OBSERVATIONS FROM THE FINTECH SNARK TANK
Apple launched its “buy now, pay later” (BNPL) service in the US to compete for the more than $100 billion in purchases Americans making using this payment method.
The service, named Apple Pay Later, will allow users to split purchases into four payments spread over six weeks with no interest or fees. Initially offered to select users, Apple plans a full roll-out in the next few months.
Apple Pay Later will be enabled through the Mastercard Installments program, with Goldman Sachs as the issuer of the Mastercard payment credential.
Apple Pay Later Is a Win-Win-Win
Providing consumers with an ability to make purchases they might not have afforded otherwise—and doing so, potentially, with no fees or interest payments—is a definite win for consumers.
Helping to enable sales that might not have happened otherwise is, likewise, a win for the merchants.
Apple has about 50 million Apple Pay users and 6.5 million Apple Card holders. Driving buy now, pay later purchases with Apple Pay users will help Apple identify potential Apple Card converts to grow that business.
And as Apple Pay Later volume grows, it gives Apple hooks into a growing number of merchants to grow their Apple Card ecosystem.
Buy Now, Pay Later Changes the Customer Experience
Observers on social media and blogosphere often claim that “BNPL is here to stay.”
That’s an odd perspective because BNPL—sometimes referred to as installment payments or point-of-sale financing (POSF)—has been around longer than some of the observers.
What’s different—and important—about today’s buy now, pay later service is its place in the customer journey.
Traditionally, installment payments, POSF, BNPL—whatever you call it—was an option at checkout (i.e, the end of the customer journey). Today, BNPL influences consumers’ choices of products and providers (i.e., earlier in the journey).
Why Apple is Launching Apple Pay Later
Apple is—at its core—a products company. Its DNA is (very) well-designed hardware. Its software and services businesses may be huge, but they’re there to serve the hardware business.
Apple Pay Later is just a small part of Apple’s overall strategy to sell more hardware.
Apple’s penetration and control in the consumer market is incredibly strong, but until recently, it’s had little presence on the merchant side. Apple realizes that it needs to pursue a platform business model to protect and grow its market position.
Its recently announced “Breakout” initiative is all about addressing weaknesses in its merchant-facing proposition. And Apple has some payments shortcomings that is accelerating initiative:
- Apple Pay usage lags. According to a Q1 2022 study from Cornerstone Advisors, roughly half (52%) of consumers with a smartphone and a checking account make mobile person-to-person (P2P) payments. Three-quarters of those consumers use PayPal, 43% use CashApp, and just 26% use Apple Pay.
- Apple Card growth slowed down. After seeing a doubling of Apple Card holders in 2020, growth in 2021 slowed to a crawl. Cornerstone found that the number of consumers with an Apple Card grew from 6.4 million at the beginning of 2021 to just 6.7 million at the start of 2022.
So Apple has some payments adoption and utilization issues it has to deal with. What can it do to address those challenges?
A buy now, pay later service is one step.
Splitting purchases into four payments may—and should—drive more iPhone users to adopt and/or use Apple Pay more frequently.
And as they use Apple Pay Later more frequently, qualified Apple Pay Later users become good candidates for a broader line of credit which they can get from an Apple Card.
Poor Goldman Sachs?
A Financial Times article titled Apple sidelines Goldman Sachs and goes in-house for lending service asserted:
“Apple is making its biggest move into finance by offering loans directly to consumers for its new buy now, pay later product, taking on a role played in its other lending services by banking partners such as Goldman Sachs.”
The article went on to say:
“Big Tech’s move into the core banking business has been long feared on Wall Street. In the past, Apple has worked with Goldman to issue a credit card in the US, as well as with banks such as Barclays in the UK to offer financing for purchases of its own devices. However, those banks’ roles are diminished in its latest financial product.”
True statements, all of them.
But don’t cry for Goldman Sachs. The Wall Street giant will be one of the biggest beneficiaries of Apple’s BNPL service.
Apple Pay Later doesn’t cannibalize the Apple Card and “sideline” Goldman Sachs—it’s a stepping stone to a credit card relationship that benefits both Apple and Goldman Sachs.
Is This a Death Blow to Affirm and Klarna?
Not surprisingly, news of the Apple Pay Later launch sent BNPL providers’ stock prices down. But don’t count out BNPL competitors like Affirm, Klarna, and PayPal out just yet.
Apple, of course, has a huge installed user base to draw on, but competition in the BNPL space is also about eCommerce enablement—helping merchants drive sales.
In the past year, Klarna has launched eCommerce enablement tools for:
- Commerce search. Klarna’s search engine compares thousands of websites to help consumers find the best price for products. Its unbiased search tool gives users the ability to filter their search across stores by color, size, features, customer ratings, store availability and shipping options. At check-out, the panel automatically looks for and applies available coupons.
- Shoppable video. With Klarna’s shoppable video, retailers share existing social content and campaigns that tell their story, create shoppable content exclusively for Klarna that inspires and converts, and partner with Klarna to be featured in curated content and campaigns.
- Creators and influencers. Klarna’s Creator Platform provides a one-stop shop for retailers and creators to work together to automate initial outreach, partnerships, and tracking sales and commissions.
To succeed and differentiate, BNPL providers need to:
- Become shopping destinations. Afterpay, for example, announced that it will enable its merchant partners to advertise on the BNPL firm’s app to boost their promotions, products, and offers. Brands will be able to choose the products they want to promote via sponsored listing formats, and pay only when a shopper engages with the ad.
- Sharpen their sales attribution claims. BNPL providers claim that they help merchants make sales that wouldn’t have been made otherwise. Sound familiar? Visa and MasterCard made the same claims about credit cards they were launched. Today’s merchants will demand accurate attribution statistics.
- Specialize. BNPL providers will need to be masters of the customer journey. Few (if any) will be able to do that in more than just a couple of product categories resulting in specialization by product category. This is already happening with BNPL specialists like LoanStar Technologies in home improvement and Prima Health Credit in elective medical procedures.
Apple will do well with consumer adoption of its buy now, pay later offering. And it’s building the tools and capabilities to deliver on the eCommerce enablement side of the coin. But the BNPL race has a lot more laps to go.