Apple Pay Later Could Pose Larger Threat To Card Issuers Than To BNPL Players

The “Pay Later” pure-play stocks took a drubbing last week on the news that Apple Pay and Goldman, who partnered on the Apple Card, are doing it again to build a BNPL product.

Details are sketchy at the moment, and rife with rumor and innuendo. But, as reported, it seems in line with the typical buy now, pay later playbook: Pay in four installments, every two weeks, without interest, for smaller-dollar purchases; pay in monthly installments over a longer period of time with interest for larger purchases.

Based on what’s been attributed to “unnamed sources,” however, the real target may not, in fact, be the pure-play BNPL competitors, but rather the card issuers whose relationship with Apple — and Apple Pay — have been a bit strained since the start.

Many card issuers are also working on how they, too, can innovate using BNPL in-store and online at checkout with minimal friction — and with minimal risk of losing control of the customer relationship when they do. And, of course, they’re all over revolving credit, which is a big source of their profits and is threatened by the BNPL upstarts.

Another Apple Me-Too?

It may be tempting to assume that like many other Apple “innovations” that have been late to market –Apple Books, Apple Music, Apple TV, HomePod — the “me-too” nature of the offer won’t deliver enough of an impact to move the needle.

Maybe not with Goldman in the mix.

In partnership with Goldman, Apple has innovated the credit card space with Apple Card. Everything from the application process to the activation process to the user experience when using it – to the user experience when managing transactions and payments inside of the Apple Wallet — is innovative. In many ways, the Apple Card was a wake-up call to traditional credit card issuers for what a mobile “card app” experience should be for consumers.

Goldman has also been successful in building up its consumer business with Marcus as its cornerstone starting in 2016. When Goldman reported Q2 earnings for 2021, net revenues for its consumer banking business – which includes Marcus as well as the Apple Card – were up 41 percent quarter over quarter to $363 million. Apple Card performance wasn’t broken out specifically.

At the same time, Apple Pay usage has remained largely unremarkable, now approaching its seventh birthday, although the details of its real performance have always been kept inside an Apple “black box.” Transaction details related to Apple Pay usage online and at the physical point of sale have never been shared by Apple on quarterly earnings calls. That said, many larger merchants report scant usage in their stores — even after seven years of availability and with nearly every iPhone now activated with the Apple Wallet (more or less because iPhone users must do so in order to complete software upgrades.)

We also see that when looking at PYMNTS data over the last seven years, and more recently across the duration of the pandemic.

Seven years and one pandemic later, based on PYMNTS data from July 2021, roughly 3 percent of U.S. adults report using Apple Pay about once a week.

Over the last five months, we observe that the number of consumers who report using Apple Pay at least once in the last year at the physical point of sale as fairly flat, at roughly 13 percent of the population. Online usage at least once over that same period is up a tick — from 10 percent to 11 percent over that same period.

The conventional wisdom is that Pay Later could boost Apple Pay usage at the physical point of sale, where Apple says it has coverage at 85 percent of merchants. That will depend on the user experience in-store at checkout, which remains an unknown, and the competition it may face there. BNPL usage in-store has ticked up a bit from 4 percent to 5 percent at the physical point of sale, and has remained constant at 5 percent online over the five-month period from March to July of 2021.

The Issuer Tension

What’s been reported is that Apple Pay Later will give consumers making larger purchases the ability to pay in monthly installments by using any credit card in their wallet as a funding source. Pay Later users do not have to have an Apple Card, according to news accounts, but will have to qualify.

Assuming that’s true (which is dangerous in the face of no known details) it would seem similar to how card network POS installment schemes are being deployed at the physical POS, which use a consumer’s existing line of credit as the basis for the installment plan repayments. BNPL options could be exposed (or not) based on rules established by the issuer (in this case, Goldman) and the merchant based on available credit on that card and the amount of purchase. A consumer would make a choice and the transaction would proceed based on those options, all taking place in a matter of seconds.

Incentives could also be offered by Apple or the merchant to sway consumer choice in their direction, similar to what Apple has done to fund and induce Apple Pay usage.

Regardless, if published accounts are true, Apple Pay would leverage existing lines of credit, approved and underwritten by the consumer’s card issuer, to enable payments to Apple in monthly installments that ride existing card rails.

Here’s the potential rub, though.

