The unpleasant economics behind Apple’s new Pay Later system

With the addition of its new Pay Later service to Apple Pay and Apple Wallet, Apple is entering the “buy now, pay later” (BNPL) market. BNPL is a technique that has come under attention by government regulators as something that could potentially affect customers, even though Apple labels the service as “built with users’ financial health in mind.”

Users may use Apple Pay to make a purchase and then pay it off in four equal instalments over six weeks with the company’s Pay Later service, which has been in development at least since last year. These payments have no interest, but it’s unclear if Apple will assess a late fee or how much it will cost.

A significant purchase can be quickly repaid in instalments with BNPL services because some come with no interest. To bridge the gap for those who cannot afford healthcare bills up front, several BNPL firms have even formed for payments linked to healthcare, with some already-existing companies, like Affirm, adding support. But, when utilized for unnecessary purchases, this kind of service is simple to misuse.

A troubling article on BNPL services was published by SFGate in May, highlighting its appeal to Generation Z, or people born between 1997 and 2012. The report claims that this age makes up 73% of BNPL customers, and 43% claim to have missed at least one payment. Another DebtHammer poll reveals that 32% of customers report skipping out on paying rent, utilities, or child support to prioritize their BNPL expenses. In comparison, 30% of users report struggling to make their BNPL payments. Some of these difficulties are probably exacerbated by the situation of the economy right now.

SFGate adds that using BNPL services may 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.

If users charge BNPL services to an account with insufficient funds, as with other payment systems, overdraft fees may apply; Apple’s fine print makes this apparent. To make matters worse, credit bureaus like Experian, Equifax, and TransUnion are trying to add BNPL loans to credit reports while BNPL is growing in popularity. This means that failing to pay for these ostensibly innocuous services may eventually impact 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.

In addition to an unstable economy, missed and late payments 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 percent of Klarna’s staff were let go last month due to “a highly unpredictable stock market and a predicted recession.”

With possible financial concerns, BNPL services are drawing the attention of global government watchdogs. 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 more robust regulatory guidelines for BNPL entities last year.

With inflation at an all-time high and people finding it difficult to pay for necessities, Apple’s Pay Later will likely face the same scrutiny. But, by incorporating the idea directly into the iPhone, it also normalizes the BNPL practice, endangering both customers and other companies. Apple can draw the attention of the millions of iPhone users who use Apple Pay, but firms like Klarna, Affirm, and Afterpay don’t.

Pay Later is at odds with the company’s mission of giving customers technologies and services they can generally feel good about by associating something as dangerous as BNPL with the Apple brand. Tim Cook, the CEO of Apple, is quoted as saying, “We do the right thing, even when it’s not easy,” on Apple’s Ethics and Compliance page.