Buy Now & Pay Later

On Apple

Friends,

I hope that all is well with you and yours.

To begin on a personal note, if I may, I must admit that I am currently burning the candle at both ends.

Over the last few months, my workload has accelerated dramatically; between client work, corporate presentations, book writing and that Cannes thing, 3 am workday finishes are now standard fare. Although I previously have had no issues with such a pace (though not condoning the practice in any way), adding a six-month-old daughter who loves little more than to wake up at 5 am to the mix means that sleep deprivation has become a very tangible facet of my life. Were it not for my saint of a wife, my love for whom I cannot express in words strong enough, I would undoubtedly have hit the proverbial wall. Hard.

Since I will be traveling for most of next week before heading into Midsummer – the second biggest holiday in Sweden only after Christmas – there will, therefore, not be a newsletter arriving in your inbox in seven days’ time. Finding the time to write in a schedule that is currently (genuinely) fully planned in 15-minute intervals would simply be a task of biblical proportions. I sincerely apologize for this, but hope for your understanding. Normal services will be resumed the week after that.

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Today, we are going to jump back into a topic which we have discussed before; Buy-Now, Pay-Later. Few sectors consist of a similar blend of growth and controversy, so it came as no surprise that the internet blew up when Apple announced they were making a move into it.

Of course, this also meant that we were treated to a few analyses that were, shall we say, not entirely accurate. Given that I have some relevant experience, I therefore thought that I would highlight three reasons for why, whatever you think of it in moral terms, the move is strategically coherent.

The Buildup

Although Apple did not make the release of its new service public knowledge until Apple Pay Later suddenly appeared in its latest iOS update, it should be obvious that this has been a long time coming. For one, it would not be unwarranted to argue that Apple’s product strategy, which centers around premium priced mobile phones that become outdated 18 months after their release, was partly responsible for BNPL becoming so broadly popular in the first place.

But the company has itself also been slowly but steadily expanding into financial services. Multiyear payment plans have been available for its most expensive products for seven years; the Apple Card, a credit card without annual fees offered on the US market, has been around for three.

With the global economy now going down faster than Piers Morgan’s TV ratings, taking even further control over how their customers might choose to pay could mitigate losses as discretionary spend falls. While the move obviously increases the overall credit exposure, the company has been building its risk management capabilities to minimize the effect. For example, earlier this year, it acquired UK-based credit-checking start-up Credit Kudos, moving such analyses from Goldman Sachs to a subsidiary.

One should also remember that while bad debt is rising in BNPL as a whole due to the escalating inflation, Apple customers are among the richest one billion on the planet, and the company has plenty of data on their purchase behaviors. With near vertical control to boot, the decision to go into BNPL thus has to be considered, well, well considered.

The Sector Structure Plays into Apple’s Strengths

In short, the bog standard BNPL solution can be seen as a horizontally stacked complement to legacy card providers; the consumer can (indeed often is told to) make the purchase in question using their credit card of choice. All parties gain, in a manner of speaking, from the transaction. The BNPL provider collects a fee, the legacy company collects a fee, the merchant achieves a sale, and the consumer achieves their goal.

Yet it is not actually in the BNPL company’s interest to maintain this chain of commerce. Over time, the fees that legacy card providers demand (and the BNPL has to pay) add up to the point where profitability is practically impossible to achieve. What the BNPL would rather that consumers therefore do is to pay direct, either by in-app balance or from their bank account. At this point a different network (typically ACH, i.e., Automated Clearing House) is used. It carries a much lower fee than the credit card networks – and frequently none at all. Paying direct, in other words, means that the credit card company is effectively disintermediated. The incentive for the fintech complement is as massive as the threat is to the incumbents – but pulling it all off is a lot easier said than done.

Unless you are Apple, that is.

Given its enormous stature, the company is able to reverse the cost structure entirely and itself charge banks a fee whenever cardholders use their card for Apple Pay transactions. Although the fees vary from country to country and even issuer by issuer, profitability is achieved much easier.

Further, any merchant that accepts Apple Pay (meaning, especially in the US, a lot) should also accept Apple Pay Later immediately; no integration is required. The infrastructure is thus already in place - and BNPL is most powerful precisely when such an ecosystem exists around it.

Apple’s BNPL Competitors Are Vulnerable

Over the last six months, some might argue overdue, the VC narrative has changed completely. Not only have the number of deals declined, but there was a 19% drop in funding volume in Q1. Globally, it is expected to drop another 19% quarter-over-quarter for Q2, while deals are on track to drop another 22%.

A myriad of leading investors are now telling their companies that they are, effectively, on their own for the foreseeable future. To illustrate, Sequoia wrote in its latest report that ‘the era of being rewarded for hypergrowth at any cost is quickly coming to an end’. Y Combinator sent out an email saying that ‘if your plan is to raise money in the next 6-12 months, change your plan’. Lightspeed declared that ‘the boom times of the last decade are unambiguously over’.

If you happen to be a VC heavy fintech, chances are that you will therefore be in for a bumpy ride. That is not to say that every single one of Apple’s BNPL competitors have cash issues, but many of them are hemorrhaging money and it is clear that securing further capital will be significantly more difficult and expensive going forward – particularly as the Covid pandemic’s eCommerce boom begins to wane, slowing previously rapid growth.

Apple, by comparison, has such a large cash reserve that it could afford to buy Klarna (which, even though it recently had to let go of 10% of its workforce, remains among Europe’s most valuable private fintechs) twice and still have money left. It is no wonder that Affirm’s stock price took another nosedive as the world learned of Apple’s move, extending what is now a 75% drop in its stock price since the start of 2022.

In Conclusion

So, as much as BNPL remains hotly debated for moral reasons, Apple’s foray into the rapidly growing sector does at least make strategic sense. Not only were all the pieces in place, but the company also had a unique position of power and an ideal time to strike. I would suspect that the company is better suited than most to handle any upcoming regulation as well.

Whether the move ultimately works out remains to be seen, of course, but the odds certainly appear to be stacked in its favor.

Until next time, have the loveliest of weekends.

Onwards and upwards,
JP