Apple To Take On Affirm And Klarna With Entry Into Buy Now Pay Later

Key Takeaways

• Apple held its WWDC keynote on Monday, announcing iOS 16, the new M2 chip and multiple other new features and technology
• They also announced a foray into the Buy Now Pay Later industry, with Apple Pay Later to be integrated into iOS 16
• With Klarna still a private company and Afterpay recently acquired by Block, Affirm was the hardest hit by the news with its share price tumbling after the announcement

If you owned a business and had to pick the company you’d be most worried about entering your market, Apple would have to be pretty high on that list. With revenue in 2021 of $365 billion and over $200 billion cash in the bank, Apple has significant scale and seriously deep pockets.

At their recent Worldwide Developers Conference (WWDC), Apple announced they’ll enter the rapidly growing Buy Now Pay Later (BNPL) space, which has so far been dominated by upstarts like Affirm and Klarna. These companies are no longer small fries though, with Affirm, for example, holding lucrative partnerships with retail giants like Walmart and Amazon.

Still, this is Apple. The company that spent $6 billion—almost the equivalent of Affirm’s entire market cap—on a handful of TV shows for its Apple TV+ service launch in 2019. BNPL firms could be forgiven for feeling a bit nervous.

Apple’s WWDC announcements

The WWDC is a hotly anticipated event on the annual technology calendar. It’s Apple’s big show to the world on what they have planned for their products and services in the coming year. The main focus of the showcase is to present to third-party developers to give them time to work on new or updated apps and products that utilize Apple’s upcoming new features and technology.

As you’d expect, announcements of new Macbooks, iPhones and iOS features garner just as much interest from the average Joe looking to upgrade. While we seem to be past the era of mile-long queues for the new iPhone, there’s generally plenty of news to get the buzz going.

We’ll get to Apple’s new BNPL service, Apple Pay Later, in a minute, but there were also plenty of other announcements at this year’s WWDC. iOS 16 is set to get a few significant updates. These include the ability to edit and unsend iMessages, a customizable lock screen that will allow greater control of apps without unlocking and the ability to use your iPhone as a webcam for your Mac.

From a hardware perspective, Apple will be launching a follow-up to their highly regarded in-house microchip, the M1. A newly designed Macbook Air will be the first Mac to receive the new M2 chip, with the Macbook Pro also receiving the hardware upgrade. There was no word on the timescale for delivery of the latest devices, and it will remain to be seen whether it’s impacted by the global microchip shortage.

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Apple Pay Later, explained

Of course, Apple announced that iOS 16 will also come with its own BNPL later service, Apple Pay Later. The new feature will allow U.S. users to pay for purchases in four installments over six weeks. They won’t charge any interest or fees to the user, and Apple Pay Later can be used for any transaction completed using Apple Pay.

This is a massive blow to the existing players in the market, such as Affirm. Apple Pay adoption is snowballing, with customer and retailer numbers increasing at an impressive pace. While full judgment will need to be reserved until the finished product is released, it would be a fair assumption that the integration between Apple Pay and Apple Pay Later will be slick.

The level of integration will provide an immediate competitive advantage to Apple over the existing players in the market. Affirm and Klarna have invested tremendous resources into partnering with retailers and have had significant success. Even so, Apple has the potential to take this integration to another level.

It’s also not Apple’s first foray into the financial-products market. For several years, they’ve allowed customers to pay in installments for items purchased from the Apple store, such as Macbooks and iPhones. Since 2019, they’ve also offered their own credit card to U.S. customers in a partnership with Goldman Sachs.

How does Buy Now Pay Later work?

With no fees and no interest, how does Apple Pay Later expect to make money? The details obviously haven’t been released yet, but we can look to other companies in the sector for some insights.

Affirm, for example, generate revenue via several different methods. They do charge interest for some of their loan products, but almost half of their income comes from fees charged to merchants.

What this means is that if you purchase something from Amazon using Affirm, Amazon will pay Affirm a fee for facilitating the transaction. The main reason they do this is that the data shows that the availability of BNPL increases sales conversion rates and the average order size.

Setting aside the ethics of this concept for a minute, consumers are likely to spend more and shop more often if they can delay paying. With a vast network of merchants already accepting Apple Pay, it’s likely to be a reasonably straightforward addition for them to accept Apple Pay Later.

The controversy surrounding Buy Now Pay Later

The industry is not without its challenges and has come under fire from those who believe it encourages unsustainable spending practices and targets those on lower incomes. This issue has been compounded by the fact that many BNPL providers don’t report all their loans to credit bureaus and often don’t conduct any credit checks on new borrowers.

This can make it easier for customers to fall into debt while allowing them to continue accessing additional credit. But given that Affirm doesn’t charge interest or late fees on many products, why is this a problem? Essentially, it’s because they’ll eventually pass the debt on to someone else.

According to Affirm, they may charge off a loan if no payments are made for 120 days. This will generally mean the loan is purchased by a debt collection agency, and they definitely aren’t as lenient regarding interest and late fees.

This controversy is causing the regulators to look closely at the industry. Late last year, the Consumer Financial Protection Bureau announced that they would be looking into companies such as Affirm, Paypal and Afterpay over concerns about mounting consumer debt and the usage of personal data.

The industry itself obviously pushes back on these accusations. They argue that BNPL provides consumers with greater flexibility and choice over their spending and, as a result, makes it easier to manage household finances.

The impact on Affirm

While Klarna and Afterpay held the biggest market share in the U.S. BNPL market as of late 2021, Affirm is growing rapidly. Needing to take down two multi-billion-dollar companies to gain the industry’s top spot, it’s no surprise that Apple has shot down Affirm’s share price.

The Affirm share price reacted immediately, dropping over 7% the morning of Apple’s announcement. The knee-jerk reaction is that Apple Pay Later will drop Affirm down the pecking order and reduce their revenue potential by eating up market share.

This could spell bad news for Affirm in the short term, but as with most aspects of investing, it’s not black and white. To look at this from a different angle, Apple entering the BNPL industry could actually help companies like Affirm and Klarna in the long run.

This is because Apple has the potential to make the BNPL pie much larger overall. While Affirm could potentially lose market share percentage, if that’s a smaller percentage of a much bigger market, they could still grow in real terms.

Analysts from Morgan Stanely have suggested that Apple Pay customers are likely to have higher incomes and more credit alternatives. This could help further legitimize the industry and increase the pool of customers comfortable with using BNPL.

The opportunities for investors

This announcement has highlighted how quickly the tech sector changes. BNPL is an entire industry that has sprung up from nothing in the last decade, spawning multiple multi-billion dollar companies off its back.

On top of new companies in which to invest, this also throws up opportunities for established players to expand, as Apple has with Apple Pay Later. While this means there are plenty of investment options to consider, it also makes it hard to stay on track.

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