Apple, new to buy now/pay later field, has its work cut out

Apple is well known for taking a disruptive approach to retail and payments. It's entering the buy now/pay later market at a time when rival lenders are salivating over the anticipated boom in spending on travel and back-to-school as lockdowns subside.

Apple's entrance may rock the boat for existing BNPL players. The nuances of its model set it apart from the pack while creating a natural acquisition funnel for Apple's various financial services products.

Unlike BNPL giants including Affirm, Afterpay and Klarna, Apple Pay Later will work as easily online as in stores through Apple Pay’s broad acceptance footprint, whereas most installment lenders are not directly integrated with store payment terminals.

Collaborating with Goldman Sachs as the lender, Apple Pay Later will offer users the option to pay off any purchase in four interest-free payments every two weeks using “Apple Pay in 4,” or spread payments out over several months with interest, according to Bloomberg.

Apple's closest rival will be PayPal, which has broad penetration in stores and online acceptance and ranks highest among BNPL providers for total purchases, according to several surveys, with its popular Pay in 4 installment loan product launched about a year ago.

PayPal charges only its standard rate for Pay in 4 and its fees for late payments are low or nonexistent, whereas most third-party BNPL providers charge merchants up to 5% for each installment purchase.

Another player with a different competitive model is Alliance Data Systems, which purchased BNPL player Bread in 2020 for $450 million. The private-label credit card issuer is now working to enable online and in-store BNPL services for some of the specialty retail chains it serves like Victoria’s Secret, Ulta Beauty and True Value.

Details about Apple Pay Later are scant, but the service reportedly will work with any credit card, including the Apple Card launched in 2019 with Goldman, making the service both ubiquitous and a possible funnel for Apple Pay and Apple Card purchase volume.

Splitit is the only other major BNPL provider that offers installment loans through users’ existing credit cards instead of establishing a new line of credit. Splitit assigns equal monthly payments for a purchase to one credit card and consumers pay down the loan in interest-free installments.

The news about Apple Pay Later caused the stock prices of Affirm and Afterpay to tumble, while a survey from Chicago-based C+R Research showed some cracks emerging amid consumers' enthusiasm for BNPL services.

Sixty percent of consumers said they have used a BNPL service, and 51% said they used BNPL services during the pandemic, when their online shopping volume also increased, according to C+R Research.

Almost half, or 46% of consumers C+R surveyed, are currently making a payment through a BNPL service for an average of 3.8 separate purchases. The average debt each consumer owed to various BNPL services was $883 when the online survey was conducted among 2,005 U.S. consumers between March 25 and April 12, 2021, C+R said.

Though most BNPL services extend credit to users without doing a typical credit check, 60% of consumers surveyed said they have been denied a purchase from a BNPL provider. More than half, or 56%, said they have fallen behind on making a payment to a BNPL provider.

Still, 56% of respondents said they prefer BNPL services over credit cards because there is more flexibility around making payments, interest rates are lower and the approval process is easier, according to C+R’s survey.

More than a third, or 38%, of users said they believe BNPL could eventually replace their credit cards.

Two months before news about Apple's BNPL plans surfaced, Indonesia-based BNPL provider Kredivo conducted a survey to measure consumers’ interest in BNPL services from various proposed providers. More than half, or 57%, said they would be interested in using BNPL services from Amazon and 25% said they would welcome a BNPL service from Apple.

Thirty-five percent of respondents in Kredivo’s survey said they have outstanding credit card balances over $500, while 11% said they owe the same amount to BNPL providers. Kredivo conducted its survey in May 2021 among 1,500 U.S online shoppers.

To be sure, JPMorgan Chase this month said revolving credit card balances declined over the last year, though spending began to rebound during the second quarter.