How the Apple Buy Now, Pay Later Service Could Work

Today, Bloomberg reported that Apple and Goldman Sachs are developing a buy now, pay later (BNPL) service. The Bloomberg article is behind a paywall but the BGR article about the Apple buy now, pay later service is available on MSN. The service would compete with similar services from Klarna, PayPal, and other major payment processors and banks.

Like the other services, the Apple BNPL service would allow consumers to make four zero-interest installment payments. These payments would occur every two weeks, while competing BNPL providers typically use four single-week payment periods. Consumers could also extend their installment payments over a longer period by taking out a loan from Goldman Sachs. This service would add interest charges to the installment payments. Here’s how the process could work.

Financing Credit Card Purchases

With this service, a shopper makes a purchase with their credit card using Apple Pay. If the shopper selects the Apple Pay Later option, Goldman Sachs pays for their credit card purchase immediately and enters into a new installment payment contract with the borrower. So the consumer needs to have a credit card linked to Apple Pay to use the BNPL service. You can use Klarna if you only have a debit card as long as you have a credit history that the bank can check.

Apple Pay Later sounds similar to how Chase’s buy now, pay later service works. Chase allows you to turn a purchase you’ve made with a credit card into a long-term installment loan. The interest payments are built into the installments, just like how it works with the long-term Apple loans. The size of each installment payment is fixed and interest does not accumulate on the balance of the loan.

The Chase BNPL service is handled directly by Chase and doesn’t require the merchant’s participation at all. You turn a credit card loan from Chase into an installment loan from Chase. But that also means that Chase’s BNPL service isn’t subsidized by the merchant, which is an important factor to consider.

Merchants Subsidize Zero-Interest BNPL Services

I recently saw an article by the founder of an Australian buy now, pay later company. He explained that it was difficult for Australian BNPL apps to enter the US market because the major BNPL services already had long-term agreements with merchants. Those contracts could prevent Apple and Goldman Sachs from entering directly into partnerships with merchants as well, which explains why you need a credit card to use Apple’s service.

BNPL companies like Afterpay, Klarna, and PayPal charge fees in the 4 to 6 percent range to merchants. A bank can offer zero-percent financing on a short-term loan because it’s really collecting its interest fee from the merchant. From the merchant’s perspective, BNPL payments aren’t free, but it’s still worthwhile to offer this service because it encourages shoppers to spend more money.

Fashion and beauty retailers and department stores frequently offer BNPL services. These stores also mark up their prices and hold regular sales where they sell their merchandise at large discounts. They have lots of flexibility when they set their retail prices and may increase them to cover the BNPL fees.

Some BNPL Services Are Not Subsidized

When the bank offers the BNPL service directly, the merchant doesn’t finance the transaction. From the merchant’s perspective, the shopper just made a purchase with their credit card. After that, the loan is governed by the contract between the shopper and the credit card company.

With direct financing, the merchant doesn’t need to pay a BNPL fee or install additional software to process the transaction. It just needs the equipment it already uses to process credit card payments. The merchant still has to pay the interchange fee for the credit card sale, but that’s typically around 3 percent so it’s lower than the BNPL fee.

Meanwhile, Apple is competing with several other BNPL providers that offer short-term, zero-interest installment loans. So if the short-term Apple loans included interest payments, the Apple service might not be competitive. And it appears that Apple will offer eight-week installment purchase plans that don’t require the borrower to pay interest.

Conclusion

Using Apple’s BNPL service to make an installment purchase that you plan to pay off in eight weeks is a good deal. You get twice as much time to pay off the loans from Goldman Sachs than you get from the other BNPL service providers like Klarna and PayPal, and these loans don’t include any built-in interest payments.

But using Apple’s BNPL service to take out longer-term installment loans may not be a good deal. If merchants aren’t subsidizing the short-term installment loans by paying fees to Goldman Sachs, the bank may use the interest it earns on the long-term loans to keep the short-term loans interest-free. If that’s the case then other BNPL service providers may offer lower long-term interest rates on installment purchases.

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