Apple Shutting Down Pay Later Is An Even Bigger Deal Than You Think. It’s Huge.
Plus, embattled Evolve Bank & Trust reportedly hit by massive ransomware attack.
Number of the Week: $40 billion (explanation below)
Apple Shutting Down Pay Later Is An Even Bigger Deal Than You Think. It’s Huge.
Whenever Apple launches a new service that’s intended to disrupt a market already dominated by disruptors, the world expects Apple to do what it does best: use breathtakingly simple technology and lean into a fiercely devoted customer base to elbow its way in and carve out sizable market share.
Think Apple Music (Spotify, Amazon Music, Pandora), Apple TV+ (Netflix, Amazon Prime Video, Disney+), Apple Pay (PayPal, Venmo, Zelle, Cash App), and Apple Card (Citi Double Cash, Capital One Venture Rewards, Chase Freedom Flex).
So when Apple launched its Pay Later service in March 2023, buy now, pay later (BNPL) providers including PayPal, Afterpay, Klarna, Affirm, Sezzle and Zip predictably girded for battle with the tech giant. Apple Pay Later gave U.S. users the ability to split purchases into four payments over six weeks without interest or fees. Pay Later users could apply for loans up to $1,000 to make online and in-app purchases on iPhones and iPads with merchants that accepted Apple Pay, including more than 85% of U.S. retailers.
From the start, Apple had an immense launchpad for the Pay Later service: There are an estimated 124.7 million iPhone users in the U.S., and 45% of Americans own an iPad. By 2023, there were 55.8 million Apple Pay users in the U.S., with the number projected to climb to 60.2 million this year and 67 million by 2026.
Just 15 months after its debut, and in spite of its early gains in the BNPL market, Apple shut down its Pay Later service. As of June 17, no new loans would be offered for purchases made with Apple Pay, but existing loans and purchases would not be affected by the termination of the Pay Later service, according to the company’s website. (Pay Later was offered by Apple Financing LLC, which was responsible for credit assessment and lending; the service was enabled through a relationship with Mastercard and Goldman Sachs.) “The inevitable hurdles Apple was navigating to maintain its own branded [BNPL] offering were likely more trouble than they were worth. In the end, allowing other established solutions to exist in Apple Pay will probably result in a better customer experience for those Apple Pay customers who use BNPL,” said J.D. Power’s Miles Tullo, managing director, financial services.
Still, termination of the Pay Later service was somewhat stunning given that Apple—the second most valuable company behind Microsoft (and, briefly last week, Nvidia), with a market cap of $3.2 trillion—rarely fails at anything.
But if you consider Apple Pay Later’s adoption rate in its short life, this was hardly a case of failure. In the service’s first three months, nearly one-fifth (19%) of BNPL customers used Apple Pay Later, leapfrogging Sezzle and Zip, according to a 2023 J.D. Power consumer survey on BNPL usage. Apple Pay Later amassed nearly half and more than half the market share of BNPL’s two most-used providers in far less time in the market: PayPal, the leading BNPL brand over the same period (39%), launched its “Pay in 4” installment product in 2020, while Afterpay, the second-most frequently used BNPL provider (33%), launched in the U.S. in 2018. (Afterpay was founded in Australia in 2015; in 2021, it was acquired by Block in an all-stock deal, of which it is now a wholly owned subsidiary.)
By February 2024—11 months into its existence—Apple Pay Later ranked sixth in J.D. Power’s 2024 U.S. Buy Now Pay Later Satisfaction Study, scoring 643 on a 1,000-point scale, behind Plan It by American Express (695), My Chase Plan (686), Citi Flex Pay (676), PayPal’s Pay in 4 (656), and Zip (655), but ahead of Klarna (633), Sezzle (630), Afterpay (626), and Affirm (618). Overall customer satisfaction was measured across six dimensions: customer support, making purchases where desired, perks for making purchases, reasonableness of terms, digital review and account management, and security of account information.
The study’s findings show that customers were more satisfied with Apple Pay Later than BNPL giants Klarna, Sezzle, Afterpay and Affirm, indicative of Apple’s brand loyalty and ability to deliver on customer experience.
Apple is known for bold thinking, constantly evolving innovation and ability to penetrate markets poised for explosive growth, hence the initial appeal of BNPL. In 2023, the global BNPL market size was $156.58 billion and was expected to reach $232.23 billion in 2024. Over the next four years, the global BNPL market size is projected to grow at a compound annual growth rate of 44.6%, hitting $1.01 trillion by 2028. North America was the largest region in the buy now, pay later market last year; Asia-Pacific is expected to be the fastest-growing region between 2024 and 2028.
But bigger things were on the horizon. The tech giant’s sudden exit from the BNPL market was preceded by an announcement at its Worldwide Developer Conference 2024 (WWDC24) that foreshadowed the end of Apple Pay Later. Starting in the fall, iPhone and iPad users in the U.S. will have the option to apply for BNPL loans directly from Affirm when using Apple Pay to make online and in-app purchases.
