Apple's plans can Shake up BNPL

Apple has set the cat amongst the pigeons by announcing its foray into Buy Now Pay Later (BNPL). In an earlier whitepaper, we had taken a view that BNPL is not viable as a standalone product and is more sustainable as part of a larger financial services ecosystem. Well, enter Apple, the big daddy of ecosystems with a billion plus active users.

What sets this product launch apart from Apple’s other financial services offerings is that the company  has decided to enter this space on its own rather than in partnership with banks or financial services providers. Apple partnered with Goldman Sachs for its previous financial services offerings like Apple Card & Apple Cash. This is believed to have been done to enable a faster global rollout without having to be dependent on local banking partnerships. Another possibility is that Apple would like to earn higher yields on its cash reserves which currently stand at over USD 200 billion by deploying its own balance sheet for lending operations.

BNPL providers have been under severe pressure of late. Regulatory loopholes like not checking credit scores & not reporting to credit bureaus are likely to get closed soon. Complaints from legacy banks about the lack of a level playing field for them are getting addressed by regulators in most jurisdictions by requiring BNPL providers to report credit defaults to bureaus. Meanwhile, Legacy financial institutions have started launching their own BNPL offerings and have been taking market share on the basis of their superior credit underwriting expertise and greater access to customer data (especially on their existing customers).

We believe Apple has strategically addressed all the factors that contribute to success in BNPL. These are: 1) a huge base of users who are accustomed to using the Wallet app through which Apple’s BNPL product is to be delivered, 2) and a ready payment infrastructure through Apple Pay, 3) hyper granular access to customer data through the Apple device and Appstore ecosystem. In addition, Apple has decided to leverage its recent acquisition of Credit Kudos, a UK based open banking & credit scoring company, to rapidly gain credit underwriting expertise.

What will set Apple’s BNPL product apart from competing offerings is that Apple’s user base skews towards higher incomes and thus likely to have better credit profiles. This is in contrast to the current leaders in BNPL which are preferred by new to credit and younger customers. Apple users interact with Apple services multiple times a day and provide a stream of data which will surely be used to pre-approve credit limits. However, this is likely to attract regulatory attention, as it would give an unfair advantage to Apple which is not available to other BNPL providers. Additionally, many jurisdictions like the EU, US etc are on the verge of enacting stringent laws to regulate the types of data that Big Tech firms can collect and use.

Lending businesses live and die by their ability to get money back from their customers. While it is always easy to find willing borrowers, it is in getting money back that financial institutions typically falter. For large ticket credits like vehicle loans and mortgages, it is viable to use collections services for recoveries in case of default. For small ticket items like BNPL (which are unsecured to boot), other levers must be pulled. BNPL providers have used intangible penalties like blocking access to their apps when customers fail to pay back their loans. For Apple, bricking iPhones and blocking access to Apple apps are options to encourage repayments. However, these options are likely to be a public relations nightmare for the firm, and hence we believe Apple will be unlikely to adopt such extreme methods. Meanwhile, employing collection agents is likely to be financially viable only for higher ticket purchases.

The coming months will make it clear what aces Apple is holding in its sleeve to make its BNPL offering a success. The current inflationary environment will put severe stress on incumbent players’ balance sheets and may lead to many going out of business. Apple’s rock solid balance sheet will ensure it is able to withstand macro headwinds and be the last man standing to capture market share vacated by weaker players.