Memo: Apple’s BNPL Ambitions

There are two classes of buy now, pay later services being formed. Klarna, Affirm, and others are competing for the masses. In a time of economic distress, those masses are relying upon BNPL more than ever. According to Credit Karma, 60% of debt users are more likely to use BNPL because of inflation. Apple is taking a different approach for a different kind of customer and it may have something to do with recent news from the Cupertino hardware and software giant.

Apple Pay Later is missing from iOS 16, delaying the company’s entrance into the buy now, pay later market. Reports have swirled that technical and engineering issues were the reason for the delay. Here’s our take. Apple could also be hitting pause after surveying the current economic landscape and the state of other BNPL competitors.

As Bloomberg points out in its iPhone 14 review, there’s no set time frame for when Apple Pay Later will be available – it could be in the spring with the iOS 16.4 update or it could be sometime this fall. Apple is likely waiting until its feature is perfect but there’s reason to believe it’s waiting until the current inflationary period passes in order to get in front of the right customer. To understand where Apple Pay Later fits into the market, it’s important to look at what’s happening in the broader BNPL space.

On Friday, Klarna announced that it will be undergoing a restructuring that will include layoffs and a focus on profitability over growth, Bloomberg reported. About 10% of the company’s 7,000 employees would be cut under COO Camilla Giesecke’s vision for the path forward. This comes as Klarna’s losses have mounted, it’s been hurt by macroeconomic forces like the war in Ukraine, America’s 9+% inflation, and recession. Private market investors have grown wary of companies that aren’t profitable. From Bloomberg:

Klarna’s losses tripled in the first half of the year. [CEO Sebastian] Siemiatkowski has said that Klarna can’t afford to be “as forward leaning” while investors are becoming more cautious on the industry, and said he aimed to bring the business back to profitability. The company’s model makes it vulnerable to rising costs that might force customers to cut spending or affect their ability to repay their loans.

Klarna, which has become a leader in the BNPL space, extended out “over its skis” as it looked for ways to grow beyond “just” payment solutions. In past coverage, Klarna has said to have goals of becoming the power platform behind the online shopping mall.

Affirm, meanwhile, announced a new partnership with Amazon on Monday to expand on the retailer’s platform in Canada. By deepening its relationship with Amazon, Affirm is attaching itself to a massive partner who can help it stretch into new areas without the cost typically associated with expansion. In a similar move, Afterpay parent Square also said this week that it will launch Afterpay in Canada to get its BNPL services in front of more customers.

Affirm and Afterpay are eyeing untapped landscapes as Klarna stumbles and Apple Pay Later looms: it’s likely a winner-takes-all for the remaining players after Apple launches its own offering. At least for traditional consumers, Apple’s BNPL strategy may differ from the rest. Like the Apple Card (backed by Goldman Sachs), Apple may be focusing on wealthier credit clients. More on this in a moment.

All of this is happening as inflation remains high in the US. Klarna and its peers are vulnerable to tighter budgeting, shorter household cash flows, and limited spending. With many people experiencing tougher times, they are more likely to default on payments, opening the model up to risks.

However, in a US survey, 60% of people were found to be more likely to use BNPL because of inflation, and 53% were using BNPL out of necessity. Forty-five percent said they were were most likely to use BNPL when their finances are tight. That means that Klarna’s troubles aren’t to be blamed on a decline in interest on BNPL. But rather, a more tenuous financial outlook makes people more reliant on services like BNPL. For many, it’s a way to make purchases now without taking on credit card debt. It’s a dangerously unregulated substitute for traditional debt.

That raises questions about Apple’s own service and how it wants to differentiate itself from others in the market. Apple is likely looking for a more premium BNPL user, one that it can link to and turn into an Apple Card owner. Apple Pay Later purchases were previously said to be capped at $1,000, meaning Apple is positioning smaller-ticket purchases for APL, while Apple Card would be used for bigger investments. Apple Pay Later is a convenient alternative to credit for people who have the option – it’s not a necessity. Apple Card also gives perks like cashback, which APL doesn’t, but if it’s an entrypoint to Apple Card, it’s a step in that rewards direction. Apple Pay is also already a trusted service, so Apple could get the sign-off from customers who may be wary of other BNPL services. It’s also a convenience factor: Apple stores all information about upcoming payments in the Apple Wallet, keeping payment trackers and reminders in one place.