One of the biggest points of contention with Apple Pay at launch in September of 2014 was the requirement that banks pay Apple 0.15 percent on every transaction made via the Apple Pay wallet. Banks relented over the fear of missing out on a mobile payments innovation that, at the time, was persuasively positioned as the death knell for the plastic card at checkout.

One could assume that the Apple Pay Later scheme, as currently described, would treat those transactions as any other Apple Pay transaction, subjecting them to the 0.15 percent fee, with Apple Pay in the middle of that customer/issuer relationship. Further, this installment arrangement cuts to the heart of the issuer credit business model – revolving credit and interest on balances. Although it is the credit story that BNPL startups and regulators love to hate, it is, in fact, how more than half of all credit card customers behave  according to the American Bankers Association — and it’s how issuers make money on their credit products to fund rewards and other features that are valued by consumers.

This could end up as an issuer double whammy: Pay Apple a fee to erode their revolving business and disintermediate their relationship with the customer by becoming the funding source for a Pay Later service powered by Goldman and Apple Pay.

It also remains unclear whether consumers would pay double interest on those purchases — interest to Apple Pay/Goldman on the monthly installment plans as well as to their issuer for the balances that are being carved up into smaller installment purchase amounts on their cards. The CFPB will, no doubt, be looking carefully at how Apple’s Pay Later plan works, as they have become quite vocal about their views on the BNPL space.

Apple Pay Later instore is also going to raise more hackles over Apple’s NFC policy. They have been widely criticized for not opening its NFC chip to other wallet providers, and have been the subject of antitrust investigations. No doubt, Apple’s Pay Later raised all sorts of eyeballs across the landscape of wallet providers and regulators on the news last week who already have Big Tech and Apple in their cross hairs.

But, hey, if you’re Apple and Goldman, a scheme like this may not be a bad place to prime the Apple Pay Later pump, even if one could argue that as it is being described today, it seems a bit of a me-too play.

PYMNTS data shows that in the U.S., the small number of Apple Pay users are employed (81 percent), college-educated (45 percent) millennials (46 percent) whose average age is 36, and are earning more than $100,000 annually (49 percent). More than half, 52 percent, have credit cards provisioned in their Apple Pay wallets.

Tapping into that demographic group, leveraging the cards in their wallet would seem to be a great way to learn “pay later” user behavior for a different Apple Pay Later 2.0 scheme down the road.

What’s Next For Apple Pay Later

The introduction of credit thousands of years ago gave consumers an opportunity to take ownership of a product or take advantage of a service at the point of purchase and pay for it over time. The innovations in credit along the way have run the gamut from helping merchants underwrite and manage credit risk, to issuing and acceptance of a single card with a credit limit for use at millions of merchants, to offering virtual credit cards provisioned to a mobile wallet to those with different factors and rewards. In all cases, consumers had the certainty of knowing how much they could spend before walking up to a terminal in a store and checking out. Credit lines, then and now, provide that spending certainty, and consumers manage their shopping and spend using that as a guidepost.

BNPL startups have taken the 19th-century store credit model and improved it tremendously by making it transparent and accessible, and have made payment plans certain and predictable. Online, the further innovation was exposing that option as part of the decision-making process along the customer’s buying journey — and before the checkout page. A would-be buyer could see that a $100 sweater would be $25 a month over four months on a product page featuring that sweater and make a purchase decision with that repayment plan in mind.

PYMNTS data shows that although BNPL users are bifurcated into two groups — the affluent customers who see it as another credit tool in the tool kit, and the lower-income consumers who don’t have credit options and need it to make a purchase — they use BNPL for the same reason. It’s not an aversion to credit or even credit cards, since many have them already and those who don’t would like them. They use BNPL as a tool to manage their spending with certainty, knowing that at the end of the payment term, their payment obligation for that purchase is complete.

So, we will all have to wait and see how and where Apple Pay Later will make its debut. If in-store, Apple and Goldman will have to do more than BNPL startups are doing today, some even inside of the Apple Pay wallet, and card issuers are doing using the consumer’s existing line of credit. Or even what card issuers could do when consumers use their card at the POS. One could imagine that issuers could message consumers seconds after checkout via their app or a text message that they have the option to pay in installments, as some do today via the online card statements.

Or online or in app, where Apple Pay Later becomes another online BNPL play, duking it out with other BNPL providers that have traction, an active user base and the need to convince its Apple Pay users who already use other options to pay online to give it a try instead.