Apple sinks teeth into ‘buy now, pay later’ sector

The iphone maker’s move into Klarna territory will spook fintechs that have feared being crushed by tech giants, writes James Titcomb

Steve Jobs once told Drew Houston, the founder of Silicon Valley start-up Dropbox, that the company’s technology amounted to a “feature, not a product”.

The former Apple chief executive’s message, part of a gambit to acquire the online storage provider, was that its service would be easily copied and integrated by larger tech companies, leaving it hopelessly outgunned.

Houston turned down the offer, and Jobs proved to be incorrect: Dropbox became a profitable and independent company. But in a host of other areas, from location tracking apps to health monitoring, Apple has thrown entire industries into crisis with a simple software update, delivered to its more than 1.8bn devices in use around the world.

The latest example came on Monday, when the iphone maker revealed it would launch a zero-interest “pay later” service, in a direct challenge to companies built around the idea.

Apple Pay Later will launch in the US this year, allowing iphone owners who use Apple Pay both in store and online to split their purchases over four instalments and six months. Crucially, Apple is making it available wherever Apple Pay is, meaning retailers do not need to sign up as they do for existing “buy now, pay later” (BNPL) companies such as Klarna, Affirm and Clearpay.

For Apple, the service is another step into finance. The world’s largest company by market value launched Apple Pay in 2014, and in the US, has followed up with a peer-to-peer payments service and credit card venture with Goldman Sachs, part of chief executive Tim Cook’s strategy of expanding the tech giant’s empire beyond the gadgets for which it is best known.

For existing BNPL companies, however, the move could be devastating. Shares in Affirm, a San Francisco company that is big in the US market, fell by 5pc on Monday.

Klarna, Europe’s most highly valued start-up, is less exposed to the US but Apple’s entry is likely to shake investor confidence just as it seeks to raise new funds. A slump in tech valuations already means Klarna is expected to raise cash at around two thirds of the $46bn (£37bn) valuation it earned just a year ago. Separately, it is cutting 10pc of staff in a bid to get on top of costs.

“Consumers trust big tech more than financial services companies,” says Amy Gavin, of London-based fintech consultancy 11:FS. “They have demonstrated their confidence in Apple to provide banking services via the huge take-up of the Apple and Goldman Sachs credit card.”

BNPL services, which typically rely on a commission from a retailer, rather than charging interest or late fees, were turbocharged by the pandemic as more shopping moved online. A Financial Conduct Authority review of the sector found use of BNPL quadrupled in 2020 to £2.7bn. It is estimated to have more than doubled again last year, with over one in 10 consumers taking advantage.

The cost of living crisis could further encourage the sector. “In some ways, there’s never been a better time than now to bring this product to market,” says Tim Waterman, the chief commercial officer of Zopa, a British fintech company that will today announce plans to enter the space with a BNPL service. “We’re expecting the

‘I think the competition should be concerned. Apple has a huge customer base’

‘There’s much money to be made from pushing people to spend money they don’t have’

conditions are going to get tougher for consumers in the UK, and actually ushering in this sort of new era of pay-later products, which are much more focused on delivering better customer outcomes, we can actually help consumers.”

Zopa says its product will be aimed at large purchases between £250 and £30,000, and that unlike much of the industry it will run affordability and credit checks in anticipation of new regulation coming in. But Waterman expects a lot of providers to struggle against Apple.

“I think they should be concerned. Apple has a huge customer base. And they have the ability to really seamlessly integrate financial products into the user experience on the phone.”

Sebastian Siemiatkowski, Klarna’s chief executive, disagrees. In response to Apple’s announcement, he tweeted that “plagiarism is also the highest form of flattery” and that it would boost the industry as an alternative to credit cards. If British and European operators are threatened, they may take respite in Apple’s lethargic expansion of finance outside the US. Apple Pay debuted in Britain in 2015, a year after the US, and is now available in 72 countries, but the Apple credit card and money transfer services remain only in America, three and five years after their respective launches. It is easier to win local permission to sell iphones than to offer credit.

BNPL regulation in Britain seems inevitable. The Treasury has consulted on rules such as affordability checks and advertising restrictions, seeking to close an apparent loophole related to short-term credit. Providers argue they are better for consumers than alternatives such as credit cards, which can charge usurious interest rates, but the sector has been criticised for encouraging unsustainable spending.

Labour MP Stella Creasy, who has called for urgent regulation of BNPL providers, said Apple’s entry into the sector demonstrated the size of the problem.

“There’s so much money to be made from pushing people to spend money they don’t have that even Apple have joined the fray, but still there’s no sign of regulation from the Government of these legal loan sharks to protect consumers from being ripped off,” she said. The Treasury’s consultation on the industry closed five months ago, with no announcement yet.

Apple could face other problems launching outside of America. Last month, the European Commission accused the company of breaking competition law by controlling access to the iphone’s contactless chip, meaning only its own Apple Pay service can use it for purchases.

“Apple may have restricted competition, to the benefit of its own solution Apple Pay,” European competition chief Margrethe Vestager said. The Commission did not comment on whether it considered Apple Pay Later to be a similar infraction.

But Cook is unlikely to stop at the US border. Pay Later services could help drive sales of increasingly expensive Apple devices, making it a priority rather than a side project. Earlier this year, the company paid $150m for UK start-up Credit Kudos, which uses “open banking” data to make credit decisions.

BNPL companies could decide whether they are a feature or product sooner than hoped.