Apple (AAPL 0.18%) is best known for its consumer tech devices like the iPhone, the iPad, the Apple Watch, and its Mac line of computers. But its services segment has been its largest source of growth in the last couple of years, and after securing a foothold in the entertainment industry with its music and video streaming platforms, it has turned some of its attention to creating a digital payments ecosystem.
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Apple Pay is used by over 500 million people globally, and at the company's Worldwide Developers Conference earlier this week, it revealed a new addition to the ecosystem: Apple Pay Later. The company's take on the installment-based lending concept known as "buy now, pay later" (BNPL) has been in the works since mid-2021.
Given that Apple lives in the pockets of over 1.2 billion people through its iPhone, the company has a real chance to disrupt the progress of current BNPL leaders such as Affirm (AFRM 3.14%) and Block (SQ 2.98%), which owns Afterpay.
BNPL is sweeping the globe
Buy now, pay later is the fastest-growing segment in the $10 trillion global payments industry. It's popular among young, tech-savvy consumers because it's low-touch and completely digital, and in many cases, it's a form of borrowing that's less expensive for them than traditional forms of unsecured credit like credit cards.
Apple Pay Later, for example, will charge consumers zero interest and no fees of any kind when they use it to make a purchase. Buyers will pay what they owe in four equal installments over a six-week period. Those terms appear to be fixed for now. It's a similar model to that used by Afterpay, which was the largest buy now, pay later provider in the world before Block acquired it in 2021 for $29 billion.
Affirm, on the other hand, offers more flexible terms. Customers can repay their loans in four equal interest-free installments in two-week intervals, or they can choose terms of up to 36 months with an annual interest rate of between 0% and 30%, depending on their creditworthiness. Affirm also provides loans of up to $17,500, whereas Afterpay is more focused on small consumer purchases with a credit limit of $2,000.
Where Apple Pay Later will really shine is its coverage. The ability to use the service everywhere Apple Pay is accepted could be a key differentiator for the new service. Affirm and Afterpay have historically relied on direct integrations with the online stores of their merchant partners. Both have recently introduced digital, in-app cards that allow their BNPL services to be utilized in more places. But in Afterpay's case, customers are still limited to selected businesses because the platform charges merchants a fee, which is how it's able to offer zero-interest loans to customers.
How Apple Pay Later fits into the industry
When Afterpay was purchased by Block, Affirm took the mantle of largest stand-alone publicly listed BNPL provider globally. It's worthy of the title thanks to its key integrations with e-commerce platform company Shopify and e-commerce world leader Amazon. Affirm is now a payment option at the checkouts of 207,000 online stores, financing over $13.5 billion in payment volume in the last 12 months, and the aforementioned deals are only just ramping up.
But tackling this industry from the merchant side is both time-consuming and cost-intensive. From the perspective of a customer using Apple Pay, if they were shopping with Amazon, the question is whether they'd go out of their way to try Affirm's BNPL service rather than using Apple Pay Later, which will already be embedded in their device. Could Apple's entrance into the space prove to be a roadblock to Affirm and Afterpay acquiring new customers from here, effectively circumventing their blockbuster deals with merchants? It's certainly plausible.
Affirm, for example, has 12.7 million users right now. Afterpay, which is now integrated with Block's Cash App ecosystem, is accessible by more than 44 million active users. Both figures are a drop in the bucket compared to the 500 million Apple Pay users who would already be practically eligible to apply for Apple Pay Later.
BNPL is leading to financial struggles -- so far
An unfortunate hallmark of the buy now, pay later concept is that its providers are consistently losing money so far. In the first nine months of its fiscal 2023 (which ends June 30), Affirm lost $520 million on revenue of $985 million. And prior to being acquired, Afterpay was also consistently in the red.
As interest rates rise, the cost of funding these short-term loans will gradually increase, as will the share of consumers who fail to repay them, which could result in even steeper bottom-line losses. Since BNPL companies rely on relatively small fees or interest payments (in the case of Affirm), they will need to generate scale before their business models can deliver earnings.
Apple might have an advantage here, too. First, it might see a higher repayment rate than its competitors since its service is tied to customers' smartphones. Second, given its fortress balance sheet with $51 billion in cash, equivalents, and marketable securities, it could theoretically fund many Apple Pay Later loans itself, eliminating the need for financing and the costs that go with it.
But one thing is certain. Existing buy now, pay later players won't rest easy with the world's largest company entering their territory.
