OBSERVATIONS FROM THE FINTECH SNARK TANK
According to a Financial Times article titled Apple sidelines Goldman Sachs and goes in-house for lending service:
“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—i.e., the Apple Card.
Bottom line: 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.
Buy Now, Pay Later is a Credit Card Acquisition Tool
Apple can’t rest easy, however. As I wrote in Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales:
“What’s different—and important—about BNPL is its place in the customer journey. Payment options typically come at the end of the journey. Today’s BNPL services influence consumers’ choices of products and providers earlier in the journey.”
QED Managing Director and Capital One co-founder Nigel Morris agrees:
“BNPL is an acquisition channel. The cost to acquire is low, and BNPL providers have proprietary data in position to offer other data-driven services.”
BNPL isn’t just an acquisition channel for merchants, however. It’s an acquisition channel for credit cards, as well—although some may not see it that way. According to American Express’ CEO Stephen Squeri:
“Buy now, pay later is not really a competitive threat to us. It’s targeted at debit card issuers. As a customer acquisition vehicle it’s not the game we’re playing.”
Squeri took some heat for that comment on Twitter from the BNPLiterati, but he’s not wrong. BNPL is not a good fit for all cards. Most Discover cards, yes. Most Amex cards, no. Capital One Platinum Secured Credit Card, yes. Chase Sapphire Rewards, no.
Many current BNPL users may not be attractive candidates for issuers like Amex. But when their credit scores are attractive to issuers like Amex, BNPL providers will have a deep history of their purchase and repayment activity, making it easier for them to offer credit cards with the right pricing and features.
Buy Now Pay Later Companies are The Real Threat
BNPL doesn’t threaten credit cards—it threatens to displace established credit card providers.
Why? Buy now pay later companies are establishing: 1) a deep history of young consumers’ purchase and repayment activity; 2) relationships that avoid revolving debt, high interest rates, and punitive fees; and 3) symbiotic merchant relationships.
BNPL is like training wheels for credit cards. It gives its users entry levels of credit. When BNPL customers demonstrate the need for more credit—and ability to repay—BNPL providers will be there with full-blown credit card offers.
BNPL companies like Klarna and AfterPay are “credit card” issuers. Distinguishing between short-term credit (i.e., BNPL) and longer-term credit (credit cards) is meaningless. Credit is credit.
As QED’s Morris says:
“In the end, it’s still lending—and to succeed the BNPL players will need longer term lending chops. It’s still to-be-determined how newcomers will develop the heuristics needed to manage credit.”