The ugly economics behind Apple’s new “Pay Later” system

This article was originally published in June 2022. We’re resurrecting it today because Apple did finally pulled through with his plans to start the service.

Apple is getting into the buy now, pay later (BNPL) business with its new pay later service, integrated with Apple Pay and Apple Wallet. While Apple bills the service as “designed with users’ financial health in mind,” BNPL is a practice that has come under scrutiny from government regulators as something that could potentially hurt customers.

Apple’s Pay Later service, in the works for at least last year, allows users to make a purchase with Apple Pay and then pay it back in four equal installments over six weeks. There is no interest on these installments, but it remains unclear whether Apple will charge a late fee and, if so, how much it will cost.

On the surface, BNPL services appear benign as some are interest-free and offer an easy way to pay back a large purchase in large chunks. Some BNPL companies have even sprung up for healthcare-related payments – with some existing companies like Affirm adding support – filling a gap for people who can’t afford to pay healthcare costs up front. However, this type of service can be easily abused when used for non-essential purchases.

In May, SFGate published a disturbing report on BNPL services, highlighting its popularity among Gen Z, or those born between 1997 and 2012. According to the report, 73 percent of BNPL customers belong to this generation, and around 43 percent of them say they are missing at least one payment. Another poll by debt hammer shows that 30 percent of users are struggling to make their BNPL payments, and 32 percent report skipping rent, utilities, or child support payments to prioritize their BNPL bills. The current economic climate is likely contributing to some of these struggles.

SFGate also points out that BNPL services can lead to larger purchases. According to data viewed by the outlet, the average Affirm customer spends $365 on a single purchase, up from the average cart size of $100 in 2020. It’s also become a way to shop for a wardrobe , without paying the costs in advance SFGate He points out that Affirm’s large Gen Z consumer base spends 73 percent of their afterpay purchases on fashion.

As with other payment systems, BNPL services can incur overdraft fees if users charge them to an account with insufficient funds, and Apple’s fine print makes it clear that this is no exception. To make matters worse, BNPL’s rising popularity comes at a time when lending companies like Experian, Equifax and TransUnion are trying to include BNPL loans in credit reports. This means that missing a payment for these seemingly innocuous services will soon have consequences – not only for consumers but also for BNPL companies. And a Morning Consult survey of 2,200 people shows that BNPL users are twice as likely to overdraw compared to non-users.

Missed and late payments, coupled with a volatile economy, have reportedly caused Klarna’s valuation to fall by a third — to $30 billion from $46 billion last year — and Affirm’s stock price as well dropped. Last month, Klarna laid off 10 percent of its employees due to “a highly volatile stock market and a likely recession.”

In addition to potential financial problems, BNPL services are attracting the attention of government overseers around the world. The Consumer Financial Protection Bureau is currently investigating BNPL companies, including Klarna, Zip, Afterpay, Affirm and PayPal, citing concerns about “debt accumulation, regulatory arbitrage and data collection in a consumer credit market that is already rapidly changing with technology.” Last year the UK announced stricter regulatory guidelines for BNPL companies.

Apple’s Pay Later is on track to get the same kind of scrutiny as it meddles in an uncertain sector when inflation is soaring and consumers struggle to pay for essential goods. But it also normalizes BNPL practice by building the concept right into the iPhone, which poses a risk for both consumers and competing companies. Apple has the power to capture the attention of millions of iPhone users who use Apple Pay, while companies like Klarna, Affirm, and Afterpay clearly lack that kind of understanding.

Linking something as risky as BNPL to Apple’s brand puts Pay Later at odds with the company’s goal of providing customers with technologies and services they can generally feel comfortable with. As Apple CEO Tim Cook’s great quote on Apple’s Ethics and Compliance page goes, “We do the right thing, even when it’s not easy.”