Can Apple Pay Later Avoid the Pitfalls of Other Buy Now Pay Later Services?

Apple’s new foray into “buy now pay later” (BNPL) services is an interesting move on the company’s part, and while it has some of the same pitfalls as any other BNPL service, it’s also uniquely Apple.

Apple Pay Later was one of the smaller announcements to come out of this year’s Worldwide Developers Conference (WWDC). Even though rumors of Apple’s work on it behind the scenes have been circulating since at least last summer, it still came as a bit of a surprise when it was unveiled as part of Apple’s iOS 16 preview.

Perhaps the most magical part about Apple Pay Later is that, in true Apple fashion, it just works. Everything is handled on the customer’s iPhone, and merchants don’t need to know that a customer is using Apple’s BNPL service.

The retailer gets their money the same way they usually would; it’s transferred as a Mastercard payment from a virtual card, and Apple takes care of collecting the payments from the user’s original debit or credit card.

The Potential Dark Side of Apple Pay Later

Unfortunately, there’s an argument to be made that this could be too easy. As The Verge noted last week, BNPL services can become a trap for consumers, perhaps even more than other forms of credit. Folks lured in by the attraction of splitting up a big purchase in smaller payments could find themselves overextended and unable to make those payments.

According to a report from SFGate, BNPL services are particularly popular among Generation Z — those born between 1997 and 2012 — and it’s sending many of them spiraling into debt.

For instance, SFGate notes that spending through BNPL point-of-sale services has increased 925% since January 2020. Much of this is driven by an “influencer-addled social media culture” that normalizes debt and encourages the Gen Z crowd to get whatever they want in “just four easy payments.”

These buy now, pay later programs incentivize people to spend above their means, because they’re like, ‘Oh, well, it’s only this amount over four months. People almost like brag or joke that ‘oh, it was only 24 payments of $20’ or ‘I got it with Afterpay, so it’s technically free.’TikTok fashion influencer @itscelesta

SFGate notes that the fashion industry seems to be driving the increase in the use of BNPL services more than any other single area. According to Afterpay, a BNPL service promoted heavily on TikTok, 73 percent of its Generation Z consumer spend was on fashion — everything from high-end couture to H&M.

Since BNPL services allow users to defer most of the “sticker shock” pain, which also results in their willingness to spend more. For example, the average spending on a single purchase using BNPL service Affirm is $365. That’s 3.5 times as much as the average cart size for online shoppers who don’t use BNPL services.

Not surprisingly, many folks who use BNPL find themselves unable to make the payments after the fact. According to an analysis by Debthammer, customers spend more than they can afford and then end up paying for it later in other ways. As Debthammer notes:

1. More than 45 percent of U.S. consumers have signed up for at least one BNPL plan — a 41 percent increase over a year ago.
2. More than 50 percent of survey respondents noted that they’re often paying off multiple BNPL plans at the same time. Six percent juggle five or more simultaneously.
3. 30 percent of consumers said they’ve had to skip paying “an essential bill” such as a car payment, utility bill, rent, mortgage, or child support to avoid missing a BNPL payment.
4. More than 65 percent of consumers said they wouldn’t have been able to purchase the items without a BNPL plan, with 42 percent saying that they simply couldn’t afford it. Other reasons given were promotional offers, a desire to have the item now instead of waiting until later or being unable to put it on a credit card because they were already maxed out.
5. The price of BNPL purchases runs the entire spectrum from less than $30 to more than $5,000. Most consumers (54.4%) only use BNPL services for purchases of less than $300, although 15 percent have funded purchases of $1,000 and up.
   

Despite the rising popularity of BNPL services among Generation Z, Debthammer notes that the older generations are still leading the pack. 35 percent of BNPL usage is among Generation X (born between 1965 and 1980), while millennials (born 1981–1996) come in at 27 percent and baby boomers (born 1946–1964) at 22 percent.

How Will Apple Pay Later Fare?

While Apple’s BNPL service hasn’t gone live yet — and probably won’t until iOS 16 lands this fall — there’s been little indication so far that it will do anything different to mitigate the risk of irresponsible spending. This has some folks wondering if Apple Pay Later is the right fit for a brand like Apple.

Attaching something as risky as BNPL to Apple’s brand puts Pay Later at odds with the company’s goal of providing customers with technology and services they can generally feel good about. Emma Roth, The Verge

Apple is a company that promotes itself as “[doing] the right thing, even when it’s not easy.” It’s not clear precisely what that means for Apple Pay Later in terms of how it might help its customers use credit more wisely, but the good news is that Apple does appear to be taking some steps in the right direction.

Although early reports suggested that Apple would be working with its Apple Card partner, Goldman Sachs, to roll out Apple Pay Later, it turns out that Apple has decided to set up its own financial services for this one — likely to avoid the compromises that would come in aligning its BNPL service with a more traditional lender.

According to The Financial Times, Apple will be offering loans directly to consumers from a new wholly-owned subsidiary, Apple Financing LLC.

It’s not the first time Apple has set up a new arms-length company to handle financial matters. When Apple launched Apple Cash in 2017, it partnered with Green Dot Bank to manage the banking side of things, but the payment processing was under another Apple subsidiary, Apple Payments Inc.

Goldman is still partially involved, as The Financial Times notes that it’s necessary to provide access to the Mastercard network since Apple isn’t licensed to issue payment credentials directly. However, all the underwriting of loans and lending is handled directly by Apple’s new subsidiary.

This arrangement gives Apple complete control over customer data, which will ensure that it can keep Apple Pay Later aligned with its core privacy policies. This is particularly important among BNPL services, whose standards don’t appear to be nearly as high as those of traditional credit cards. According to Fast Company, one reason retailers embrace traditional BNPL services is the amount of customer data they can glean from them.

Many retailers likely won’t be big fans of Apple Pay Later. Fortunately, that doesn’t matter, as the retailer doesn’t get to be involved in the process — they simply see the customer making a Mastercard payment.

Apple has not yet applied for a banking license, and it told The Financial Times that it doesn’t see the need to do so right now. With $73 billion in net cash sitting in the bank, Apple can afford to lend the money right from its own balance sheet, although it didn’t share specifics on how its financing mechanism will work.

Most significantly, however, Apple also plans to “restrict access to short-term credit,” implying that Apple Pay Later customers may be limited regarding the number of BNPL arrangements they can enter into simultaneously.

Meanwhile, Apple is also working to improve how it determines creditworthiness. In March, it acquired Credit Kudos, a UK-based fintech startup that uses machine learning as an alternative to traditional credit scores.