The Ugly Economics Behind Apple’s New Pay Later Service

With the addition of the new Pay Later service to Apple Pay and Apple Wallet, Apple is joining the “buy now, pay later” (BNPL) market. BNPL is a practice that has come under scrutiny by government regulators due to its potential to possibly impact customers, even though Apple describes the service as “designed with users’ financial health in mind.”

With Pay Later service,  customers can now purchase items and then pay them off over the course of four equal instalments spread out over six weeks thanks to Apple Pay. This service has been in development since last year. These payments are interest-free and do not incur late fees. The 0% financing scheme seems to be a great deal for users—but how will the company make money? The answer is merchant fees, which retailers pay Apple in exchange for adding Apple Pay as a payment option.

A major purchase can be easily repaid in instalments with BNPL services because some of them come with no interest. In order to bridge the gap for those who cannot afford to pay for healthcare bills up front, several BNPL companies have even emerged for payments related to healthcare, with some already-existing companies, like Affirm, adding support. But, when utilized for unnecessary purchases, this kind of service can be abused.

A shocking article on BNPL services was published by SFGate in May, highlighting its appeal among Generation Z, or people born between 1997 and 2012. This demographic makes up 73% of BNPL customers, and 43% of them claim to have missed at least one payment, the report claims. A DebtHammer poll reveals that 32% of customers report skipping out on paying rent, utilities, or child support in order to prioritize their BNPL expenses, while 30% of users report struggling to make their BNPL payments. Some of these difficulties are partly caused by the current situation of the economy right now.

SFGate reports that using BNPL services may likely result in more expensive purchases. The average Affirm user spends $365 on a single purchase, as opposed to the $100 average cart size noted in 2020, according to statistics examined by the source. SFGate notes that Affirm’s sizable Gen Z customer base spends 73 per cent of their Afterpay purchases on clothing, demonstrating how it has evolved into a way to purchase a wardrobe without paying the full price upfront.

In a case where users charge BNPL services to an account with insufficient funds, just like other payment systems, overdraft fees may apply; Apple’s fine print makes clear it’s no exception.  To make matters worse, credit companies like Experian, Equifax, and TransUnion are trying to add BNPL loans to credit reports at the same time as BNPL is becoming increasingly prevalent. This means that failing to make a payment on these purportedly simple services may eventually have an impact on both consumers and BNPL businesses. Furthermore, BNPL users are twice as likely to overdraw than non-users, according to a Morning Consult survey of 2,200 people.

Missed and late payments, in addition to an unstable economy, have reportedly caused Klarna’s valuation to decrease by a third, from $46 billion last year to $30 billion, as well as a decline in the share price of Affirm. Ten per cent of Klarna’s staff were let go last month as a result of a highly unpredictable stock market and a predicted recession.

Together with possible financial concerns, BNPL services are drawing the attention of government regulatory agencies around the world. In its investigation into BNPL firms including Klarna, Zip, Afterpay, Affirm, and PayPal, the Consumer Financial Protection Bureau cited worries about “accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit industry already rapidly altering with technology.” The UK set stiffer regulatory standards for BNPL companies last year.

With inflation at an all-time high and people find it difficult to pay for basic necessities, Apple’s Pay Later is likely to face the same kind of scrutiny. But again,  by incorporating the idea directly into the iPhone, it also normalizes the BNPL practice, endangering both customers and other companies. Apple with its technological prowess has the ability to grab the attention of millions of iPhone users who use Apple Pay, but firms like Klarna, Affirm, and Afterpay obviously can’t.

Associating a service as risky as BNPL with the Apple brand goes against the company’s mission to offer clients technologies and services they can generally feel good about. Going by the big quote from Apple CEO Tim Cook on Apple’s Ethics and Compliance page reads, “We do the right thing, even when it’s not easy,” we’ll just allow Apple to figure it out.