Apple (AAPL 0.70%) unveiled its own buy now, pay later (BNPL) service, called Apple Pay Later, at its virtual Worldwide Developers Conference (WWDC) earlier this month. The service, integrated into Apple Pay, could provide a nice boost to Apple's increasingly important services business, and represents a threat to established BNPL service providers like Affirm and PayPal Holdings (PYPL 0.46%).
With the growing popularity of buy now, pay later, Apple Pay Later could provide a nice boost to Apple's services business. Here are two reasons for investors to get excited about Apple Pay Later.
1. Growing adoption and use of Apple Pay
Apple Pay is still incredibly underutilized by Apple device owners. While a large percentage of iPhone owners have set up Apple Pay, just 6% of them use it for in-store purchases, according to a survey from PYMNTS last fall. That's despite the fact that most merchants are already capable of accepting Apple Pay.
Adding buy now, pay later to Apple Pay gives consumers a reason to adopt Apple Pay, especially in stores. While other BNPL solutions have in-store capabilities, they rely on using a physical card or QR codes (which have lower adoption rates among merchants).
Apple will generate revenue from Apple Pay Later through interchange fees paid by merchants for accepting card payments. It isn't charging interest on the short-term loans or charging additional fees. In that sense, its business model is similar to PayPal's.
PayPal has seen success with its Pay in 4 product. "Buy Now, Pay Later has an incredible return for us, not just in actual usage of the product but we actually see a halo effect of about double the revenue of the product usage itself when people use that product," PayPal's Vice President of Finance and Analytics Erica Gessert said during an analyst call in February.
Indeed, Apple could see much higher usage rates among consumers who adopt the Pay Later service. Apple Pay Later's greatest value may be increasing the use of Apple Pay among consumers who already have it set up on their devices.
2. Building out Apple financial services
Apple Pay Later is just one of several new services within Apple Pay. The company also rolled out a tap-to-pay feature, which enables merchants to accept payments with an iPhone, no extra terminal hardware required. It also introduced order tracking for online orders made with Apple Pay, which automatically provide receipts and tracking information at merchants that have integrated the service.
All these features look to increase adoption of Apple Pay by providing services that make using Apple Pay more convenient than other payment methods. But they also point to Apple's push toward building out more financial services.
Apple has been working on bringing more behind-the-scenes financial services in-house this year, according to a report from Bloomberg. Apple wants to do everything from payment processing to credit checks to lending decisions internally, instead of relying on third-party fintech companies and partner banks.
Building out its own financial services will allow it to expand services like Apple Pay Later, Apple Cash, and its credit card globally without the need to rely on local partners. So, if Apple Pay Later is a success in the U.S., it may drive further development of internal financial services, seeding the potential for global expansion.
Establishing its own credit and lending services could also pave the way for an all-in-one subscription service for Apple's devices and services. An iPhone subscription bundled with Apple One -- a bundling of Apple services like Arcade, News+, Music, iCloud+, Fitness+, and TV+ -- for one recurring monthly payment could ensure steady device sales and be a boon for Apple's services business.
As Apple's device sales face headwinds in the near term, the services business has increased in importance to Apple and its investors. The introduction of Apple Pay Later may be just a small piece in Apple's plans for a much bigger financial services business, bolstering the overall services segment for the tech giant.
