PayPal is in for a rough ride as Apple Pay Later ramps up

Apple Pay Later is seemingly inching closer to claiming the lion’s share in the Buy Now Pay Later (BNPL) space, foreign territory for the tech firm until June last year when it first announced its Pay Later service. 

Although newcomer Apple Pay Later isn’t as popular as the established players PayPal, Afterpay, Klarna, or Affirm, almost a fifth (19%) of BNPL customers used Apple Pay Later in its first three months after launch, according to a new report by J.D. Power. PayPal held its ground and remained at the fore as the most-used BNPL brand over the same period (39%), followed by Afterpay (33%) as the next-most used brand.

Initially scheduled to roll out last year, the much-awaited Pay Later service finally debuted this year in March. The service is currently only available to (nearly 55.8 million) customers invited to access a pre-release version by Apple.

Source: Quartz

Affirm stock slumped 7% after the launch of Apple Pay Later, which indicates that existing BNPL players may now become extra competitive in protecting their market shares. However, Max Levchin, founder of Affirm and co-founder of PayPal, didn’t sound worried, saying that “I don’t think there’s much concern” and that the Pay Later service “creates a really nice tailwind for us” by educating the market about BNPL. 

While Pay Later outpaced the current availability of BNPL providers like Sezzle used by only 10% of users, 17% of PayPal users also tried and paid through Apple Pay Later as of June.

Apple’s brand recognition, network effects, and technological advancements likely contributed to Apple Pay Later scaling quickly, despite its recent and limited availability. Given the fact Apple already enjoys an extensive user base and pursues an ecosystem strategy, the Pay Later option can influence payment behaviors going forward. Meanwhile, existing users locked into its ecosystem can also be a cushion for the firm when its focus is centered on new customer acquisition. That said, the report showed that the Pay Later service was even used by first-time customers who otherwise consider BNPL as a payment method that lures consumers into spending more than they can afford. 

The secret sauce for Apple’s financially healthy customer base

Apple Pay Later users tend to be more financially stable compared to other BNPL users of other brands. This could be attributable to a couple of things. Firstly, Apple Pay Later is available in the US for online and in-app purchases on iPhone and iPad only to select, invited users. And, though new, Apple may be cherry-picking its financially healthiest of customers. Apple’s method of underwriting Pay Later loans capitalizes on the Apple ID data points it aggregates from iPhone users that provide insight into consumers’ purchase behaviors including their registered payment credentials. This eventually helps in estimating future consumption and payment flows.

Additionally, Apple Pay Later doesn’t accept credit cards and requires users to link a debit card from their wallet as their loan repayment method, which according to Apple will “help prevent users from taking on more debt to pay back loans”. While this step acts as a safety net for the tech firm to avoid default risks, it also spells out why consumers should be mindful of making informed and responsible borrowing decisions.

PayPal’s customer churn: By the numbers

Inversely, PayPal reported its second-quarter financial results last week that showed an increase in customer turnover – a boon for Apple (maybe).

Source: Statista

PayPal’s BNPL was used by 60 million of PayPal’s customers. And while the company did better than expected on revenue and net income, and expanded its offerings contributing to its increased Total Payment Volume (TPV), it also saw tightening operating margins and a slip in active users number.

TPV increased 11% and came in at $376.5 billion for the second quarter, while total active accounts totaled 431 million on June 30, 2023, down from 433 million on March 31, the first quarter.

Apple’s expanding moves into financial services

Although PayPal has a much larger existing BNPL user base and benefits from a strong and long-standing financial brand, its situation is analogous to the challenge facing banks. Apple has already made inroads into the deposit game by offering higher APY through its Apple Card savings account. Launched in partnership with Goldman Sachs, Apple Savings has reached over $10 billion in deposits since launching in April, serving as a reminder to traditional banks that they may face competition in retaining deposits, customer relationships, and profits down the line.

“Absolutely. Anybody competing for deposits and offering payment capabilities is a threat to banks – big or small,” answered Ron Shevlin, chief research officer at Cornerstone Advisors, when asked if Apple is a threat to incumbent financial institutions.

In the same vein, PayPal might be in for a rough ride in the months ahead as Apple Pay Later is on the move to gain market share rather quickly, siphoning off a portion of PayPal customers.

“Apple continues to expand in financial services and I think it’s a formidable competitor already,” said Miles Tullo, managing director of banking and payments at J.D. Power.

It remains to be seen whether PayPal can adapt to changing market trends and continue to capitalize on the growing demand for digital payment options given new players like Apple are strengthening their foray into financial services and competing to make it to the top.