Apple's strategy is to layer frictionless services on top of exceptional products. The latest offering is Apple Pay Later, a Buy Now Pay Later product that enables users to buy more than can afford right now. But what does it really mean and why are they doing it?
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Buy Now Pay Later: the $100 billion market
Back Story: Apple Pay Later is Apple's Buy Now Pay Later, or "BNPL" financial services product. It was announced at WWDC a couple of weeks ago and caught everyone by surprise (because we were all looking for an announcement about Apple Glasses). And in true Apple style, the big reveal didn’t reveal anything, keeping the commentators guessing.
So, what is it?
Apple Pay Later lets users split an Apple Pay purchase into 4 equal payments paid back over a 6-week period. It will be available anywhere that Apple Pay is accepted (which is around 9 in 10 of all US retailers).
- 48% Apple Pay Reach Amongst Global iPhone User Base
- 20% of Apple’s Revenue from Services (inc Apple Pay)
- 6 out of 10 UK consumers used Apple Pay in Stores or Restaurants
Whilst the details are a little hazy, Apple Pay Later is essentially a short-term, interest-free loan to customers. Exactly how Apple will make credit risk decisions is unclear, or who will carry the default exposure (probably Goldman Sachs, the bank behind Apple’s credit card, called Apple Card).
But, Apple is starting from a strong position when it comes to default risk. Remember, they already have a consumer's payment information on file.
And Apple’s customer demographics (probably, I assume) rank high when it comes to the ability to pay.
The takeaway: there are 2 dynamics at play here - (1) Apple owning the rails and (2) BNPL growing at 25% pa.
Apple own the rails
Apple controls the phones of the billion wealthiest people in the world (remember, the iPhone is a high-margin, luxury item, more Ferrari than Ford). Apple Pay is already 7 years old, bedded down and trusted. It’s used by over half the iPhone population!
Here's the thing: It all happens inside Apple.
The retailers get paid the full amount at checkout. It's not even clear if they will know that the consumer has taken the BNPL option.
It's significantly easier for Apple, compared to, say Klarna because there's no setting up partner agreements with retailers. It all happens inside the iPhone. The retailer would never know that the consumer is spreading the payments.
This is the latest step by Apple toward owning the entire experience in the Consumer Payments space.
Apple’s competitive strength comes from having the scale of a billion iPhone users, PLUS a highly trusted brand, TOGETHER with an established frictionless cashless payment mechanism AND the ability to roll out the product simply with an iOS update.
It’s hard to see how the specialist BNPL’ers like Affirm or Klarna can compete. IMHO, there’s only PayPal that has the dynamics to do this.
Note: remember that Apple just rolled out a feature that lets an iPhone act as a credit card payment device, removing the need for specialist equipment to be rolled out into every store (cutting Square off at the knees).
And last month I reported that Apple has paid $150 million for Credit Kudos, a UK company that uses Open Banking to help companies do credit scores.
BNPL is a growing segment of e-commerce
In 2020, $97 billion worth of global e-commerce transactions used BNPL. This accounted for around 2% of all e-commerce spending and is forecast to double in the next 2 years.
In the US alone, BNPL spending increased 13x from 2019 to 2020 ($3 billion to $39 billion). It is forecast to top $100 billion in the US by 2024.
When consumers buy using BNPL, the basket size is 3x bigger. The data shows that consumers buy more when they are offered “free” credit. (I put free in quotes because there is no such thing as free money, but for now, it seems that Apple is not taking any fees for providing the 6-week short-term loan. For now, anyway.)
Have what you want, and you don’t need money to pay for it
Caution: But here’s the problem waiting to happen.
I’m over 55 and I don’t get why anyone defers paying for small-ticket items (avg basket size in the UK is £79) for 30 or 45 days? There’s no upside, is there?
But here’s the thing, if you’re from the TikTok generation and want to be That Girl, then you’re being influenced to buy now, pay whenever.
Retailers like Chinese “low-cost, abundance” brand Shein put out 10,000 products a day. Their smart marketing uses a Hunger Games presentation with timed mark-downs shown in hours and minutes, fuelling “I have to buy it now” emotions.
One reason for the growth in BNPL is that it is so easy. No messy credit card applications to fill out. No credit checks to get in your way. Simply click the option at check out and, bingo, you can have it without paying for it (yet).
Which brings me back to Apple Pay Later and its characteristic to be soooo easy to use. Apple won't be making a fee on the Apple Pay Later product. They're doing it (simply) to improve the customer experience. The goal is simply to make the iPhone the one-stop device for all your needs...and the road to making Apple the first $1 trillion a year company.
Sweden has long dominated the BNPL market. Back in 2016, Sweden led the way for BNPL domestic e-commerce payments with 2x more than second-placed The Netherlands. By 2020, Sweden’s domestic BNPL e-commerce payment proportion had more than doubled. Germany and Norway were ranked second and third. Australia and New Zealand are the only non-European countries in the top 10. In fact, all of the other eight countries that use BNPL the most are located in Northwest Europe.
👉 Almost 4 in 10 (37%) Brits say they have used a buy now pay later service.
👉 BNPL is most popular amongst millennials, with 54% using this payment method.
👉 Klarna was the most popular BNPL app.
👉 Online purchases using buy now pay later services are growing at a rate of 39% per year.
👉 Almost ten million (9.5 million) Brits said that they avoided buying from retailers that don’t offer BNPL options at the checkout.
How Banks Innovate:
Rick Huckstep interviews Christer Holloman, founder of DIVIDO, the BNPL Fintech Startup
- Klarna lay off 700 staff. The buy-now-pay-later startup sees its valuation fall by one-third in a tough environment for tech companies. Source: WSJ
- Apple Pay Later: Cutting Through The Buy Now, Pay Later Hype. Source: Forbes
- How That Girl, Coastal Grandmother and Cottagecore have Created a Gen Z debt disaster. Source: Credello
- 'Buy now, pay later' is sending the TikTok generation spiraling into debt, popularized by San Francisco tech firms. Source: SFGate
- Fast, Cheap, and Out of Control: Inside Shein’s Sudden Rise. The Chinese company has become a fast-fashion juggernaut by appealing to budget-conscious Gen Zers. But its ultralow prices are hiding unacceptable costs. Source: Wired
- Is Klarna lending responsibly. Source: Medium
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