OBSERVATIONS OF THE FINTECH SNARK TANK
You must be jealous of Apple.
When 99.999% of companies on the planet announce a new product or service, few people generally care.
However, when Apple announces a new product, the whole world – and especially the media and tech influencers – goes wild about it.
So when Apple held its Worldwide Developers Conference (WWDC) in early June, the announcements sparked a wave of statements about the impending galactic and disruptive impact of the new products and services.
One of these was Apple Pay Later, a buy now, pay later service that Apple will be launching.
Over-the-top hype about Apple Pay Later
Unsurprisingly, some media outlets went overboard in their descriptions of the new service.
Perhaps no publication has been more guilty of this than Inc., which published an article titled Apple has just quietly unveiled a new feature that will completely revolutionize this $125 billion industry.
Quiet my foot
You know right away that this article is approaching maximum hype because Apple didn’t “just quietly” reveal anything.
The announcement of Apple Pay Later was made at the company’s 2022 Worldwide Developer Conference, an event that, according to Wikipedia, attracted 23 million online viewers when it was streamed in 2020.
“Silent” is when there are 23 people in the audience – not 23 million†
Who is? Will you be taking advantage of Apple Pay later?
The Inc. article states:
“One of the most important [conference] announcements isn’t just for app developers. It’s for small businesses. Yeah, sort of. Really, it’s for users, but the biggest beneficiary will be small businesses.”
Why should small businesses use the biggest beneficiary? After all, according to a 2019 report from the Small Business Administration:
†[Small businesses] accounting for 44% of US economic activity. This is a significant contribution, but this overall share has gradually decreased.”
So maybe big companies are the biggest beneficiaries.
The article may imply that consumers will spend more as a result of BNPL services than they otherwise would, and that small businesses will benefit.
If so, that’s quite a claim. I haven’t seen any definitive evidence yet that consumers are spending more than they otherwise would because of buy now, pay later (BNPL).
Towards the end of the article, the author states:
“Most interestingly, I think Apple isn’t disrupting this market just for the money. There is a better reason, which is to own the whole experience. After all, Apple doesn’t even take care of some of the Apple Pay transactions.”
Merchants treat Apple Pay transactions as card transactions, meaning they pay an interchange fee for those transactions. While most of the exchange goes to the card-issuing bank, Apple does collect transaction fees.
Apple Pay Later won’t change anything
Inc.’s notion that Apple isn’t “disrupting the market just for the money” is ludicrous — as is the claim that Apple’s buy now, pay later service “will rock the industry.”
According to Cornerstone Advisors, U.S. consumers spent $100 billion — 1.5% of all U.S. retail sales — in 2021 on products and services that they funded with BNPL services.
Apple Pay transactions at U.S. retail stores in 2021 were $90 billion in 2021. Had Apple Pay Later been available and consumers funded 1.5% of their Apple Pay transactions with the BNPL services, Apple’s BNPL transaction volume would about $1.36 billion – just 1.36% of the total US GDP pie.
That’s not “up” the industry.
Poor Goldman Sachs?
Then there’s the Financial Times article titled Apple sidelines Goldman Sachs and goes in-house for lending service. According to the article:
“Apple is making the biggest step in finance by offering loans directly to consumers for its new ‘Buy Now, Pay Later’ product, and taking on a role in its other lending services through banking partners such as Goldman Sachs.”
Financial Times goes on to say:
“The move from Big Tech to core banking has long been feared on Wall Street. In the past, Apple has partnered with Goldman to issue a credit card in the US, and with banks like Barclays in the UK to offer financing for the purchase of its own devices. However, the roles of those banks have diminished in their latest financial product.”
Real statements, everyone.
But don’t cry for Goldman Sachs. The Wall Street giant will be one of the biggest beneficiaries of Apple’s BNPL service.
Why Apple is launching Apple Pay Later
Despite the hype, Apple Pay Later is only a small part of Apple’s overall strategy to sell hardware (such as iPhones).
Apple is essentially a products company. The DNA is (very) well-designed hardware. The software and services business may be huge, but they are there to serve the hardware business.
Apple’s penetration and control of the consumer market is incredibly strong, but until recently it was scarce on the merchant side. Apple realizes that it must pursue a platform business model to protect and expand its market position.
The recently announced “Breakout” initiative is all about addressing weaknesses in its trader-centric proposition. And Apple has some payment shortcomings that are speeding up the initiative:
- Apple Pay usage lags. According to a survey by Cornerstone Advisors in the first quarter of 2022, about half (52%) of consumers with a smartphone and a checking account make person-to-person (P2P) mobile payments. Three quarters of those consumers use PayPal, 43% use CashApp and only 26% use Apple Pay.
- Apple Card’s growth is anemic. After the number of Apple Card holders doubled in 2020, growth slowed to a snail’s pace in 2021. Cornerstone found that the number of Apple Card consumers grew from 6.4 million in early 2021 to just 6.7 million in early 2022.
So Apple has some issues with the payment acceptance and usage it has to deal with. What can it do to meet those challenges?
A buy now, pay later service is one step.
Splitting purchases into four payments can and should lead to more iPhone users using and/or using Apple Pay more often.
And as they use Apple Pay Later more often, qualified Apple Pay Later users are becoming good candidates for the wider line of credit they can get from an Apple Card.
In other words, Apple Pay Later can’t ditch the Apple Card and Goldman Sachs — it’s a stepping stone to a credit card relationship that benefits both Apple and Goldman Sachs.
Regardless of whether consumers actually spend more, merchants also benefit. According to Tony DeSanctis, Senior Director at Cornerstone Advisors:
“Assuming Apple Pay Later works like other pay-in-four providers, only the first payment will be charged to the card and subsequent payments will come from the consumer’s checking account. This means that traders pay a lower interchange fee on the BNPL transaction.”
Apple Pay Later will do “ok”. Just as Apple Pay itself didn’t “turn things around” right away, Apple’s new purchase won’t pay now, either.
But it’s part – and an important part – of Apple’s broader strategy.