later will allow Apple Pay users to split a purchase into four installments paid over six weeks with no interest or fees. The model is similar to other brands such as PayPal, Klarna, Affirm, and Afterpay. It also has been reported that Apple is developing a monthly installment service with Goldman Sachs that will split larger transactions monthly with interest. This service will certainly compete with BNPL providers such as Affirm who also offer a monthly payment plan in 3-, 6-, or 12-month equal installments with APR’s up to 36%.
Entry into the U.S. BNPL market comes at a time where the service is widely popular. According to the CFPB, U.S. consumers accumulated $24 billion in BNPL loan volume in 2021, which was ten times the amount in the year previous. Apple is certainly betting that buy now, pay later will continue to grow and they have all the tools to make this product a success.
Apple is, well, Apple. The brand is instantly recognizable, and the logo can be found in merchant checkout lines throughout the country as well as many major e-commerce vendors. Apple Pay has also gained significant traction among consumers, given that 28% of U.S. consumers used the service last year, albeit, most usage was online rather than in-store.
If Apple Pay Later service is integrated well within the Apple Pay app (I am sure it will be) then customers won’t have to download extra apps and create more login credentials. Clicking a few buttons to download an app does not seem like a lot of work but spending an extra 10 seconds to download, yet another app can make or break a solution in today’s digital ecosystem where consumers may be fatigued by an abundance of digital finance offerings.
The major problem that we foresee is the deteriorating economic environment. BNPL underwriting practices tend to be a lot less stringent than traditional credit card underwriting, and thus presents a higher level of risk. Little visibility into consumer finances means consumers could be taking on debt that they cannot afford to payoff later.
Apple Pay Later could become a formidable competitor in the BNPL market because Apple can place installment payments directly into a digital wallet consumers already use. That combination of convenience, existing merchant acceptance, and a large customer base could make it easier for Apple to encourage adoption without requiring consumers to establish a relationship with another financial app.
The bigger question is how the product performs as economic conditions change. With BNPL lending potentially exposing providers and consumers to greater credit risk, Apple’s success will depend not only on a seamless user experience but also on effective underwriting and responsible management of installment lending.
Overview by Ben Danner, Research Analyst at Mercator Advisory Group.
