Apple will launch Apple Pay later, and it’s going to be a winner

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 make using this payment method.

The service, called Apple Pay Later, will allow users to split purchases into four payments spread over six weeks with no interest or fees. Apple was initially offered to select users, and plans a full rollout in the coming months.

Apple Pay Later will be enabled through the Mastercard Installments program, with Goldman Sachs issuing the Mastercard payment credentials.

Apple Pay Later is a win-win-win

Giving consumers the ability to make purchases they might not otherwise have been able to afford – and to do so, potentially without fees or interest payments – is a clear win for consumers.

Contributing to enabling sales that might not have happened otherwise is similarly a gain for the sellers.

Apple has around 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 conversions to grow its business.

And as Apple Pay Later volume grows, it gives Apple links to a growing number of merchants to expand the Apple Card ecosystem.

Buy now, pay later changes the customer experience

Observers on social media and the blogosphere often claim that “BNPL is here to stay.”

It’s a curious prospect because BNPL – sometimes referred to as Installment Payments or Point of Sale Finance (POSF) – has been around longer than some 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 – were an option at checkout (ie the end of the customer journey). Today, BNPL influences consumers’ choice of products and suppliers (ie earlier in the journey).

Why Apple is launching Apple Pay later

Apple is – at its core – a product company. Its DNA is (very) well-designed hardware. The software and services businesses may be huge, but they are 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 there has been little presence on the seller’s side. Apple realizes that it must pursue a platform business model to protect and expand its market position.

The recently announced “Breakout” initiative is about addressing the weaknesses in the buy-side offering. And Apple has some payment shortfalls accelerating the initiative:

• Apple Pay usage delays. According to a Q1 2022 study by Cornerstone Advisors, about half (52%) of consumers with a smartphone and a checking account make mobile person-to-person (P2P) payments. Three-quarters of these consumers use PayPal, 43% use CashApp, and only 26% use Apple Pay.
• Apple Card growth slowed. After seeing a doubling of Apple cardholders in 2020, growth slowed to a crawl in 2021. Cornerstone found that the number of consumers with an Apple card grew from 6.4 million at the start of 2021 to just 6.7 million at the start of 2022.

So Apple has some payment adoption and usage issues it needs to deal with. What can it do to meet these challenges?

A buy now pay later service is one step.

Splitting purchases into four payments can – and should – lead more iPhone users to adopt and/or use Apple Pay more often.

And as they use Apple Pay Later more often, eligible Apple Pay Later users become good candidates for a wider line of credit that they can get from an Apple Card.

Poor Goldman Sachs?

A Financial Times article titled Apple Sidelines Goldman Sachs, Goes In-House for Lending Services claimed:

“Apple is making its biggest move into finance by offering direct-to-consumer loans for its new buy-now, pay-later product, assuming 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 core banking has long been 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 the purchase of its own devices. However, these banks’ roles have been reduced in the 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 for Affirm and Klarna?

Unsurprisingly, news of the Apple Pay Later launch sent BNPL suppliers’ share prices down. But don’t count out BNPL competitors like Affirm, Klarna and PayPal just yet.

Apple, of course, has a huge installed user base to draw on, but the competition in the BNPL space is also about e-commerce enablement – ​​helping merchants increase sales.

In the past year, Klarna has launched e-commerce activation tools for:

• Trade search. Klarna’s search engine compares thousands of websites to help consumers find the best price for products. The unbiased search tool gives users the ability to filter their search across stores by color, size, features, customer reviews, store availability and shipping options. When checking out, the panel automatically looks for and uses available coupons.
• Purchasable 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 collaborate 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 of sales and commissions.

To succeed and differentiate, BNPL suppliers must:

• Become shopping destinations. For example, Afterpay 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, paying only when a buyer engages with the ad.
• Sharpen sales attribution claims. BNPL suppliers claim that they help sellers make sales that otherwise would not have been made. Sounds familiar? Visa and MasterCard made the same claims about credit cards when they were launched. Today’s salespeople will demand accurate attribution statistics.
• Specialise. BNPL suppliers must be masters of the customer journey. Few (if any) will be able to do so in more than just a few product categories, resulting in specialization by product category. This is already happening with BNPL specialists such as 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. And it builds the tools and capabilities to deliver on the e-commerce enablement side of the coin. But the BNPL race has many more rounds left.