Payments Briefing: Is the ‘Apple Pay Later’ hype warranted?

As is the case with most announcements involving an Apple product or feature, the Apple Pay Later news has attracted a lot of hype in the media and across the tech world.

The news comes at an uncertain time for the BNPL industry, owing to slow economic growth, rising inflation, and higher interest rates. Klarna recently laid off 10% of its global workforce, citing the impending recession and the onset of war in Ukraine as primary reasons. The firm is reportedly discussing raising funds at a $15 billion valuation – substantially lower than its $46 billion valuation last June.

Last year, Klarna’s total losses doubled to reach $487 million. Other operators in the space have also been struggling to achieve profitability. Affirm reported net losses of around $430 million for the fiscal year ending in June 2021, while Afterpay’s annual losses jumped to $345 million last year. 

Some believe that Apple’s entry will only add to the problems of these existing providers, citing fears that Apple, a $2 trillion company and the world’s second-largest smartphone manufacturer, will have a clear competitive advantage over current providers. Apple Pay Later is integrated with Apple Pay and Apple Wallet, which means users don't need to involve a third-party service, and can manage their payments directly on their Apple device. This could put added pressure on existing players in the space.

Others are saying Apple will completely shake up BNPL and are calling its entry a “game-changer” for the industry: “A quick reminder of Apple Pay’s scale will make it clear what a game-changer this is. Apple Pay has 507 million global active users. And it has a 44% share of the US mobile payments market.”

Fortune’s Jacob Carpenter warns that Klarna, Block, and Affirm should be especially worried, saying, “Apple is coming to take your lunch.”

Not everyone’s buying into the hype, though.

Karen Webster, CEO of PYMNTS, argues that this “Pay Later frenzy” isn’t warranted: she believes that current leaders in the space don’t have much to worry about.

Webster says most retail purchases are still made at the physical point of sale, for which Apple Pay Later is currently unavailable – and Apple Pay’s in-store growth has been stagnant for many years. She cites PYMNTS research from last month, which found that “37 times more consumers used debit cards, 29 times more consumers used credit cards, and about twice as many consumers used PayPal instead of Apple Pay to make a retail purchase in-store in the last 30 days.”

Webster adds that the online and in-app market situation isn’t much better, either. She says Pay Later’s total addressable market only ends up being a small fraction of overall consumers, since many of them either don’t meet eligibility criteria for using the service, or like to shop online at places like Amazon and Walmart, where Apple Pay isn’t accepted.

Meanwhile, Cornerstone Advisors’ Ron Shevlin is quick to dismiss claims that Apple’s BNPL entry will upend the industry, calling them “ludicrous”. He refers to most media reactions to Apple Pay Later as “over the top hype”, saying, “Just as Apple Pay itself didn’t “upend” anything right away, neither will Apple’s new buy now, pay later service.”

To try and make sense of these conflicting viewpoints, I spoke to a few experts from within the payments industry to get some further insight into what Apple’s entry into BNPL means, and what its likely impact on the industry will be. Here’s how they see it.

Sal Rehmetullah, co-founder and president of Stax:

Apple Pay Later has the potential to make Apple a major player in the BNPL space. The new feature could boom among younger consumers, especially Gen Zers, since many of them are more budget-conscious and already use both BNPL and Apple Pay, making this a seamless fit.

The Apple Pay Later feature is also a significant development for big tech companies entering the payments space. It acts as another big tech offering driving the rise of digital wallets and software-led payments. Merchants who already have integrated payments will be able to implement Apple Pay Later seamlessly, meaning they can start accepting these payments quickly.

BNPL will likely remain the top alternative to credit cards in the near future, but between high inflation and recent geopolitical tensions, we could see its momentum slow, even with Apple’s announcement. High inflation is deterring customers from making bigger purchases, even ones made using BNPL. Additionally, the boost in post-pandemic transactions that led to BNPL’s rise is slowing down as well.

Brian Dammeir, president of North America at Adyen:

Apple’s announcement surrounding the upcoming Apple Pay Later service shows the consumer demand for more BNPL options, which is in line with our research. Adyen recently conducted a survey that found that in the past year, nearly half of Americans used BNPL services – a 70% increase over the global average – yet, only one in five retailers allows customers to use BNPL services. Apple offering a BNPL option for all merchants that accept Apple Pay is confirming the notion that the payments experience has fundamentally changed in the last two or three years, and will continue to change as consumers change their perspectives on new and non-traditional payment options.