That could help Apple Pay Later succeed where other BNPLs falter. Klarna’s most recent announcement follows a year of disruption, which we reported on in June:

What is the main culprit causing Klarna’s valuation to tank after such soaring heights? Is it being in the sights of Apple’s next ground capture? Or PayPal developing its own competitive products? Is it the regulations emerging in the UK against Klarna and its peers over predatory practices appealing to young customers? Or is it the sobering up of venture capitalists as we loom on the brink of a recession? It’s likely a combination of the above.

Apple has the ability to withstand obstacles like regulations and a recession in ways that Klarna and its peers may not – at least not to the same degree. Apple’s advantage may grow against AfterPay, Affirm, Klarna, and others. Apple’s payment systems are native to its operating system and hardware, an advantage that other financial technology companies do not seem to share.

Regulations have begun to ramp up. After undergoing scrutiny in the UK for practices that lure young customers into incurring debt, BNPLs are finding themselves facing regulations in the US by the Consumer Financial Protection Bureau, Fox Business reported on Monday. The agency does not currently oversee BNPLs, but new guidance would apply the same standards for credit cards to the sector. If Apple only lends to Apple Card holders, this regulation would benefit them.

BNPL lenders would be subject to “supervisory examinations”, like credit cards, Fox Business reported. Risks assessed by the agency include user privacy and data protection – something that Apple, which already runs Apple Wallet and Apple Card using security measures like Face ID, has an advantage in. At the same time, the CFPB is wary of a monopoly that would consolidate market power, “reducing long-term innovation, choice and price competition” while giving a few big players access to an outsized amount of consumer data.

In BNPLs, competition is a positive, the CFPB posits. From the Fox Business report:“In the United States, we have generally had a separation between banking and commerce,” [CFPB Director Rohit] Chopra said. “But, as Big Tech-style business practices are adopted in the payments and financial services arena, that separation goes out the door.”

With all of that being said, Apple Pay Later is still mysteriously delayed. When you look at the BNPL landscape, the company could be waiting until the right time to release its own entrant into the market. Once competitors start building back up, Apple could come in and disrupt the entire category. But for now, it’s waiting – for the right product, the right customer and the right conditions.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams 

Member Brief: Klarna’s Challenges Ahead

Venture-backed consumer technologies thrived throughout the decade-plus long bull market. Profitability was secondary to growth. Market capture was the key performance indicator. The buy now, pay later (BNPL) industry is one of those industries facing the strongest headwinds.

From $5.5 billion market capitalization and up to a $46 billion before falling to $15 billion and dropping: Klarna’s rollercoaster valuation over the past two years is symbolic of the larger buy now, pay later cohort of fintech companies that promised to change the way we consume online. For online retailers, BNPL represented a promise of higher conversion rates for costly products. According to recent reports, the investment capital has dried up. Of all of the recent reports on the matter, WIRED’s was the most thorough:

Klarna’s dream—to replace credit cards, which Siemiatkowski describes as “the worst form of credit”—is facing a series of existential threats. The company’s workforce is still reeling from layoffs that affected 10 percent of its staff and new regulation which will impose stricter rules on BNPL providers in the UK, one of its key markets. At the same time, BNPL executives told WIRED that investors are losing faith in the sector in the face of a potential recession.

What is the main culprit causing Klarna’s valuation to tank after such soaring heights? Is it being in the sights of Apple’s next ground capture? Or PayPal developing its own competitive products? Is it the regulations emerging in the UK against Klarna and its peers over predatory practices appealing to young customers? Or is it the sobering up of venture capitalists as we loom on the brink of a recession? It’s likely a combination of the above.

What it all means is that Klarna and companies like it, including Affirm and Afterpay, will need to place greater ambitions for taking over online shopping on the backburner in order to focus on core product and profitability. It’s back to reality.