The partnership with Affirm is also a signal of where Apple intends to position itself in the payments ecosystem. “Affirm is the undisputed market leader, adding about 50,000 to 100,000 new users per month to their financial services super app, not just BNPL,” Richard Crone, CEO of Crone Consulting LLC, said in an email to FIN. “Affirm also has more than 1 million Visa credit card holders that will be instantly populated into Apple Pay along with all the other alternative payment types spawned from Affirm’s financial services super app.” (Crone’s observations about Affirm are based on the consulting firm’s independent estimates, not public disclosures made by the company.)
Calling Apple’s move “brilliant,” Crone said that since Apple Pay is not limited to just partnering with Affirm and can support all other BNPL providers, Apple stands to “get 15 basis points on every transaction, the same take-rate as on credit cards. In fact, the high-water mark is what they charge in the iOS App Store, which is a one-third take-rate.”
When you consider the broader implications of Apple Pay’s expansion, it becomes clear that Apple’s impact on the payments universe is about to change in very substantial ways. Notably, expanded browser support across Google Chrome, Microsoft Edge and Apple Safari means that Apple Pay will now be accessible to 89% of the e-commerce market, driving up sales and conversion rates because “desktop browser purchases have double the conversion rates and 22% higher order values than mobile,” Crone said.
It will also greatly enhance security, streamlining checkout with multifactor biometric authentication. The upshot of these features as Crone sees it: “Combined with more than 550 million active users, Apple Pay browser integration will take precedence over any consideration to add individual alternative payment types because merchants and payment facilitators will have access to new tender types.”
At its WWDC24, Apple also announced that with the release of iOS 18 this fall, loans will be offered through credit cards, debit cards and lenders when customers use Apple Pay. Customers will be able to redeem rewards with Discover and Synchrony, and across Apple Pay issuers with Fiserv in the U.S., and access installment plans from credit and debit cards through ANZ in Australia, CaixaBank in Spain, HSBC and Monzo in the U.K., and Citi, Synchrony, and issuers with Fiserv in the U.S.
This is a direct attempt by Apple Pay to get out in front of Visa Flexible Credential, which will map multiple funding sources to a single card, whether virtually or at the physical point of purchase, once Visa’s U.S. pilot is rolled out later this year. By offering issuers more options to add various account types and credentials, Apple Pay is giving consumers the ability to choose their preferred payment type and method. “Apple Pay’s upgrades in this release essentially deliver on all the promises of Visa Flexible Credential, but with a proven user interface for selecting alternative payment types at the point of purchase, especially the physical point of purchase,” Crone said. “Visa Flexible Credential lacks a standardized, universally accepted digital wallet of the scale of Apple Pay.”
This kind of digital wallet transformation by Apple Pay will facilitate the rise of alternative payment types, cutting into the market long dominated by traditional bank-centric credit and debit cards. In the U.S., credit card purchasing volume accounted for $5.6 trillion (53%), while that from debit and prepaid cards was $4.9 trillion (47%), according to Nilson Report data.
As for the future of the global BNPL market, even if the projected growth materializes, it will likely be dominated by well-established players, limiting future new entrants to credit and debit card issuers that offer post-purchase conversions to fixed payment plans rather than new point-of-sale checkout options. “This is a difficult market to enter, and the benefits of doing so may be limited given the opportunity size and competition. New entrants must be able scale consumer usage and merchant acceptance, underwrite carefully, provide slick technology, enable cancellations and returns, and so much more.” J.D. Power’s Tullo said. “The market may be reaching its full potential.”
Apple’s shrewd move to make Apple Pay central to all payment types, methods and providers is a much bolder, more interesting and likely more profitable strategy than continuing to build its own BNPL service—with far less credit risk. With Affirm now on board, Apple Pay is positioned to benefit from the “feeding frenzy” to come from rival BNPL providers eager to participate, while also setting the pace for future innovation across the payments landscape. “The Apple Pay updates promise to open more doors for all buy now pay later providers, making the selection of BNPL through Apple Pay more streamlined than using a credit ‘card’ for making purchases, especially for in-store purchases,” Crone said. “Essentially, Apple Pay acts like the iOS App Store for enabling new ‘payment applications.’”
Noted & Noteworthy
From bad to worse: Evolve Bank & Trust, the embattled former banking partner of now-bankrupt Synapse, reportedly has been hit by a major ransomware attack. Today, Lockbit, a Russia-linked ransomware group, posted a large cache of files (21 separate links) that are property of Evolve Bancorp, the parent of Evolve Bank & Trust. An alleged 33 terabytes of data from Evolve’s systems were released, including clear text files with end users’ personally identifiable information, such as Social Security numbers, card primary account numbers, wires and settlements. Fintech Business Weekly’s Jason Mikula reported that while “the authenticity of and potential scope of the data breach couldn't immediately be verified by Fintech Business Weekly,” industry sources who have reviewed the data said the situation was “as bad as it gets.” The attack is unnerving as Evolve Bank & Trust partners with many high-profile fintechs including Stripe, Mercury, Affirm, Dave and TabaPay, among others. Timing is everything: Evolve Bank and Trust was just issued a “cease and desist” order by the Federal Reserve Board, citing the bank for its IT practices and deficiencies in risk management and compliance.
