Apple new Pay Later system: The Economics behind the step

Apple is contacting the “buy now, pay later” (BNPL) business with its new Pay Later service created into Apple Pay and Apple Wallet.

While Apple bills the assistance as “designed with users’ financial health in mind,” BNPL is a technique that has come under scrutiny by government regulators to hurt customers potentially.

Apple’s Pay Later assistance, which has been in the assignments since last year, lets users purchase with Apple Pay and then deliver it back in four equivalent installments over six weeks. There’s no interest in these installments, but it remains ambiguous if Apple will levy a late fee and, if so, how considerably it will cost.

BNPL services seem benign on the surface, as some come with no interest and authorize an easy way to pay back a significant asset in chunks. Some BNPL players have even emerged for payments related to healthcare with some existing companies, like Affirm, adding support filling a gap for people who can’t afford to pay the healthcare costs upfront. However, this kind of service becomes straightforward to abuse when used for nonessential purchases.

In May, SFGate published an alarming report about BNPL services that highlights its favor among Generation Z or born between 1997 and 2012. Seventy-three percent of BNPL customers are part of this generation, and approximately 43 percent report missing at least one payment. Thirty percent of users toil to make their BNPL payments, and 32 percent report neglecting spending on rent, utilities, or child support to prioritize their BNPL bills. However, the present condition of the economy is likely donating to some of these efforts.

SFGate also uses $365 on a single asset instead of the $100 average cart size recorded in 2020. It’s also become a way to purchase a wardrobe without footing the expenses upfront. SFGate points out that Affirm’s extensive Gen Z consumer base spends 73 percent of their Afterpay buys on fashion.

Like other payment assistance, BNPL services can incur overdraft fees if users levy them to an account with inadequate funds, and Apple’s fine print makes clear it’s no exception. Moreover, BNPL’s rising popularity comes at a time to make matters worse when credit companies such as Experian, Equifax, and TransUnion are getting to include BNPL loans on credit reports. It means missing a payment on these seemingly benign services will momentarily come with a consequence not just for customers but for BNPL players, too. And a survey of 2,200 people reveals that BNPL users are twice as likely to overdraft than non-users.

Missed and late payments, associated with a volatile economy, have led Klarna’s valuation to tumble by a third reportedly from $46 Bn last year to $30 Bn and have also caused Affirm’s share price fall. Last month, Klarna laid off 10 % of its workers due to “a highly volatile stock market and a possible recession.”

In addition to possible financial problems, BNPL services are capturing the attention of government watchdogs around the planet. Last year, the U.K. announced stricter regulatory policies for BNPL businesses.

Apple’s Pay Later is on track to accept the same scrutiny as it injects itself into an uncertain sector when inflation spikes and consumers struggle to pay for everyday goods. But it also standardizes the BNPL practice by assembling the concept straight into the iPhone, posing a risk to consumers and competing businesses. In addition, Apple has the power to catch the eyes of the millions of iPhone users who use Apple Pay, while companies like Klarna, Affirm, and Afterpay don’t have that kind of grasp.

Attaching something as risky as BNPL to Apple’s brand puts Pay Later at odds with its goal of providing customers with technology and services they can generally feel good about. The great quote from Apple CEO Tim Cook on Apple’s Ethics and Compliance page reads, “We do the good thing, even when it’s not comfortable.”

Pay Later with AfterPay

Afterpay was launched by Molnar and his then-neighbor, Eisen, in October 2014. On May 4, 2016, the company was documented on the Australian Securities Exchange with a A$25 million IPO. In American venture capital fund Matrix Partners, in January 2018, revealed its intention to invest A$19.4 million in Afterpay to fund its entry into the U.S. retail market. Afterpay was launched in the U.S. in mid-May 2018 with retailers such as Anthropologie, Free People, and Urban Outfitters. With conveyed underlying sales of A$4.7 Bn in the 11 months to May 2019, in June 2019, Afterpay earned A$317.2 million in fresh capital with a share issue to assist in funding its international growth.

Two months later, the company said that it had over two million active users and 6,500 merchants in the U.S. and announced a strategic partnership with Visa Inc. Then, on May 21, 2020, the company announced that its operations had grown to five million active customers in the U.S.

In August 2018, Afterpay gained 90% of the equity in Clearpay, a U.K.-based buy-now-pay-later service, for a total review of one million Afterpay shares. In the financial year 2019 update, the company reported that its development in the U.K. was faster than that of the U.S., with more than 200,000 UK customers joining in the first 15 weeks.

During the COVID-19 pandemic, many traders closed physical stores, and potential customers were hesitant to shop in person. The Financial Review commented that Afterpay’s development was spurred by “investors [who] are seeking exposure to e-commerce as the coronavirus concern pushes more shopping online, and continuing government stimulus will maintain bad debts low.” In 2020, Afterpay revealed plans to expand its assistance to at least four continents, including Asia, to capitalize on the online shopping wave brought by the COVID-19 pandemic. This plan would entail the purchase of Singapore-based, Indonesia-focused buy-now-pay-later service EmpatKali.

Afterpay and Square, a digital payments company, reported in August 2021 that Square would acquire Afterpay. Square will spend A$39 billion in stock for the purchase, and the process is anticipated to be terminated in the first quarter of 2022. In addition, it was reported that Molnar and Eisen would lead Afterpay’s merchant and consumer businesses inside Square. Shares of Afterpay in Australia closed more heightened after the news. In November 2021, Afterpay announced that they would buy now pay later for subscriptions to U.S. customers, such as gym memberships and entertainment subscriptions.

The Bank of Spain endorsed Block’s takeover bid of Afterpay on January 12, 2022, to celebrate the final hurdle in the acquisition merger. On January 19, 2022, Afterpay paused trading its claims on ASX. On January 20, 2022, the linked entity trading as Block started trading on the ASX under the ticker SQ2. On January 31, 2022, Block finished the acquisition of Afterpay, officially making it a subsidiary.