Apple Pay Later, Bad for Brand?

Just when the market excitement about Buy Now, Pay Later (BNPL) financing was waning, Apple breathed new life into the concept with Apple Pay Later in its announcement last summer—adding a consumer debt product to their fledgling Apple Pay digital/mobile wallet. While it has been delayed, the wait is over. In an announcement at the end of March, Apple began rolling out the service through its partnership with Goldman Sachs.

BNPL is hardly an innovation in consumer finance. Grandparents were plenty familiar with it in the 20th century when it was called an installment or layaway plan. These were used when consumers couldn’t pay for something immediately. They would put a deposit down and pay the merchant over time; when the payments were complete, consumers would get their goods. These days financial institutions have all your data and customer information. With that information, merchants can offer the goods up-front and hand the messy payment matters to a third party.

The 21st-century take for BNPL was to innovate the layaway by calling it a fintech, adding an app, and drawing the distinction that is it not a credit card. This helped to drive appeal for Gen Z and Millennials who, in general, famously eschewed credit cards and consumer debt until a few years ago. Fortunately for fintechs, like Affirm, Klarna, and PayPal (as well as Apple now), debt financing is somehow not as scary to younger consumers as credit financing. Because they’re really different, right?

BNPL financing has been gaining significant traction for the last few years, jumping from low single-digit penetration in 2018 to over 26% with Gen X, almost 40% with Millennials, and over 46% with Gen Z (eMarketer). Much like Robinhood repackaged day trading into smart investing, BNPL fintechs have packaged debt into smart spending. They gamified the concept, recruited a legion of influencers, and tapped into consumers’ need for instant gratification.

With near-zero interest rates on financing the last couple of years, capital quickly poured into fintech from investors predicting the next big payments innovation, especially attractive given the demographics’ aforementioned reticence to traditional credit. While investment seemed to cool in 2021 and 2022 because of rumblings of pending regulation, companies like Klarna and Affirm still saw 2022 growth of around 20% YoY (Klarna). Not surprising since the Federal Reserve announced that consumer debt, after a pandemic retreat, hit a record of $16.9 trillion in 2022.

With gas prices soaring, inflation rising and interest rates continuing an upward climb, consumers are going to be even more enticed to spread their payments over time, potentially leveraging BNPL options. And while this can make sense for large, considered purchases, the unfortunate side of payment flexibility, is that it’s become so easy (and fun?) that consumers rack up debt from all sorts of purchases. Especially for consumers who have little experience with credit and are lured by assurance, credit bureaus don’t report BNPL debt on credit reports (yet).

Unfortunately, as more and more consumers are realizing, there is a cutoff where small monthly payments turn into a significant portion of disposable income. And when payments are missed, late fees, interest rates, and credit report hits made the game a lot less fun. According to a 2021 Credit Karma Survey, 38% of BNPL consumers had been late on at least one payment, and naturally, almost 20% regretted signing up for the payment plan.

Suffice it to say, behind the fintech packaging and rapid adoption, the real innovation of BNPL has been the ability to scale a new form of debt somewhat under the radar of traditional credit lenders and regulation. But that may be changing. Last Fall a number of financial services lobbyists, along with consumer advocacy groups, urged the Consumer Financial Protection Bureau (CFPB) to open an investigation into BNPL provider practices. BNPL has generally skirted truth in lending (TIL) regulations by offering payment terms in 4 installments (the limit for TIL) as well as glossed over the fine print of their disclosures to consumers, which only helped its meteoric rise. Scrutiny will likely come sooner than later with the entry of Apple into the marketplace.

The world’s most valuable company now offers layaway financing with the benefit of immediate gratification. What could go wrong?

Rumored by Bloomberg since July 2021, Apple announced last June the addition of BNPL functionality to Apple Pay transactions, Apple Pay Later. Much like their credit card offering, Apple Card, the feature will be intimately connected to their iOS software within Apple Wallet. The street commentary on the move has been generally positive, interpreting the move as a way for Apple to boost its payments platform (Apple Pay) for both in-store and online transactions and more closely bond consumers to the Apple ecosystem.

While the benefits of tightening the consumer footprint in payments make some business sense to drive loyalty, this feels more like a financial operations decision than one that will ultimately benefit consumers. By and large, Apple iOS dominates the U.S. smartphone market with close to 55.79% market share (25.94% away from its nearest competitor, Samsung). Further, Apple already has 92% of the U.S. mobile payments market (Discover/Pulse), so little competitive pressure there either.

The problem isn’t one of share, but of consumer adoption and usage of digital payments. Since its launch in 2014, Apple Pay has not been a runaway success. While the early pandemic saw a great jump in mobile/digital payments (along with online), there has since been a waning as consumers have become less afraid of touching things. Also, one can assume that since Apple Pay Later will not be used for every transaction, it will do little to help mobile payment usage and habituation.

There are a ton of risks for Apple in making this move right now. Most obviously, is the fact it serves the objectives of Apple vs. consumers. There is a huge customer experience (CX) elephant in the room, and if consumers have a bad experience with Apple Pay Later it will damage their overall loyalty to Apple. The #1 complaint of consumer banking customers is fees. Surely Apple will mete out fees, interest charges, and the like for missed payments. And Apple Pay Later payments will come automatically from checking accounts or debit cards, so consumers could be hit doubly with non-sufficient funds and/or overdraft charges. Not to mention damaging unsuspecting customers’ creditworthiness as well as the potential ego hit if/when transactions are denied at point-of-sale.

Aside from the individual consumer reputation risk, the bigger risk to Apple this move could change is its brand perception at a macro level. Apple was a brand before Apple was a viable company. That brand has enabled it to capitalize on the intangible value that no company in history has since emulated, yet. Does Apple really want to be considered in the same groupings of these, albeit sexy for now, fintech providers? While the entrants have strived to position themselves as fun and innovative, when bills come due and the economic outlook is grim, sentiment will tank as delinquency rises.

Don’t worry about Apple. Apple will weather any economic downturn just fine with or without BNPN loan exposure. Bloomberg writes Apple will underwrite the cost of this venture with its own balance sheet, and they clearly have the capital to support the risk.

One risk they absolutely won’t avoid are regulators–and not just the CFPB scrutiny of BNPL. The U.S. and international governments have been looking very carefully at the self-referring/preferencing practices of Apple (Google, Amazon, Facebook) for several years now. And Apple already has several anti-trust investigations and suits at various stages of the legal processes. Surely, the embedding of a consumer lending product into its mobile operating system for in-app, in-store, and online purchases will look mighty suspect.

A final risk for Apple with its BNPL foray is its relationships with issuers and merchants. Apple worked diligently in the early days of Apple Pay to encourage issuers to sign on to their product. They even rewarded issuers with an additional (0.15%) fee over and above the interchange fee paid to the card networks. While Visa is evaluating this fee given backlash from major banks, the sting of the unfulfilled Apple Pay dream will continue. And on top of being an expensive payment option for issuers, Apple Pay Later will circumvent credit card and retailer financing options by moving those transactions directly to Apple.

It is likely the BNPL move by Apple will do very little to drive Apple Pay consumer usage, aside from transactions where consumers don’t have the funds ready for purchase. A better strategy may have been to take a page from the issuers and their everyday spending pushes, rewarding customers for transactions just enough to drive habituation. Sure, this looks less attractive right now; however, the potential damage to consumer loyalty, retention, and brand reputation along with the added layer of scrutiny as well as issuers and retailer tensions, not to mention bad debt, will likely outweigh the costs. And actually do right by customers.