During its WWDC keynote, Apple announced a bevy of changes and updates to its hardware and software. In the mix were anticipated improvements to its various operating systems and computers — and plans to expand its fintech footprint.
Apple has been growing as a consumer finance company for some time, most famously thanks to its Apple Pay service and the launch of a branded credit card in recent years. However, while it’s earned a market footprint of sufficient scale as to matter in the consumer financial technology market, it’s not considered a fintech company per se.
That could be changing. During its WWDC speech, Apple announced a new service called Apple Pay Later that will allow consumers to make mobile and online purchases sliced into four payments over six weeks at the millions of U.S. retailers that already accept Apple Pay. The offering won’t include fees or other charges, the company said, requiring only a “soft” credit check and review of the user’s transaction history with Apple.
This concept should be familiar. Often described as “buy now, pay later,” or BNPL, the installment payment method became a startup darling in recent years, with companies like Affirm (which has Stripe and Amazon partnerships) riding the consumer credit option all the way to the public markets. Klarna reached an epic scale as a private BNPL company, and we’ve recently seen Block buy Afterpay, a BNPL provider, and a merger between Sezzle and Zip.
“We are quickly seeing BNPL providers evolve into more full-featured digital wallets that include ‘pay in one’ in addition to installments, and we have seen traditional digital wallets such as PayPal add the pay-in-installment feature. So it is not surprising that Apple has added this feature,” Dayna Ford, senior director analyst at Gartner, told TechCrunch via email. “BNPL has proven to be popular among consumers and merchants as a way to increase sales. It is likely to help boost Apple Pay usage, and it is a logical extension of their growing financial relationship with Apple users.”
“Banks, lenders and merchants need not view Apple Pay Later as a threat but rather as an opportunity to carve out their own niche in what has become the payments standard.” Jifiti CEO Yaacov Martin
TechCrunch has reported on myriad BNPL startups around the world, each chasing scale with modest model variations, at times focusing on particular verticals or other forms of customer segmentation. How will all of these BNPL-focused providers fare with Apple pounding its way into their market? We got an early look at what investors are thinking, at least, when shares of Affirm sold off in the wake of Apple’s news.
But that’s just one company, one result. What about outfits like Afterpay and Affirm? Will Apple’s news upset their apple carts? And what should we consider the potential impact of Apple’s news on the smaller, regional or otherwise niche-y BNPL players that raised so very much capital in the last few years? TechCrunch wanted to find out.
Competition
It’s worth noting that the BNPL sector has been under some pressure in recent months. After Affirm’s share price came back to Earth following a period of investor fancy, Klarna was forced to change up its fundraising hopes, cutting its valuation to pursue new capital.
The company remains on the defensive. TechCrunch has written about the economics of the BNPL world here, if you would like to go deeper.
To get a better handle on how Apple will impact the well-funded, if slightly ill market, TechCrunch reached out to — and heard back from — many of the major vendors in the BNPL space, including Affirm, Afterpay and Splitit. Klarna declined to comment.
Affirm CEO Max Levchin characterized Apple Pay Later as evidence that BNPL isn’t a fad — it’s here to stay and grow.
“Consumers, especially now, are looking for more transparent and flexible alternatives to credit cards,” he said. “Affirm has offered this for nearly a decade through personalized payment plans with term lengths ranging from six weeks to 60 months. By underwriting every single transaction, we empower [nearly 13 million active] consumers to responsibly pay over time and help [over 207,000] merchants drive growth, turning browsers into buyers.”
Amanda Pires, VP of communications for Square-owned Afterpay, also asserted that BNPL is a huge market — worth billions — with lots of room for competitors. More than 51% of Americans said that they’d tried a BNPL service as of March 2021, according to one survey. And Accenture estimates that the number of BNPL users in the U.S. reached 45 million in 2021.
Pires also highlighted Afterpay’s symbiosis with Cash App, Square’s money-transferring service, which she sees as a “longer-term” BNPL play.
“In partnership with Cash App, we have more consumer scale than almost any other network out there,” Pires said. “It’s important to note that, since Day One, Afterpay has always welcomed and encouraged choice in the market. And in fact, we feel very confident in our position when we are presented to shoppers next to other ways to pay — as we know that consumers prefer our brand for the value and flexibility we offer.”
Splitit CEO Nandan Sheth didn’t deny that BNPL remains an enormous opportunity, but he candidly admitted that Apple Pay Later comes at a time when the industry is facing headwinds.
The economics of the traditional model are unsustainable, in his opinion, because many BNPL vendors are driven by an “unnaturally” high tolerance for risk (i.e., the subprime segment). This makes it difficult for them to turn a profit, particularly when contending with steep customer acquisition costs and the challenge of obtaining capital in an inflationary market.
