Apple Pay Later: From Solo Act to Strategic Symphony
Turns out splitting the bill is more fun with friends...
Welcome to Fintersections, where we explore the exciting collision of fintech trends with diverse industries! In this edition, we are unpacking Apple's abrupt U-turn on Apple Pay Later and exploring its new partnership-focused approach to BNPL. Join us as we slice down the insights into the tech giant’s strategic pivot!
Apple Pay Later burst onto the scene in 2023, offering a convenient way to split purchases into manageable instalments. However, in a recent move, Apple announced it would be shutting down its own BNPL service in the US. Instead, they're shifting gears and pursuing a partnership-based approach.
This new strategy sees them collaborating with established fintechs like Affirm and Monzo, established banks like Citi, Synchrony, HSBC, ANZ, Caixabank, and even card issuer processor platforms like Fiserv. This isn't just about spreading the risk – it seems to be a strategic shift that leverages the strengths of both sides. Apple brings its robust distribution ecosystem components – think Apple Pay, Apple Wallet, and the ubiquitous Apple ID – to the table. The BNPL partners, on the other hand, offer expertise in underwriting, credit risk management, customer service and regulatory know-how. So, what's the story behind this strategic pivot? Let's dive into the exciting intersection of Apple's powerful ecosystem and the established BNPL landscape to see how this collaboration is poised to redefine the future of BNPL.
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Let's examine the value chain elements of Apple Pay Later and who controls what in this structure, depicted as a vertically integrated model in the image below. In this model, Apple maintains substantial control, streamlining operations and enhancing the customer journey within its ecosystem, yet it collaborates with external partners like Goldman Sachs and Mastercard for specialised services.
Apple's Strategic Shift in BNPL
Apple is embracing a collaborative ecosystem model, moving away from a traditional vertically integrated approach. This strategic realignment is designed to harness the strengths of partnerships with banks, technology firms, and other BNPL providers, which are crucial for expanding market reach and enhancing operational efficiency. On the flip side, there are key inhibitors like Regulatory Complexity and Operational Overhead, which posed significant challenges in the vertically integrated model.
Let's dive deep into the intricacies to unpack the inhibitors of the vertically integrated model and the drivers for the collaborative ecosystem model shaping Apple's BNPL strategy.
Shifting Gears: Why Did Apple Shut Down Its Own Pay Later Service?
While Apple hasn't explicitly stated the reasons behind this move, there could be several factors at play. Apple owns almost all the critical elements of the Pay Later value chain in its vertically integrated business model.
Let’s look at the challenges with this vertically integrated business model for Apple Pay Later:
Regulatory Complexity: Managing regulatory compliance across various jurisdictions is intricate and time-consuming, requiring substantial resources. For example, in May 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule concluding that “Buy Now, Pay Later” (BNPL) loans accessed through a digital user account are “credit cards” subject to Regulation Z dispute and refund requirements. This can have significant implications for Apple’s regulatory obligations to run Pay Later in-house.
Operational Overhead: Internal management of all aspects of BNPL services, such as credit underwriting, identity and fraud checks, capital provisioning, credit bureau reporting, dispute handling, etc., involves high operational costs and complexities, including in-house and third-party technology infrastructure maintenance.
Scale Limitations: Scaling a vertically integrated BNPL service globally requires significant investments in local market understanding, procuring necessary regulatory licenses and setting up technology infrastructure. Apple has struggled to rapidly expand its Pay Later services internationally, unlike its quicker global rollouts of Apple Pay and Apple Tap to Pay, which benefited from partnerships with card issuers and payment processors, respectively.
Risk Management Concerns: Taking full responsibility for credit risk, fraud prevention, and financial liabilities can strain financial resources and capabilities. As we described in Apple’s Embedded Finance Playbook, Apple tends to target customers with low credit scores and limited credit histories. In 87% of the states where Apple holds a lending license, the credit scores are below average. Apple also targeted states with a predominantly younger population, with 67% of the states where it has a lending license featuring a median age of below 39 years. Managing loan loss provisioning for these customer segments could be a risky expedition.
Concerns with the Goldman Sachs partnership: News reports indicate that Apple's partnership with Goldman Sachs for its credit card and bank account products may be ending earlier than expected. As Goldman Sachs prepares to exit the consumer lending business, Apple might have anticipated this move by expanding its Pay Later collaborations with other banks and BNPL providers.
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Strength in Numbers: Partnership Advantages for a Global BNPL Rollout
Apple's strategic decision to collaborate with established BNPL providers represents a crucial pivot aimed at enhancing its global market presence.
Here’s a look at the potential advantages of the collaborative ecosystem model:
Market Expansion: Apple is collaborating with banks, technology firms, and Buy Now, Pay Later (BNPL) providers to extend its Pay Later services globally. This strategy leverages these partners' established market presence and regulatory approvals, enabling Apple to quickly enter new markets and cater to a broader customer base without the need to build infrastructure from scratch.
Risk Sharing: Apple's strategy of partnering with well-established financial institutions and BNPL providers allows it to share the financial risks associated with lending, such as defaults and delayed payments, and reputational risks, such as regulatory penalties and consumer complaints. This approach not only mitigates Apple's financial exposure but also distributes regulatory responsibilities, which can vary significantly across different regions, thus easing the burden of compliance and reducing potential liabilities. The ecosystem collaboration strategy enables Apple to transition the revenue generation of its BNPL services from potentially risky interest income to more stable fee-based income derived from its partners.
Expertise Utilisation: Apple capitalises on the specialised knowledge and experience of its financial services partners to enhance its BNPL offerings. This includes leveraging advanced risk assessment techniques, proven customer support frameworks, and efficient operational practices. By integrating its technology with the expertise of these partners, Apple ensures that its services are compliant with financial regulations, efficiently managed, and able to provide superior customer service.
Customer Acquisition: Through its collaborative model, Apple taps into the existing customer bases of its partners, which include banks and other BNPL providers. This relationship enables Apple to access a ready-made market, significantly speeding up customer acquisition. Furthermore, collaborative marketing strategies, such as co-branded promotions and exclusive offers, help attract customers who are already familiar with and trust the partner brands, thereby enhancing the uptake of Apple's Pay Later services.
Building a moat with Card Issuers: Apple's strategic partnership with card issuers enhances its BNPL offerings by positioning Apple Wallet as a central hub for diverse payment options—including debit cards, credit cards, and BNPL. This integration not only streamlines the consumer payment process for both in-store and online transactions but also reinforces consumer loyalty by offering a seamless and comprehensive payment experience. By allowing users, such as those in the UK, to link their debit and credit cards directly to their Apple Wallet, Apple enables real-time visibility into account balances and transaction histories at the point of sale. This approach potentially locks in users to Apple's ecosystem, making it a primary platform for managing personal finances and making payments across multiple instruments.
The Road Ahead: What to Expect from Apple's News BNPL Strategy
Apple's new BNPL strategy, built on collaboration, promises a future filled with possibilities.
This strategic pivot to partner with banks, technology firms, and BNPL providers is expected to catalyse rapid global expansion, enhance customer experiences, and optimise risk management. This strategic shift positions Apple to be a major player in the BNPL landscape across multiple markets, potentially fostering healthy competition and offering a wider range of flexible payment options to consumers.
And It’s A Wrap! 👏
Hope you enjoyed this edition of Fintersections! Stay tuned for more interesting think-pieces in the coming months.
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