Apple’s Pay Later Option May Impact US Consumption Patterns

In the latest Worldwide Developers Conference (WWDC), some key updates were announced for Apple Wallet. Besides the Tap to Pay feature, which allows users to skip the use of a POS terminal, Apple has introduced the Pay Later option, under which the cost of a purchase can be split across four payments over six weeks for US users. Given the US’ big iOS user base, the Pay Later option is expected to impact consumption patterns and payment behaviour there.

Buy-now-pay-later (BNPL) has been a rapidly growing payment method in recent years. Even as digital/mobile wallets are increasingly becoming popular, the fintech sector is developing further, with BNPL catching on with consumers, particularly in the US and Europe. BNPL is a short-term financing service that allows consumers to trade first and pay the total amount in instalments within a specified period after the product purchase and delivery. It helps in expanding the consumer’s purchasing power. It should be noted here that BNPL is not a replacement or alternative for credit cards or debit cards. It relies on the user’s original bank account (credit card or debit card) to offer a time gap between consumption and payment.

How Apple’s Pay Later works?

When the consumers choose Apple Pay to make payments at Apple stores or merchants adopting the Apple Pay API, the payment can be split into four equal instalments spread across six weeks, without incurring any interest or fees. “Built into Apple Wallet and designed with users’ financial health in mind, Apple Pay Later makes it easy to view, track and repay Apple Pay Later payments within Wallet,” the company said in a press release on Monday.

Apple Pay Later is operated on its own database set mainly. It is the latest technologies being used in financial services that differentiate BNPL from the traditional credit card system. These technologies enable a new way of assessing personal credits and managing risk levels. BNPL needs to update the database to adjust the risk control model quickly to be much faster than the credit card repayment cycle, generally no more than three months. Each cycle (from borrowing to repayment) is considered to have run out of data once. The BNPL companies need to continuously run the data to improve the risk control system. With the tons of data on transactions and purchasing behaviour via Apple Wallet, Apple possesses a healthy and trained risk management model to support its operation on Pay Later.

Pay Later Advantages and Risks

Just like Apple Cash and Apple Card, Apple Pay Later will launch in the US initially. After all, Apple Wallet enjoys the biggest base in the US. Furthermore, the US has some of the best banking and credit systems globally.

Klarna, Afterpay (owned by Square) and Affirm are the world’s largest BNPL companies and they all have operations in the US. Moreover, the US is among the top countries in terms of BNPL consumers.

It is a good move to launch Tap to Pay together with Pay Later because Pay Later has a strong link with merchants. The typical business model of BNPL companies has most of the operating income coming from merchants. With Apple Pay’s new functions, merchants can benefit from Tap to Pay with less system integration investment and extra transactions from the Pay Later users. The Tap to Pay and Pay Later combination is the unique selling point for Pay Later over other BNPL providers.

At the same time, Apple Pay Later may experience the shared risk of other BNPL companies –  uncertainty cropping from macroeconomic changes. The BNPL companies have to pay more for funding when the central bank or federal government raises benchmark interest rates. Furthermore, if the debt carries floating interest rates, it gets more expensive when the Federal Reserve raises its benchmark rate. Some companies can pass higher funding costs to merchants through higher fees, or to their borrowers. However, raising the fee for merchants may affect the business relationship. Even if some companies choose fixed-rate debt funding, the attendant risks will come along. But Apple may have less to fear as it has a solid cash flow.

Also, Apple can only encourage its current installed base because the business model leverages Apple Wallet. This can make it easier for the current Apple users to buy more or upgrade Apple products at an early stage.

Apple’s Pay Later will probably be released after the new generation of iPhone and iOS 16 upgrades. Its popularity is expected to grow within years because it is more like an ecological development.

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