In June, Apple announced that it was adding a buy-now-pay-later (BNPL) component to its Apple Pay offering, enabling customers to split a purchase into four equal payments over six weeks with no interest or fees to pay. It will perform a ‘soft’ credit check on users along with a review of their transaction history with the company.
At first glance this appeared to be bad news for the likes of Affirm and Klarna, who have been experiencing difficulties this year. Klarna’s valuation fell by 85% in its latest fundraising round despite the company describing itself as being bigger than American Express and it reduced its headcount by 10% earlier this year, while Affirm’s share price has fallen dramatically in 2022.
But many analysts believe the tech giant’s entry into the BNPL space will grow the overall market by appealing to people who don’t currently use it rather than poaching Klarna or Affirm users.
Instead of partnering with retailers, the service has been developed as a component of Apple’s digital wallet targeting the millions of people who use its mobile devices – and are incredibly loyal to the brand. These users also tend to have higher disposable income than the typical BNPL customer and for most, Apple Pay Later will be just another payment option that appears in their Apple Wallet.
One of the factors working in Apple’s favour is its deep pockets, which should cushion it from the worst effects of any slump in revenues resulting from recession and the end of the post-Covid recovery in consumer spending.
Regulation is an elephant in the room. In an interview last month, Rohit Chopra - Director of the US Consumer Financial Protection Bureau (CFPB) - said it would be looking carefully at the implications of so-called ‘big technology’ firms such as Apple entering the BNPL market.
The CFPB is particularly concerned about how these companies might use customer data given the amount of information they would have on consumer spending patterns, location and even health. Chopra also intimated that there were concerns over whether merchants might be forced to accept payment by instalment.
Under the UK government’s plans for the sector announced in June, lenders will be required to carry out affordability checks (ensuring loans are affordable for consumers) and financial promotion rules will be amended to ensure BNPL advertisements are fair, clear and not misleading. Lenders offering the product will need to be approved by the Financial Conduct Authority and borrowers will also be able to take a complaint to the Financial Ombudsman Service.
Providers and users of BNPL services will also be keeping a close eye on the extent to which the market is affected by rising interest rates. In the B2B space the impact is already being felt as the cost of capital continues to increase explains Brian Blank, Senior Manager at BNPL business services provider Splitit.
“Most legacy BNPL solutions are providing a loan where they pay the merchant or business for their goods or services in advance while taking over the collection of instalment payments from the customer,” he says. “This was an easier business model to support where interest rates were historically low, but as rates increase the cost of borrowing money to fund merchants continues to grow.”
However, Aiga Senftleben, Co-Founder and Managing Director of BNPL platform Billie reckons higher rates will translate into higher demand on the buyer side.
“Increased interest rates mean that refinancing and working capital funding will become more expensive,” she observes. “Hence, access to external funding will be more difficult. Since the costs for the service are borne by the merchant and not by the buyer, a BNPL solution offers the buyer additional liquidity for the duration of the payment period granted by the service provider.”