Why Apple’s BNPL efforts could mark a ‘tipping point’ in lending

The expansion of Apple Inc. moving towards ‘buy now pay-later financing’ could be just the beginning of an attempt to shake up the traditional payment system.

The consumer electronics giant has done other financial services ventures before, including through its Apple Pay payment technology and a co-branded credit card with Goldman Sachs Group Inc.

However, Apple’s

BNPL launch, announced in June at the WWDC developer eventis notable because the company has decided to take on lending itself through a new internal financing arm.

The pursuit suggests that Apple may have bigger financial ambitions in the future and not just disrupt the BNPL market that players like Affirm Holdings Inc. includes.

and PayPal Holdings Inc.

but also the broader banking and financial technology landscape.

“It could be a tipping point in consumer lending,” said Tom Noyes, the managing partner of Starpoint LLP consulting and a Citibank veteran.

For Pay Later, Apple uses Mastercard payments, a program from the card giant that let lenders make installment offers to customers, and Apple’s new financial arm will retain government loan licenses. Goldman will be the issuing bank, but “in name only,” Noyes said, as the smartphone giant creates a new lending entity of Apple Financing LLC that will make credit decisions.

The creation of an Apple lending unit is “really big news,” Noyes continued, but also a bit “back to the future.”

Before Visa Inc.

and Mastercard Inc.

came into existence and created open-loop cards that could be used almost anywhere stores would offer their own credit to customers in a closed-loop model, Noyes said. Now Apple could move to get the best of both worlds: Its upcoming, open-loop Apple Pay Later product allows consumers to split purchases into interest-free chunks at any store that accepts Apple Pay, but the company may also see its expansion into lending as a way to help customers better finance the purchase of iPhones and other Apple devices.

By enabling consumers to pay for devices more easily, Apple could boost its sales, expand its ecosystem and offer a type of financing in BNPL that is gaining traction, especially among younger consumers, despite some concerns it might can lead shoppers to spend beyond their means

Apple is also reportedly investigating the creation of in-house payment processing technology and infrastructureBloomberg has said. And in the longer term, through loans and other efforts, the company could look for opportunities to devour the traditional banking system, given the economics of card transactions.

When consumers make credit card purchases from a merchant, that merchant pays their bank a discounted rate, meaning the merchant does not receive the full price of the item purchased. Then the merchant’s bank splits that discount fee into an interchange fee that is paid to the bank that issued the card, discounts for Mastercard or Visa, and an amount for itself.

Because Apple is a huge retailer, card costs are mounting and the company may see opportunities to reduce what it pays by getting more involved in the transaction process itself.

“The reason banks exist is as someone who vouches for you and takes risks in transactions,” Noyes said. “Today, Apple, Google and Amazon know you better than any bank, and they’re all looking for ways to improve the financial services you need.”

Rather than pay card fees while its customers also earn credit card interest, Apple may look at its current financial system and realize it “could only build this business by cutting costs alone,” Noyes added.

He noted that emerging markets such as India and Brazil have payment systems without the fee models that people in the US are used to. “In the US, we need to prepare for days when the exchange goes to zero,” Noyes said.

Even if such a move were to bring success to Apple, it’s an open question whether other retailers could realistically follow the company’s lead in financial services and lending.

“It takes a pretty big organization to get this done,” Noyes said. He stressed that Target Corp.

has seen strong adoption of his RedCard, although he sees that happening more on the debit side.

Amazon.com Inc.

and Google from Alphabet Inc


have shown growing ambitions in fintech, but seem less likely to build their own internal lending business.

As it stands, Amazon has its Amazon Pay digital wallet and is partnering with Affirm to offer installment payment options. And timeframes seem “a natural evolution of Google Wallet,” but perhaps in cohort with an existing player, said Jordan McKee, a chief research analyst at 451 Research, which is part of S&P Global Market Intelligence.

“I think Apple will be somewhat unique… in terms of offering these types of services completely in-house and lending its own balance sheet,” McKee said. “I expect others to partner with existing providers and traditional financial institutions.”

Some banks, for their part, have tried to stay ahead of the BNPL threat by offering some variation of the trend themselves. Citi, Chase and American Express Co.

have options for consumers who want to split certain purchases into installments.

Financial institutions “have been keeping a close eye on BNPL as they realize that while it may not pose a threat to the credit card side of the business today because its primary users are younger, debit-oriented consumers, there is a real possibility that if that younger consumers who grew up on BNPL are getting older, they may never graduate,” said McKee.

A younger consumer whose first credit experience is Apple Pay Later may eventually switch to an Apple Card instead of a Citi or Bank of America Corp credit card.

he offered.

McKee also focuses on the broader implications for the BNPL market, which has found itself in difficult times amid rising interest rates, increasing credit risk and shrinking margins. Affirm, which offers both interest-free and interest-bearing installment products, has seen its shares fall nearly 80% so far this year.

While Affirm, privately owned Klarna, Block Inc.’s

Afterpay and PayPal are among the big names in the industry, there are also plenty of smaller players. For Block and PayPal, BNPL is just one part of the overall business, and Affirm and Klarna have expanded into adjacent areas such as content discovery and bank-like products with debit cards.

“The BNPL provider that only does BNPL is being pressured,” McKee said. There is an “increasing need for consolidation” or a move to neighboring areas in the hopes that a more diversified company could “fend off newcomers to the space like Apple.”

BNPL’s services make money in several ways. The typical interest-free offering is merchant-funded, meaning retailers will give BNPL companies a share of the transaction value in return for making consumers more willing to go through with a purchase. Interest-bearing BNPL options are more like traditional loans, as consumers assert the right to pay over time.

Apple itself does not charge merchants for Apple Pay Later. A spokesperson for Mastercard said that “the fees associated with the program are value-based and shared among lenders, acquirers and the network.”

So Apple’s interest-free BNPL offering comes at an interesting time for the industry, as merchant fees have fallen amid growing competition, forcing traditional carriers to find new revenue streams, according to Francisco Alvarez-Evangelista, a consultant at Aite – Novarica Group.

His research shows that consumers generally prefer an interest-free offer. But BNPL firms may be increasingly motivated to provide more interest-bearing loans for economic reasons.

Unlike established players, Apple isn’t necessarily looking to make Pay Later a major source of income. The company is more likely to see opportunities within lending to bolster the stickiness of its business and keep consumers locked in the ecosystem, Alvarez-Evangelista said.

“A big player like Apple can come in and disrupt the space and say, we know competitors are shifting to interest-bearing, but let’s step back and go to interest-free,” he said.

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