Brex’s Ali Rathod-Papier, global head of compliance, has stepped down and is joining Andreessen Horowitz as a partner and compliance officer, TechCrunch exclusively reported, noting that Rathod-Papier’s arrival at the venture capital firm “comes at an interesting time.” Indeed, Andreessen Horowitz invested in Synapse, touting it as “the AWS of banking” before it blew up in spectacular fashion. The trustee in charge of the Synapse bankruptcy, Jelena McWilliams, has reported that $65 million to $96 million of customer funds held in For Benefit Of (FBO) accounts are missing, devastating the financial lives of many customers. Meanwhile, Synapse founder and former CEO Sankaet Pathak walked away seemingly unscathed, raised $10 million from Tribe Capital and launched Foundation, a robotics startup. The accuracy of Pathak’s claims around funding and customer acquisition in emails sent to prospective Foundation investors, however, has already raised questions.
No longer in sync with the 9-5 business operations of post offices, pharmacies and banks, the average American is increasingly turning to fintechs for the convenience and flexibility they afford consumers pressed for time, but keen to stay on top of their finances. New research commissioned by Chime in partnership with the Financial Technology Association and conducted by Talker Research finds that:
Close to two-thirds (63%) of consumers said they find digital banking apps more convenient than their in-person bank (28%). On average, they use digital banking or financial apps four times per week.
Over half (59%) of fintech users said they have more control over their finances when they use a banking or financial app. Many prefer it over physical banks because it saves them time (66%) and allows them to conduct personal financial business from home (56%).
Nearly a quarter (23%) of consumers admitted if they didn’t have access to a physical bank, such as when residing in a “banking desert”—areas without a physical bank in a 10-mile radius, populated by more than 4,000 people—then it would have a big impact on how they manage their finances.
Seen and Heard…
Apple is now the first company to be charged by European Union regulators for violating the Digital Markets Act (DMA) over its alleged anti-competitive App Store policies. The European Commission concluded its preliminary investigation and informed Apple of its findings. The Commission also opened a new non-compliance procedure against the tech giant over concerns that its new contractual requirements for third-party app developers and app stores, including Apple's new “Core Technology Fee,” fail to ensure effective compliance with Apple's obligations under the DMA. …Klarna has sold its checkout business for $520 million to an investor consortium to get out from underneath conflicts of interest with Stripe and Adyen, according to Bloomberg News. Klarna Checkout enables merchants to work directly with Klarna to put its offerings on their site while also partnering with payment service provides like Stripe or Adyen to make Klarna products available. Ownership of the checkout business will be assumed by the buyers on October 1st. …In other BNPL news, Zilch raised $125 million in debt financing from Deutsche Bank in a bid to triple sales in the next couple of years and position it for an initial public offering in the next 12 to 24 months. The debt was structured as a securitization, with multiple loans packaged together. The deal will enable Zilch to tap up to $315 million of credit, including from different banks.
FINvestments
🦈 Number of the Week: Revolut seeks an eye-popping valuation that could exceed $40 billion—more than the market caps of Barclays, NatWest, and Deutsche Bank—in a $500 million share sale, including employee shares, the Financial Times reported. This would make Revolut the most valuable fintech startup, far exceeding the valuations of rivals Wise ($8.9 billion), Monzo ($4.6 billion) and Starling ($3.2 billion). Monzo and Starling have banking licenses; Revolut, a fintech super app, is still waiting for its banking application to be approved.
🦈 Gynger, an embedded financing platform for B2B technology purchases, has raised $20 million in Series A funding, led by PayPal Ventures, with participation from Gradient Ventures, Velvet Sea Ventures, BAG Ventures and Deciens Capital. The company intends to use the capital to scale operations and transform its platform into a full payments solution to facilitate the corporate buying and selling of technology. It also secured a debt facility from Community Investment Management (CIM), which has agreed to fund up to $100 million. The agreement will enable Gynger to increase its technology spending to meet customer growth and demand.
Gynger’s capital raise and planned expansion could be well timed. As the economy continues to improve, technology spending is expected to increase 5.3% in 2024, reaching $4.7 trillion with growth occurring across Asia Pacific (5.7%), North America (5.4%) and Europe (5.1%). The growth will be primarily driven by more spending on software and IT services (generative AI, cloud, security and digital) and economic growth in the Asia Pacific region, according to Forrester’s Global Tech Market Forecast, 2023 to 2027.
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