You’re thinking about Apple Pay Later all wrong

Apple’s “buy now, pay later” product has a distinctly different distribution strategy that means it doesn’t directly threaten Affirm, Klarna and Afterpay.

Phones with Apple Pay Later

Apple Pay Later emerges as a distinctly different product than what Klarna and Affirm offer.

Image: Apple; Protocol

Apple’s entry into the “buy now, pay later” market was one of its worst-kept secrets: Analysts had been predicting the company’s rollout of a pay-later service as early as 2020. The most common read on the move was predictable: Apple was here to smash the competition. The company has a track record of jumping into new sectors late and still managing to come out on top — the iPod came out when there were tons of MP3 players on the market.

But some analysts have a starkly different view. When you look at it under the hood, Apple Pay Later emerges as a distinctly different product than what Klarna and Affirm offer, they say — and one that isn’t much of a market predator.

“This is an opportunity to greatly expand ‘buy now, pay later’ services to people who haven’t used them in the past,” said Ian Rasmussen, who co-leads the North American asset-backed securities ratings group at Fitch Ratings.

That’s for two main reasons. For one, Apple is marketing its pay-later offering to customers in an entirely different place than competitors. Second, the customers Apple is targeting have habits that differ markedly from traditional “buy now, pay later” users.

The most popular pay-later providers have a straightforward primary marketing strategy: partner with retailers that typically feature their logos at checkout, prompting customers to pay over time. Many of these partnerships are exclusive, allowing a company like Klarna, for example, to be the only pay-later provider for customers checking out at Macy’s. The tight integration is meant to boost conversions. Reducing or eliminating “friction” is a “huge factor” in helping sign customers up, said Harry Kohl, a director at Fitch Ratings.

The pay-later companies are trying to extend their reach through financial super apps, which allow customers to apply for payment plans even when there’s not a deal in place with a retailer, though that takes more steps than pressing a button at checkout. Other tools are the virtual and physical cards that allow customers to pay online or in-store, like Affirm’s Debit+ card or the Klarna Card.

Apple Pay Later lives in Apple’s digital wallet, an iPhone feature the company has been trying to build up. Users will be prompted to check out using Apple Pay Later any time they use Apple Pay, or can configure loans directly in the wallet. Customers who do will be able to complete the payment across four charges, spread out over six weeks. The wallet will also show users their Apple Pay Later plans and the payments due over the next 30 days, Apple said.

Confusingly, Apple Pay Later is almost completely separate from Apple’s other venture into consumer credit, the Apple Card. (Apple Card has its own pay-over-time feature, but only for Apple products.) Customers must link payments to a debit card, not a credit card like the Apple Card.

Apple’s advantage is the wide reach of iPhones among consumers and Apple Pay among merchants — particularly at retail, where the pay-later companies are trying to use cards to boost usage.

“It’s a different mindset,” said Patrick DellaValle, director in the financial services practice at Guidehouse. Apple doesn’t need to compete with other pay-later companies for exclusive contracts with retailers, he said, and can focus on continuing to monetize loyal Apple consumers. “They could miss out [on some customers], but it could also be an intentional strategy if you’re going to focus on those customers that will pay upfront with Apple Pay,” he said.

Those existing Apple customers differ from the kind of customer “buy now, pay later” companies have talked about serving: typically a younger person, turned off by credit cards. Third-party surveys consistently show that Apple customers have higher incomes and spend more than Android users.

About three-quarters of pay-later users in the U.S. are Gen Z or millennials, according to a report from eMarketer. Adults who make between $50,000 and $100,000 are most likely to use “buy now, pay later.” Research from The Ascent also shows that 45% of those customers are using “buy now, pay later” to afford something that didn’t already fit into their budgets.

That all points to Apple not making Apple Pay Later to woo existing “buy now, pay later” customers away from the services they use. Instead, it appears the company made a product for the people who love Apple, aimed at persuading them to make more use of the Wallet app and Apple Pay.

Mike Taiano, a senior director at Fitch’s North American Banks Group, sees it simply. “This is another tentacle for them to get into customers’ everyday life,” he said. “I wouldn’t necessarily assume that they automatically go to the top of the leaderboard.”

And “buy now, pay later” may be just one product among many that Apple has in mind. The company is making a big fintech play with the goal of taking more of its financial infrastructure in-house. The long-term goal may not be letting customers pay later; it could well be letting them pay any way they want to.

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