Mechanics of Apple’s newly launched BNPL Service

Here is the summary:

• Unlike the Apple Card, where Apple serves primarily as a marketing and UX frontend for Goldman Sachs, Apple is providing far more of the functionality tied to Apple Pay Later.
• “Apple Inc. will handle the lending itself for a new “buy now, pay later” offering, sidestepping partners as the tech giant pushes deeper into the financial services industry.
• A wholly owned subsidiary will oversee credit checks and make decisions on loans for the service, which is called Apple Pay Later. The business — Apple Financing LLC — has necessary state lending licenses to offer the feature, though it operates separately from the main Apple corporation…”
• While Apple is in-sourcing capabilities it relied on Goldman for with the Apple Card, it’s still dependent on the bank for some of the capabilities that power Apple Pay Later.
• Apple needs Goldman, its network partner Mastercard, and, presumably, its processor CoreCard, to handle some elements of the payment processing.
• When a user chooses to split pay a transaction, in the background, Goldman is likely issuing a virtual card for the amount of the purchase.
• While invisible to the user, that virtual card is used to process the transaction and pay the merchant. The transaction generates interchange income, most of which would go to Apple, but some of which, presumably, would get shared to Goldman, Mastercard, and the payment processor.
• Further, because Goldman holds more than $10 billion in assets, it is not exempt from the Durbin Amendment’s cap on debit interchange — meaning the income earned could be lower than if Apple partnered with a smaller bank on the program.
• The average interchange fee of a covered transaction is just $0.23 — about half the average fee of Durbin-exempt debit transactions.
• Apple then collects repayment from the user via their linked debit card — and pays processing fees to do so.
• While fraud losses should be significantly lower for Apple Pay Later vs. a standalone BNPL provider, given the authentication and additional data Apple holds on users, they’re unlikely to be zero.
• Apple will conduct a soft credit check, presumably when users initially enroll in Apple Pay Later. And Apple customers skew higher income and higher credit score than the overall population. But while credit losses are likely to be lower than other BNPL providers, again, they are unlikely to be zero.
• Can Apple make these economics work? With the information we have, it’s impossible to say — hopefully, future disclosures can shed additional light on the interchange revenue, payment processing costs, fraud, and credit losses.
• Even if the unit economics work, it’s unclear how significant the BNPL offering could be in the US market.
• While consumers have certainly shown a willingness to use BNPL, that may not generalize to Apple customers or the UX of how Apple is deploying this — as an extension of Apple Pay, as opposed to integrated in merchants’ shopping experience, as is the common approach of BNPL providers.
• Doing some quick back of envelope math, there are something like 113 million iPhone users in the US. But estimates of the proportion that actually use Apple Pay are as low as 6% in one survey.
• Of the ~7 million US Apple Pay users, how many could be convinced to use the Pay Later functionality?
• Higher earning, higher credit score Apple customers have access to a variety of payment and financing mechanisms — namely, credit cards. Using Apple Pay Later, which can only be linked to a debit card, would mean foregoing credit card rewards points.
• For users who don’t typically carry a credit card balance, convincing them to use Apple Pay Later may be an uphill battle.
• That winnows the population most likely to consider Apple Pay Later to iPhone users, who use Apple Pay, who are willing to trade credit card rewards points for short-term (6 week) financing — neither the largest TAM, nor the most compelling value proposition.
• Still, Apple Pay Later may attract more people to use Apple Pay who previously had not. And it is likely to make those who use it even stickier (and more profitable) users of the overall Apple ecosystem.
• Apple has shown patience in building new business units, like its services and media properties. Surely, Apple Pay Later is but a waypoint on Apple’s larger financial services journey.