The Harsh Economics of Apple’s Latest Pay Later System

    This article was first published June 20, 222. This article is being republished today because Apple has completed its plans to launch this service.

    Apple is entering the “buy now and pay later” (BNPL), market with its new Pay Later service, which is integrated into Apple Pay/Apple Wallet. BNPL, which Apple calls “designed with users’ financial health in mind”, has been criticized by regulators for potentially causing harm to customers.

    Apple’s Pay Later service, has been in development since at least last year. It allows users to make purchases with Apple Pay, then pay it back in four equal installments over six weeks. These installments are free of interest, but Apple may charge a late fee if they do.

    BNPL services look harmless on the surface. They offer no interest and make it easy to pay off large purchases in small chunks. Some BNPL companies even started to make payments for healthcare. There are also companies like Affirm that can help people who cannot afford healthcare upfront. This service can be misused if it is used for non-essential purchases.

    30% of users have difficulty making their BNPL payments

    SFGate published a disturbing report on BNPL services in May. It highlighted its popularity among Generation Z (those born between 1997-2012). The report shows that 73 percent of BNPL clients are from this generation and that 43 percent report missing at most one payment. A survey by DebtHammer found that 30% of customers struggle to pay their BNPL bill. 32 percent reported skipping rent, utilities or child support in order to pay their BNPL bills. These struggles are likely to be exacerbated by the current economic state.

    SFGate notes that BNPL can result in larger purchases. The outlet has seen data that shows the average Affirm customer spending $365 per purchase. This is in contrast to the $100 average cart size for 2020. It has also been a way to purchase a wardrobe without having to pay upfront. SFGate points out that Affirm’s large Gen Z customer base spends 73% of their Afterpay purchases fashion.

    Overdraft fees can be charged to BNPL services if they are charged to accounts with insufficient funds. Apple’s fine print clearly states this. Even worse, BNPL is gaining popularity at a moment when credit companies Equifax, TransUnion, and Experian are considering including BNPL loans in credit reports . This means that BNPL companies and consumers alike will be penalized if they miss a payment for these seemingly simple services. A survey of 2,200 people conducted by Morning Consult found that BNPL users are twice more likely to overdraw than non-users.

    Klarna’s value has reportedly fallen by a third, from $46 billion last fiscal year to $30 billion. Affirm’s share prices have also dropped due to missed and late payments. Last month, Klarna fired 10 percent of its employees because of “a volatile stock market” and a possible recession.

    “We do the right things, even when it is difficult.”

    BNPL services are attracting the attention of governments around the world, in addition to financial concerns. The Consumer Financial Protection Bureau is currently investigating BNPL businesses, including Klarna Zip, Afterpay and Affirm. It cites concerns about “accumulating credit, regulatory arbitrage and data harvesting in a consumer market already rapidly changing with technology” and has announced more stringent regulatory policies to BNPL firms.

    Apple’s Pay Later program is likely to be subject to the same scrutiny as its predecessor. It injects itself in a volatile sector where inflation is high and consumers are finding it difficult to pay for their everyday goods. It also normalizes BNPL practices by embedding the concept directly into the iPhone. This poses a risk for consumers as well as competing businesses. Apple Pay has the ability to capture the attention of millions of iPhone users, while companies such as Klarna, Affirm and Afterpay don’t clearly have the same power.

    Pay Later’s decision to attach BNPL to Apple’s brand is a risky move. This goes against the company’s mission of offering customers technology and services that they can feel good about. The big quote by Apple CEO Tim Cook, Apple’s Ethics and Compliance Page states, “We do right, even when it is difficult.”

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