“The most significant impact Apple Pay Later will have will be on the legacy BNPL players who are vying to become more than a pure-play point-of-sale lender. Apple Pay Later offers the same ‘pay in four’ over six weeks, but is embedding the option into an existing payment flow used by millions of consumers,” Sheth said. “This is a far superior way to offer ‘pay in four’ than the traditional BNPLs that have zero underwriting information on the consumer. Keep in mind, what Apple is doing is nothing new; however, the bar has been raised by a new entrant with access to more consumers and better information to make underwriting decisions. Although we continue to see new companies venturing into BNPL, many won’t have the backing and financial buffer Apple brings to the table.”
Could the launch of Apple Pay Later spur previously reluctant brands to enter the BNPL market, in fact? Jifiti CEO Yaacov Martin thinks so. (Jifiti provides white-label BNPL services to corporate customers, a twist on the conventional approach.)
In Martin’s view, Apple Pay Later will “require” those sitting on the fence to jump into BNPL with their own offerings, facilitated by banks, lenders, merchants and even mobile payment providers.
“Pay-over-time has become the new payment standard for consumers and merchants, and Apple’s pivotal entrance into the market solidifies this reality. While Apple Pay Later won’t become the industry leader, as it is limited to users of Apple Pay, the move itself has firmly established BNPL as a must-have for banks and merchants. … BNPL is what paying at retail now looks like, whether one uses Apple Pay Later or bank-specific or merchant-specific solutions,” Martin said. “Banks [in particular] now have the opportunity to show up for their consumers at critical junctures where they previously weren’t needed. Banks, lenders and merchants need not view Apple Pay Later as a threat but rather as an opportunity to carve out their own niche in what has become the payments standard.”
All of the BNPL vendors we spoke with acknowledged that regulation will play a role in determining how Apple Pay Later and rivals evolve. Bloomberg reported this week that Apple formed a fully owned subsidiary called Apple Financing LLC to do the actual work of assessing and issuing credit in compliance, partnering with Goldman Sachs only as a Mastercard credential provider. (Mastercard’s network powers Apple Pay Later.)
In December, the U.S. Consumer Financial Protection Bureau opened an inquiry into BNPL credit, and the U.K. last year announced new regulatory policies for BNPL companies. California sued Afterpay after it initially refused to obtain a lender’s license from the state. Elsewhere, Massachusetts regulators entered into a consent agreement with Affirm after allegations that it engaged in loan servicing activity without a license.
Sheth fears that — absent regulation — BNPL “will continue to put many consumers on a slippery financial slope.” To his point, more than a third of respondents in a survey last year by Credit Karma who’d taken advantage of BNPL plans reported falling behind on installments, while a DebtHammer poll showed that 32% of customers skip out on paying rent, utilities or child support to make their BNPL payments. BNPL services can also lead to bigger purchases. In May, SFGate reported that the average Affirm customer spends $365 on a single purchase, as opposed to the $100 average cart size recorded in 2020.
“The ‘pay in 4’ appeals to a younger demographic that may not have access to credit nor the means to repay these loans. Sadly, I think this new debt will start to catch up with some consumers. Many are tempted to make a purchase they wouldn’t otherwise because of the ease of instant credit. This is incredibly unfortunate because we have an existing regulated infrastructure that can protect those consumers,” Sheth said. “The access to this instant credit from many different providers is incredibly dangerous. … [It’s] quite easy to go and get $500, $1,000 or even more from three or four different BNPL providers, all without being able to properly assess whether or not the consumer has the means to manage and repay these loans.”
Apple said it won’t charge late fees for missed payments, but that it will restrict access to further short-term credit if customers fail to pay back their loans on time. Like other BNPL services, Apple Pay Later can incur overdraft fees if a customer charges it to an account with insufficient funds. Still unclear is whether Apple plans to report delinquencies or on-time payments to major credit bureaus; in March, the company acquired U.K.-based Credit Kudos, which uses machine learning to create an alternative to traditional credit scores.
If stricter oversight does arrive, whether as a result of Apple Pay Later’s reach or broader market trends, Sheth doesn’t see it necessarily dimming the appeal of BNPL on the vendor side. One reason is that there’s a large segment of consumers with available credit that they don’t use because they don’t want to pay interest or fees. Sheth argues that these consumers are prime candidates for BNPL options.
“I think the rise of BNPL and contactless payments coinciding with the pandemic may have accelerated what was probably going to be inevitable. The level of consumer interest of BNPL the past few years has been incredible,” Sheth said. “We saw firsthand the impact pandemic shopping had on its growth. The public health crisis meant many of us took to contactless payments and we’re starting to see that behavior stick even with the easing of restrictions.”
A final note for startups
Regulation, public companies, tech giants and decacorns are the leading players in the BNPL space, but that doesn’t mean that they are the entirety. There are so very many small players around the world working on particular angles and niches in the credit space — BNPL is hardly looking like a winner-takes-all market.
But it is clear that the mass-market, untargeted, consumer-facing BNPL market will become mostly owned by a handful of the largest, wealthiest companies in the world. Apple, yes, but Block as well. Affirm and Klarna may also maintain their market position. But for anyone else wanting to turn BNPL services into gold, it’s looking increasingly like a race to specialization is all that will help them cheat death.