The most apparent form of that reality is the impending regulation that 2PM forecasted back in 2020. As BNPL normalizes, more attention will be paid to how these companies operate. From the recent report in WIRED:

The problem of the summer surge in competition is compounded by the UK government’s plan, announced on June 21, to require lenders to carry out affordability checks on people using BNPL, to make sure they can afford the loans they take out. (1)

This was predictable based upon our study of the consumer debt cycle in China, a country that adopted the democratization of this form of debt long before the United States.

Like millions of people around the world, Zhang Chunzi borrowed money she thought she’d be able to repay before the coronavirus changed everything.

Now laid off from her job at an apparel exporter in Hangzhou — one of China’s most prosperous cities — the 23-year-old is missing payments on 12,000 yuan ($1,700) of debt from her credit card and an online lending platform operated by Jack Ma’s Ant Financial. “I’m late on all the bills and there’s no way I can pay my debt in full,” Zhang said. (2)

China has since regulated their accessible consumer credit industry. In America, regulations could lead to a ripple effect, putting a leash on Klarna and other BNPL’s bounds by enacting borrowing protections typical of regular credit. According to the UK government’s statement, BNPLs are “rapidly increasing in popularity, resulting in potential risk of harm to users.” As more risks behind BNPL schemes – which can sometimes seem too good to be true – are made apparent, users could second guess whether or not to use them at all.

Klarna and its peers are not the only class of disruptors who are facing growing pains. The glory days are over for other companies like Uber and Airbnb, and the industries they operate in. Ride share companies in New York City often make less sense than hailing a taxi, while rates have ballooned in all markets to make up for driver shortages. Uber is in ongoing legal battles over whether or not its drivers count as employees, as regulations hit the rideshare industry. Airbnb is wading through customer backlash as people report poor experiences and stacked-high fees that make hotels the better option in comparison. How Airbnb began, versus where it is now, is drastically different: it’s playing into the housing crisis and struggling to maintain quality across its rental options as its inventory has become more and more expensive.

When disruptor companies grow out of their scrappy startup stages, they face realities of incumbents: regulation, widespread competition and fewer outside funds. For BNPL companies, the biggest threat is being replicated by institutions that have the customer base and protections to withstand regulations. Why outsource your payments to Klarna when you could use Apple Pay? And who says Apple and PayPal are the last to step into this territory. This scenario is reminiscent of a concern that we published in 2020 on The Credit Report. In it, we explain what happened to the debt bubble in China:

According to Atlantis Financial Research, defaults in China have risen from 1% to 4%. And with overdue credit up 50%, delinquency has increased from 13% to 20%. Once a conservative country with respect to debt-to-income ratios, China’s consumer habits mirror America’s. The aggregate debt load of China has doubled since 2015. Globally, it’s even more frightening. Some projections by the International Labour Organization cite 25 million global jobs lost with a potential debt load of $3.4 trillion. But here in the United States, economic matters are shaping up to be an historic outlier of devastation.

This makes debt alternatives more risky than the traditional credit institutions, a realization that only seems to arrive as bull markets become bear markets. Here is that TL;DR from that now two year old report on the matter:

In the short-term, there is a train headed towards the consumer economy that can only be slowed. If China’s response to a weakening economy is any indication, the corporate and consumer debt bubbles are in danger.

For now, BNPL firms are going to try to distance themselves from the BNPL tagline. According to WIRED, Klarna, Affirm and others will focus on profits as well as other financial services like debit and wallets. Klarna’s modest valuation could set the space on a more responsible track. It’s the market leader of the new era of fintech creditors like Afterpay, Zip, Sezzle, and Affirm. In pursuing profitability and product diversification, its next steps will serve as a bellwether for the rest of the industry.

By the 2PM Team 

Informe para los miembros nº 14: El co-signo de la marca

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Introduction to intra-package advertising. About four months ago, a few things happened in a short period of time. There began early conversations around Facebook and Google’s privacy shortcomings, marketers began discussing ever-increasing top funnel advertising costs, and I began thinking through methods for vertical brands to offset their growing logistical costs. To solve for all three, I proposed a simple solution to a few high-volume, brand equitable retail startups: offer promotional space within your existing packaging to a like-minded brand. Add value to a buyer’s unboxing experience.

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