OBSERVATIONS FROM THE FINTECH SNARK TANK
You gotta envy Apple.
When 99.999% of the companies on this planet announce a new product or service, generally speaking, few people care.
When Apple announces a new product, however, the whole world—and, in particular the media and tech influencers—go gaga over it.
So when Apple held its Worldwide Developers Conference (WWDC) in early June, the announcements set off a spate of pronouncements about the impending galactic and disruptive impacts of the new products and services.
One of which was Apple Pay Later, a buy now, pay later service that Apple will launch.
Over the Top Hype About Apple Pay Later
Predictably, some media outlets went overboard in their write ups on the new service.
Perhaps no publication was more guilty of this than Inc. which published an article titled Apple Just Quietly Revealed a New Feature That Will Completely Upend This $125 Billion Industry.
Quiet, My Foot
Right off the bat you know this article is approaching max hype because Apple didn’t “just quietly reveal” anything.
The announcement of Apple Pay Later was made at the company’s 2022 Worldwide Developer Conference, an event that Wikipedia estimates drew 23 million online viewers when it was streamed in 2020.
“Quiet” is when there are 23 people in the audience—not 23 million.
Who’s Going to Benefit From Apple Pay Later?
The Inc. article states:
“One of the most important [conference] announcements isn’t just for app developers. It’s for small businesses. Well, sort of. Really, it’s for users, but the biggest beneficiary will be small businesses.”
Why would small businesses be the biggest beneficiary? After all, according to a 2019 report from the Small Business Administration:
“[Small businesses] account for 44% of US economic activity. This is a significant contribution, however this overall share has declined gradually.”
So maybe big corporations are the bigger beneficiary.
The article may be implying that, as a result of BNPL services, consumers spend more than they would have otherwise, and that small businesses will benefit from that.
If so, that’s quite an assertion. I’ve yet to see definitive proof that consumers spend more than they would have otherwise because of buy now, pay later (BNPL).
Near the end of the article, the author states:
“The most interesting thing is that I don’t think Apple is disrupting this market just for the money. There’s a better reason, which is to own the entire experience. After all, Apple doesn’t even take a cut of Apple Pay transactions.”
Merchants treat Apple Pay transactions as card present transactions, which means they pay an interchange fee on those transactions. Although the majority of the interchange does go to the card-issuing bank, Apple does collect a transaction fee.
Apple Pay Later Won’t Upend Anything
Inc.’s notion that Apple isn’t “disrupting the market just for the money” is ludicrous—as is the claim that the Apple’s buy now, pay later service will “upend the industry.”
According to Cornerstone Advisors, in 2021, US consumers spent $100 billion—1.5% of all US retail sales—on products and services that they financed with BNPL services.
Apple Pay transactions at US retail stores in 2021 amounted to $90 billion in 2021. If Apple Pay Later had been available, and consumers financed 1.5% of their Apple Pay transactions with the BNPL services, Apple’s BNPL retail transaction volume would have come to roughly $1.36 billion—just 1.36% of the total BNPL pie in the US.
That’s not “upending” the industry.
Poor Goldman Sachs?
Then there is the Financial Times article titled Apple sidelines Goldman Sachs and goes in-house for lending service. According to the article:
“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.”
Financial Times goes 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.
Why Apple is Launching Apple Pay Later
Despite the hype, Apple Pay Later is just a small part of Apple’s overall strategy to sell hardware (like iPhones).
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’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 is anemic. 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.
In other words, 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.
Regardless of whether or not consumers actually spend more, merchants benefit as well. According to Tony DeSanctis, Senior Director at Cornerstone Advisors:
“Assuming Apple Pay Later works like other pay-in-four providers, only the first payment is taken from the card, with follow-up payments coming out of the consumer’s checking account. This means merchants pay a lower interchange fee on the BNPL transaction.”
Apple Pay Later will do “ok.” Just as Apple Pay itself didn’t “upend” anything right away, neither will Apple’s new buy now, pay later service.
But it is a piece—and an important one at that—of Apple’s broader strategy.