Apple Pay Later Reconsidered

Apple’s venture into BNPL may prove more difficult for the computing giant than
it thinks.

When Apple officially announced its new Apple Pay Later feature this summer, many in the industry weren’t surprised. Yet it ushered in renewed anxiety for existing card-based BNPL market leaders, as it added another layer of competition to an increasingly crowded, card-based BNPL marketplace.

It also comes at a time when many card-based BNPL leaders are facing a series of unrelated challenges, ranging from rising interest rates and higher borrowing costs to new regulatory headwinds and inflationary pressures. Together, these challenges are knocking many leaders off their thrones and causing some analysts to question whether the card-based BNPL movement is truly sustainable.

While it’s clear that Apple is trying to hedge in and take ownership of BNPL users—many of whom are young Millennials and Gen Zers who don’t want to be tied to transitional forms of credit—Apple Pay Later may not be as big a threat to the system as initially thought.

In fact, the entry of Apple in the card-based BNPL market could even be good news for some providers, including banks and financial institutions. That is, if they can prove they are better-positioned to compete and win at the point of sale, particularly when compared to Apple Pay Later.

That’s because, when viewed at scale, banks and financial institutions have all the right ingredients for BNPL: easy and more affordable access to capital; regulatory- and lending-compliance know-how; the ability to easily offer a broader range of credit products; and, most important, existing consumer trust. Yet, despite these strengths, many banks remain on BNPL’s sidelines even as the product gains popularity with consumers, merchants and lenders alike.

Apple Pay Later’s Strategy

Among global businesses, Apple is known for creating one of the tightest ecosystems by controlling the user experience across its devices.
This ensures that its users interact only with the Apple brand, as evidenced by its software and now payment features.

Apple sees the card-based BNPL “pay in 4” providers, such as Zip, Afterpay, Klarna, Affirm, and PayPal, as direct threats to this tightly wound ecosystem. That’s because once a consumer uses his or her Apple wallet to pay through a competitor’s BNPL product, the competitor can then market to them, potentially drawing them away from Apple.

This is a key reason Apple is offering Apply Pay Later. The new product helps keep consumers in the Apple-only ecosystem and seals them off from competitors. Of course, there are additional layers of commercial considerations, such as acquiring and processing fees, that are a part of Apple’s go-to-market strategy. But the main objective is to keep the Apple user within the Apple experience and ecosystem.

However, Apple is at a disadvantage in that it intends to underwrite its BNPL transactions using its own balance sheet. That means losses will be a direct hit to the company. Plus, in the beginning, its BNPL product will likely not be available to all of its users—not necessarily a bad thing, particularly for those with questionable financial behaviors and spending habits.

Apple will reportedly use the newly acquired Credit Kudos, a company whose services leverage open banking to enable credit providers to increase approval rates. And it will use its own data on individual shoppers to decide who can, and cannot, use Pay in 4. The use of personal-shopping and behavioral data from a user’s phone and Apple devices does raise questions concerning privacy and will probably become a focal point of prospective regulatory oversight.

Furthermore, Apple’s entry into BNPL will open the brand up to direct compliance scrutiny in every country where the product is offered. While Apple does have a fair amount of payments experience, much of the pending regulation is not only unknown but also out of Apple’s core competency, specifically as the balance-sheet holder and underwriter.

Regulatory Burdens

While the card-based BNPL vertical has been able to operate in an area mostly free of strict compliance and regulation, that’s quickly changing. Regulatory bodies are concerned that consumers don’t realize they’re taking on debt or understand the ramifications of missed payments, even with a debit-card based Pay in 4 product.

Over the past several months, various governments have announced plans to introduce new laws to help ensure that card-based BNPL is conducted responsibly, including through soft-credit inquiries, credit reporting, and measures to ensure the avoidance of loan stacking.

This includes the United States, New Zealand, and Australia, as
well as the U.K. finance ministry, which recently announced the following rules (which it hopes to draft into legislation by the end of the year):

• Lenders will be required to ensure their loans are affordable and their advertisements are fair, clear, and not misleading;
• Rules will be expanded to cover other forms of unsecured short-term credit that pose similar risks to consumers, like dentistry work;
• Lenders offering BNPL products will need to be approved by the Financial Conduct Authority (FCA), with borrowers able to take a complaint to the Financial Ombudsman Service (FOS).

While this could be problematic for Apple, financial institutions are accustomed to working within highly regulated environments. In fact, this is where financial institutions reign supreme with their ability to offer customers a wide variety of credit-based BNPL products that are clear, transparent, and regulated. Consumers also tend to have higher trust in banks, with 70% of BNPL users saying they would be interested in obtaining BNPL financing from their banks if such offerings were available.

Banks can quickly begin offering consumer financing to merchants that don’t involve building out custom solutions on their own, which can be expensive, time-consuming initiatives and are not the core competency of the banks.

A Look Ahead

Apple Pay Later is further validation that BNPL is here to stay, as it indicates that one of the world’s leading brands sees it as a proven and growing payment type that’s in high demand despite a broad range of existing service providers.

While many of these providers see Apple Pay Later as yet another threat, the brand will be operating from a disadvantage as it attempts to underwrite BNPL from its own balance sheet and is forced to open itself up to new regulatory and compliance scrutiny.

These disadvantages for Apple are key advantages for banks and financial institutions, which are more poised than ever to win at BNPL given their easy access to capital, existing consumer trust, and ability to not just survive but thrive in tightly-regulated environments. Now is the time for them to enter and begin winning the BNPL game.

—Jeffrey Tower is executive vice president, global business development and strategy, at ChargeAfter Inc., New York, N.Y.