Apple Pay Later: More Splash than Substance

Apple’s March into BNPL Foreshadows Change For Banks

Apple Pay Later is the tech giant’s latest rumored foray into payments. Powered by Goldman Sachs, Apple Pay Later would give Apple users the option to pay over time at the point of checking out with Apple Pay.

While we expect this product to be more successful than previous attempts by financial services providers to offer similar products to their card holders, we do not believe it will be as impactful as many seem to believe.

The power of BNPL for retailers has been to 1) increase conversion by moving customers through the purchase journey with the perception of lower pricing, and 2) enable customers to skip parts of the cumbersome checkout experience that still plagues many merchant websites. Apple’s latest offering will provide neither of those key benefits. Since the consumer will not see different messaging in the purchase journey and is already in the ApplePay flow, there won’t be any incremental conversion lift from an improved checkout experience.

Despite our skepticism, Apple’s entrance does mark a new chapter in the rapidly evolving BNPL landscape.

BNPL History

The rapid adoption of BNPL by retailers in the past 5 years represents a shift away from the traditional private label credit model. With financing embedded in the e-commerce experience, retailers can drive conversion earlier in the shopping journey versus capturing payments-based revenue at the point of checkout.

BNPL has changed significantly even within the past 5 years. The market was originally defined by first movers such as Affirm and Klarna that applied hard underwriting to finance higher dollar purchases. These players began to face greater competition in 2018 with the growth of “split pay” challengers, like Afterpay and Quadpay, that applied free financing to lower dollar value transactions with even less friction for the customer.

Commerce platforms responded during the pandemic, with Shopify and PayPal rolling out BNPL products in 2020. PayPal in particular saw massive growth on the back of integrating BNPL as part of its payment acceptance — with +$1B in new BNPL volume. Apple’s potential entry to BNPL will add significantly more noise to an already noisy market but suggests a broader race for acceptance of alternative payment forms.

In a short period of time BNPL models have evolved to meet changing needs, with four major evolutions, visualized below.

Against this backdrop, Apple Pay Later could present a meaningful new evolution, especially given its history of disrupting payment flows with intuitive experiences tied to its device. However, there are a couple of points to consider.

BNPLs can be considered across two categories:

• Merchant Focused: This model is centered on changing the consumer purchasing behavior. BNPL is integrated earlier in the shopping journey, during product discovery, so that consumers perceive the product to be less expensive and are more likely to buy. In this model, BNPL providers sell directly to the merchant and the merchant implements financing as part of its overall e-commerce experience.
• Illustrative companies: Afterpay, Affirm, Klarna

• Consumer Focused: Here, the goal is to get the consumer to pay for something using an alternative credit product. This model is unlikely to affect conversion because the offer is made at the time of checkout rather than earlier in the shopping journey. Providers do not sell to merchants but offer the product directly to consumers. The benefits for providers is to capture payment volume and interest revenue.
• Players: Incumbent banks, Apple Pay Later

Apple’s offering appears to fall squarely in this second category. Its success will be entirely dependent on user awareness of Apple Pay Later as an option at the point of checkout and willingness by those users to forego an alternative option much earlier in the shopping journey.

Looking Ahead

Stepping back, an increasing number of players and models are competing to develop awareness and acceptance of BNPL as an alternative form of payment. Regardless which of these players will gain the edge, traditional issuers will feel the pressure. As more BNPL players enter the market and scale, consumer credit will start to shift away from issuers and towards these alternative models. This is a wake-up call for banks that have significant exposure to retail credit, especially as many of these banks have neither direct merchant connectivity nor dominant influence on consumer’s digital behavior.