Vijay Sondhi, CEO of NMI:

This new Pay Later feature is further confirmation that BNPL is going to be a standard and expectation across the industry. With Apple having such an extensive footprint through the widespread use of its other technologies like Apple Pay, the release of Apple Pay Later could really drive adoption across consumers, especially younger ones, many of whom have gravitated toward BNPL over the last couple of years.

Apple Pay Later will further fuel the digital payments boom and add another layer to the seamless experience that consumers expect. This will put more pressure on the players who provide payment solutions to merchants to ensure that these new types of payment options are available to them in order to meet customers’ ever-changing payment needs.

After integrating Afterpay with Square Cash App and Seller ecosystems, in-store sales are up 384%

Square is bringing Afterpay to in-store purchases, making it even easier to pay in 4. But convenience may lead to overspending, especially when consumers stack their loans.

On May 17, Square announced that it will be extending Afterpay’s BNPL services to its in-store merchants in the US and Australia. This news comes a mere 3 months after Block’s acquisition of Afterpay, which is aimed at introducing BNPL capabilities across all of Block’s online commerce and in-person sales ecosystem.

While merchants offering Afterpay profit from a large consumer network, customers also benefit from increased Afterpay adoption, with stores that offer the payment method popping up on a separate tab on the Afterpay app. Zahir Khoja, Afterpay’s GM of Platforms and Partnerships, says this has turned the app into a “top shopping destination for consumers to discover new brands”, and it allows Afterpay to send over one million leads per day to its merchant partners.

So far, the partnership’s success is compelling, with Khoja reporting that Afterpay’s adoption by small businesses has gone up by 18 times, and they’ve noticed a “steady upward trend of in-store orders since the holidays, with sales up 384%, as well as during Afterpay Day in March 2022, up by 91% – pointing to how consumers are craving an IRL shopping experience.”

Despite this success, skepticism has been ailing the BNPL sector for some time, with some claiming that the business strategy is not profitable, while others assert that it may be detrimental to consumers’ financial health and wellbeing.

Hannah Gdalman, Senior Associate at the Financial Health Network, points out that practices such as loan stacking can make it harder for the consumer to track and manage payments across multiple simultaneous loans, and could lead to hardship if the total amount owed exceeds their ability to repay. “If we think about consumers with income volatility, such as gig workers, what happens if multiple BNPL payments fall on a payday that is a bit lower than expected? This could lead to late payment fees, overdraft charges with their bank, or undue financial stress,” she said.

Meanwhile, Khoja was keen to point out that Afterpay’s customers are using it to spend responsibly: “over the past year, 95% of installments were paid on time and 98% of purchases incurred no late fees.” He also stated that the company promotes responsible spending through a couple of measures. First, spending limits start low and increase with a good repayment history. Second, they’ve now introduced one-time “soft credit checks” at sign-up for US in-app customers, which allow the app to “help customers spend within their means” without impacting their credit scores.

With companies like Apple also joining the roster of BNPL service providers, paying in four is unlikely to lose steam in the near future. In order to ensure that consumers grow with their BNPL service providers rather than spiral into debt, Gdalman urges BNPL lenders to “embrace financial health issues through careful underwriting that helps avoid loan stacking, by avoiding reliance on late fees as a key source of revenue, and embracing financial health opportunities such as thinking about how to incorporate credit reporting into BNPL services.”

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What we're reading

• Stripe unveils global infrastructure for bank transfers (Finextra)
• Why did Brex really decide to ditch SMBs? (TechCrunch)
• Klarna slashes fundraising ambition, raising at a $15 billion valuation, down from $46 billion last year (Wall Street Journal)
• C2FO debuts CashFlow+ Card to speed up invoice payments (PYMNTS)
• PayPal expands its pay later options with a more flexible 'Pay Monthly' service (TechCrunch)
• TD Bank introduces BNPL for credit card holders (Finextra)
• Mastercard debuts open banking feature ‘Pay By Link’ (PYMNTS)
• Western Union taps Marqeta for payment card issuance (Finovate)
• Affirm teams up with Stripe as the BNPL wars intensify (TechCrunch)
• JPMorgan exec: payments systems are the future of fintech (Blockworks)
• B2B ACH payments are experiencing a boom (PYMNTS)