This week Apple (AAPL) made financial waves by announcing that it will begin offering Buy Now Pay Later (BNPL) services through Apple Pay. BNPL allows consumers to split purchases into multiple payments over time, typically with no interest, and is a fast-growing segment of the payments market. Companies like Klarna and Affirm focus almost exclusively on BNPL, while PayPal and other fintech companies have added BNPL services within the last two years.
There are many reasons for BNPL incumbents to fear Apple’s entry into the market, starting with hardware advantage: there are more than 1 billion active iPhones in the world. Moreover, while Apple Pay got off to a slow start after its 2014 launch, it currently enjoys more than a 90% market share of all US mobile wallet payments, according to Statista.
The number of consumers using BNPL has skyrocketed during the last two years, fueled in part by a pandemic-driven rise in contact-free payments, as well as a desire to avoid paying the high interest that credit cards charge. The 2021 global BNPL market was estimated to be $125 billion, and is projected to grow to trillions of dollars within the next few years.
While banks and financial companies have long feared that big technology firms could eat their lunch, there have been several false alarms in recent years. In 2019, Facebook (META) shook the world by announcing it intended to create its own currency, originally known as the Libra. When regulators balked, the idea retreated to a kind of stablecoin called Diem, but that, too, was scrapped. Similarly, Google (GOOGL) announced with great fanfare in 2020 that it was going to massively expand Google Pay into a service called Plex, which was to include banking accounts and Google-issued credit cards. A little less than a year later, Google killed the program.
Why do Big Tech financial efforts often falter? Silicon Valley companies like to operate under Mark Zuckerberg’s famous motto “Move fast and break things.” By contrast, banking and finance is a highly regulated industry. In addition, big tech companies usually have important relationships with banks, which can create awkward situations. When, for example, Google announced that it was not going forward with Plex, theWall Street Journal reported that a top Google executive “was concerned that Plex could make other banks think that Google was out to compete with them.”
While Apple Pay Later seems far more modest than Google’s Plex ambitions, it nonetheless shifts Apple’s relationship with some banks. The Financial Times reports that the Apple Pay Later loans will be made through a wholly owned subsidiary called Apple Financing LLC. In the past, Apple has worked with banks such as Goldman Sachs and Barclays to issue credit cards and offer financing to buy Apple products.
It’s also possible that BNPL will not continue to grow at its recent feverish pace. Numerous surveys have indicated that BNPL consumers have missed payments, and in many cases have had to use credit cards to pay off their BNPL loans. Investors have begun to notice that the BNPL space is highly competitive; shares in Affirm are worth a small fraction of their value a year ago.
