Beijing time on the morning of June 14th, at last week’s WWDC22, Apple announced that it had entered the crowded “Buy now, pay later” (Buy Now Pay Later, BNPL), putting pressure on fintech companies in the industry.
Apple has announced plans to launch an “Apple Pay Later” lending service, expanding a range of financial services products that already include mobile payments and credit cards. The service, nicknamed “Apple Version of Huabei,” will allow users to pay in four interest-free installments.
Not only does it provide technical services on applications, but Apple has also become a dedicated subsidiary – Apple Finance(Apple Financing Inc), where users conduct credit checks and lend money.
The subsidiary, which operates separately from the main body of Apple, has all the necessary state-level lending licenses, marking the first time Apple has included financial businesses such as lending and credit assessments within the company.
With the entry of a giant with a market value of more than 2 trillion, and the blessing of the iPhone, how many customers will Apple attract? This has put BNPL companies such as PayPal, Affirm and Klarna in an awkward position. Affected by this news,Affirm shares fell 17% last week.
Not only are giants entering the game, the BNPL market has already shown signs of trouble. Last month, Sweden’s Klarna laid off 10 percent of its global workforce, citing recession fears.
Reduced consumer spending, rising interest rates and deteriorating credit conditions are reportedly causing trouble for BNPL servicers and raising the prospect of consolidation in the industry.
According to consultancy GlobalData, BNPL is one of the fastest-growing segments of consumer finance, with transaction volume reaching $120 billion in 2021, up from $33 billion in 2019.
The BNPL business model was born in a low interest rate environment, which allows BNPL companies to raise funds at a lower cost and provide “point of sale” loans to users on shopping sites.
Buy now, pay later, as the name suggests, is a way to allow users to place an order first and pay after the goods arrive. Consumers can pay in installments over weeks or months, often interest-free, while BNPL charges the online retailer a per-transaction fee.
During the pandemic, the BNPL model has become popular among young consumers as e-commerce transaction volumes have soared. GlobalData data shows that for every $100 spent on e-commerce last year, $2 was done through BNPL.
But as the environment that fueled its explosive growth (the pandemic, etc.) is coming to an end, the industry is facing reckoning, with consumer spending cuts and rising interest rates pushing up BNPL’s financing costs, squeezing its profit margins. According to the data of 451 Research, an authoritative research organization,More than 100 BNPL companies worldwide.
Apple’s entry into BNPL will further intensify market competition. In fact, the news has briefly hit the stock prices of several listed companies, such as Firm Holdings, the largest BNPL company in the United States, and Zip and Sezzle in Australia.
Shares of these companies are already under pressure. Firm Holdings shares are down about 75% this year. Also, shares of Block, the payments company of Twitter co-founder Jack Dorsey, fell about 48%. In January, Block completed the acquisition of Australian BNPL provider Afterpay.
Financing difficulties
Bryan Keane, senior payments analyst at Deutsche Bank, said: “Investors are now more cautious about BNPL.Decreased desire to invest. Because if we were in an economic slowdown or a potential recession, financial risks could become apparent. “
A year ago, Klarna, Sweden’s top BNPL company, was valued at $46 billion. But recently, the company announced 700 layoffs, or 10% of its workforce. Klarna blamed changes in consumer sentiment, inflation and volatile international conditions for the layoffs. Klarna also said it was in talks with investors to raise more capital.
For smaller competitors, many of which are fledgling start-ups,Financing will become more difficult.
Jordan McKee, principal research analyst at 451 Research, said: “Most BNPL service providers cannot provide deposit services because they are generally not financial institutions, with a few exceptions. But generally, they need to borrow funds through to lend; their profit margins are bound to come under pressure as the interest rates associated with borrowing funds rise.”
By contrast, companies such as Klarna and Block have banking licenses and can finance through depositor deposits, so they are hardly affected.
Market Supervision
In addition to this, the industry is also facing increasing scrutiny from regulators.
On Tuesday local time, British charity Citizens Advice said,Among 18-34 year olds in the UK,Half used BNPL service. To this end, the UK Treasury has launched a consultation on how to regulate BNPL companies. In addition, Australia’s Financial Services Minister said on Tuesday that the government will regulate BNPL lenders under the Credit Act.
This didn’t scare some latecomers. British banking start-up Zopa announced on Tuesday that it will launch a BNPL product. Zopa Chief Commercial Officer Tim Waterman expects,Regulatory regulations to be introduced by the government will be more stringent in assessing the ability of customers to pay their loans.
“The affordability check will create more friction in the customer experience and potentially tip the scales for merchants,” Waterman said. “Currently, BNPL is very efficient in driving sales and conversions, and that may change slightly in the future.”
If BNPL can bring more customers to the merchant’s website, merchants may endure higher fees, but this is often only the strength of BNPL, said Keane, an analyst at Deutsche Bank.
“I think some of the smaller players in the industry may go out of business, or link up with other tech companies, or consolidate into larger companies,” Keane said. “Some large financial institutions may also be interested in M&A opportunities in the industry.”
Rob Galtman, a senior director at Fitch Ratings, believes any loan product could face higher default rates during a downturn; but BNPL firms may be protected because they can control what they do based on user behavior the line of credit offered. Also, they usually offer shorter loan terms. Galtman also said that Apple’s entry also proved the effectiveness of the service in the market.
Deutsche Bank expects the market to reach $482 billion by 2025, accounting for 5.6% of e-commerce spending, which includes travel and activities.
“Apple’s entry into the market sends a signal that BNPL is increasingly seen as a feature rather than a stand-alone business,” said 451 Research analyst McKee.
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