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Apple Inc.’s expansion into buy-now pay-later financing could be just the beginning of an attempt to shake up the traditional payments system.
The consumer-electronics giant has made other ventures into financial services before, including through its Apple Pay payment technology and a co-branded credit card done with Goldman Sachs Group Inc.
GS,
However, Apple’s
AAPL,
BNPL launch, announced in June at its WWDC developer event, is notable because the company has decided to take on lending functions itself through a new in-house finance arm.
The endeavor suggests Apple may have greater financial ambitions down the line and could be looking to disrupt not just the BNPL market that encompasses players like Affirm Holdings Inc.
AFRM,
and PayPal Holdings Inc.
PYPL,
but also the broader banking and financial-technology landscape.
“It could be very much a tipping point in consumer lending,” said Tom Noyes, the managing partner of the Starpoint LLP advisory business and a Citibank veteran.
For Pay Later, Apple is leveraging Mastercard Installments, a program by the card giant that lets lenders make installment offers to customers, and Apple’s new finance arm will maintain state lending licenses. Goldman will be the issuing bank, but “in name only,” according to Noyes, since the smartphone giant is creating a new Apple Financing LLC lending entity that will make credit decisions.
The establishment of an Apple lending unit is “really big news,” Noyes continued, but also a bit of “back to the future.”
Before Visa Inc.
V,
and Mastercard Inc.
MA,
came about and created open-loop cards that could be used nearly anywhere, stores would offer their own credit to customers in a closed-loop model, Noyes said. Now, Apple could be moving to get the best of both worlds: Its forthcoming, open-loop Apple Pay Later product will let consumers split purchases into interest-free chunks at any retailer that accepts Apple Pay, but the company may also see its expansion into lending as a way to help customers better finance the purchase of iPhones and other Apple devices.
By enabling consumers to more easily afford devices, Apple could boost its sales, expand its ecosystem, and offer a type of financing in BNPL that is gaining steam, especially among younger consumers, despite some concerns that it may cause shoppers to spend beyond their means.
Apple is also reportedly exploring the creation of in-house payment-processing technology and infrastructure, Bloomberg has said. And longer term, through lending and other endeavors, the company might look for chances to eat away at the traditional banking system given the economics of card transactions.
When consumers make credit-card purchases at any merchant, that retailer will pay its bank a discount rate, meaning that the retailer doesn’t receive the full price of the item purchased. Then the merchant’s bank divvies up that discount fee into an interchange fee paid to the card-issuing bank, cuts for Mastercard or Visa, and an amount for itself.
Because Apple is a massive retailer, its card fees add up, and the company may see opportunities to reduce what it pays by getting more involved in the transactional process itself.
“The reason banks exist is as someone to vouch for you and take on risk in transactions,” Noyes said. “Today Apple, Google, and Amazon know you better than any bank does, and they’re all looking for ways to improve how the financial services that you need are delivered.”
Instead of paying card fees while its customers also rack up credit-card interest, Apple may be looking at the current financial system and realizing that it “could build this business just from expense savings alone,” Noyes added.
He noted that emerging markets such as India and Brazil feature payment systems without the fee models that people in the U.S. are used to. “In the U.S., we need to start preparing for days where interchange is going to zero,” Noyes said.
Even if such a move were to bring success for Apple, it’s an open question whether other retailers could realistically follow the company’s lead in financial services and lending.
“It takes a fairly big organization to pull this off,” Noyes said. He highlighted that Target Corp.
TGT,
has seen strong adoption of its RedCard, though he sees that happening more so on the debit side.
Amazon.com Inc.
AMZN,
and Alphabet Inc.’s Google
GOOGL,
GOOG,
have shown growing ambitions in fintech, but they seem less likely to build their own internal lending businesses.
As it stands, Amazon has its Amazon Pay digital wallet and works with Affirm to offer installment-payment options. And installments would seem to be “a natural evolution of Google Wallet,” but perhaps in cohort with an existing player, said Jordan McKee, a principal research analyst at 451 Research, which is part of S&P Global Market Intelligence.
“I think Apple will be somewhat unique…in terms of offering this kind of service fully in-house and lending off its own balance sheet,” McKee said. “I expect others to partner with existing providers and traditional financial institutions.”
Some banks, for their part, have tried to get ahead of the BNPL threat by offering some variation on the trend themselves. Citi, Chase, and American Express Co.
AXP,
have options for consumers looking to break certain purchases into installments.
Financial institutions “have been watching BNPL closely because they realize that while it may not be a threat to the credit-card side of the business today because the primary users are younger, debit-centric consumers, there’s a real possibility that as those younger consumers that grew up on BNPL get older, they may never graduate,” McKee said.
A younger consumer whose first credit experience is Apple Pay Later might ultimately move to an Apple Card rather than a credit card from Citi or Bank of America Corp.
BAC,
he offered.
McKee is also focused on the broader implications for the BNPL market, which has fallen upon challenging times amid rising interest rates, growing credit risk, and shrinking margins. Affirm, which offers both interest-free and interest-bearing installment products, has seen its shares drop nearly 80% so far this year.
While Affirm, privately held Klarna, Block Inc.’s
SQ,
Afterpay, and PayPal are among the big names in the industry, there are a host of smaller players as well. For Block and PayPal, BNPL is just one part of the overall business, and Affirm and Klarna have expanded into adjacent areas like content discovery and bank-like products featuring debit cards.
“The BNPL provider that only does BNPL is getting squeezed,” McKee said. There’s a “ramping need for consolidation” or a move into adjacent areas in hopes that a more diversified business “could fend off newcomers into the space like Apple.”
BNPL services make money in various ways. The typical interest-free offering is merchant funded, meaning that retailers will give BNPL companies some cut of the transaction value in exchange for making consumers more willing to go through with a purchase. Interest-bearing BNPL options are more similar to traditional loans in that consumers are ponying up for the right to pay over time.
Apple itself doesn’t charge fees to merchants for Apple Pay Later. A Mastercard spokesperson said that “fees related to the program are value-based, and shared by lenders, acquirers, and the network.”
Apple’s interest-free BNPL offering thus comes at an interesting time for the industry, because merchant fees have been coming down amid growing competition, making it so traditional providers have to find new revenue streams, according to Francisco Alvarez-Evangelista, an advisor at Aite-Novarica Group.
His research indicates that consumers generally prefer interest-free offerings. But BNPL companies increasingly may be motivated to do more interest-bearing loans for economic reasons.
Unlike established players, Apple isn’t necessarily looking to make Pay Later a big revenue driver. More likely, the company sees opportunities within lending to reinforce the stickiness of its business and keep consumers locked into the ecosystem, Alvarez-Evangelista said.
“A big player like Apple can come in and disrupt the space and say, we know competitors are shifting toward interest-bearing, but let’s take a step back and go toward interest-free,” he said.
