Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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Why Apple wants you to ‘buy now, pay later’

A "shop now, pay later" neon sign

Hello and welcome to Protocol | Fintech! This Friday: Apple Pay … later, Mastercard's India ban, and Revolut's mega-deal with Tiger and SoftBank.

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The Big Story

Apple Pay … later

After the iPhone, services is Apple's next-largest business, accounting for almost a fifth of revenue in its most recent quarter. It's a catch-all category, including everything from iCloud storage to Apple TV+ subscriptions, but at $16.9 billion a quarter, it's tough to find businesses that can move the needle.

Payments are the logical next frontier. Apple makes a small fee from Apple Pay purchases — a transaction security fee it charges banks, not merchants or consumers. It's more or less free money, since the payment technology is already developed and baked into hundreds of millions of iPhones. But it's hard to generate a lot from such a tiny cut.

Apple's got the tech. It needs more fin. Apple is planning to launch a "buy now, pay later" product with Goldman Sachs, according to Bloomberg, moving into the newest and hottest area of consumer finance.

  • "Buy now, pay later" are essentially instant lines of credit issued at the point of sale when a consumer is shopping. Terms vary, but a "pay in four" plan seems to be the most popular.
  • Shaken by the financial crisis, consumers in recent years, particularly younger ones, are avoiding credit cards. "Buy now, pay later" appeals to them.
  • Merchants love the larger ticket sizes they see with "buy now, pay later" purchases, and the higher conversion rates, according to most reports.
  • Because of that, retailers are willing to pay higher fees than what they already pay for credit-card transactions — reportedly as high as 5% or 6% of a transaction, plus per-transaction fees. Between the transaction fees and interest on loan balances, "buy now, pay later" is lucrative.

The "buy now, pay later" competition is heating up. Apple and Goldman will be entering a crowded market, with Affirm, Klarna, PayPal and others offering their own versions.

  • Visa started a pilot last year, and Amazon has Amazon Pay Later in India, which has hit 2 million customers.
  • Banks aren't standing still: Citi and American Express let cardholders turn credit card purchases into "pay later" installment loans after the fact.
  • Affirm has deals with a range of merchants, including Peloton. It recently did a deal with Shopify, and could offer special deals for Shopify merchants' customers. But PayPal already has a massive network of merchants for its more general payments network. And Apple has its massive base of iPhone users, many of whom have linked a payment card to their account for App Store downloads and other purchases.
  • Affirm's stock dropped 10% on the Apple news, an indication of the challenges Affirm could face.
  • The company with the least to worry about seems to be PayPal, which has made 14 million loans to over 5 million customers through its Pay in 4 service. It's the most popular "buy now, pay later" service, according to one survey.

Stores are the next battlefield for "buy now, pay later." Ecommerce is where most of the payment-plan action is happening today, but it's coming to retail. That's where Apple Pay's reach could really give Apple an edge.

  • Affirm's answer: The Affirm Card, which it announced in February but hasn't released yet. Affirm already has a virtual card — which it recommends customers use in-store with Apple Pay or Google Pay.
  • Klarna has a deal with Macy's; paying in store also requires use of a virtual card.
  • PayPal has struggled to break out of the ecommerce box and its weak in-store presence could hurt it here.

Of course, banks are figuring out how to make money on "buy now, pay later." Goldman wants to boost its consumer business, giving it a natural incentive to enter this market. Other banks see an opening, too.

  • Affirm works with chartered banks Cross River Bank and Celtic Bank.
  • Klarna uses WebBank for some of its loans.
  • Barclays invested in Amount and partners with it on "buy now, pay later" services for merchants.

Goldman and Apple's rollout of the Apple Card was far from seamless, but both companies are becoming more experienced in consumer credit. A lot depends on getting the details right. And if they don't? Well, they'll pay later.

— Tomio Geron

A MESSAGE FROM CHECKOUT.COM

Let's take Europe's online retail sector as an example. Checkout.com recently surveyed over 550 senior executives at top ecommerce retail organizations and found that 59% aren't getting a transparent breakdown of the costs of payments. A further 67% are not receiving any fraud or chargeback analysis.

Learn more

From Protocol | Fintech

Robinhood's retail trading business is much more lucrative than its competitors'. We dive into the data that shows how Robinhood makes so much more per customer.

Square is diversifying. The goal of a new bitcoin-focused unit, which will be separate from Square's existing crypto efforts, is to build developer tools for crypto. Meanwhile, Square also bought Crew, a workforce messaging app startup.

Overheard

  • "In the last year, we published research that found nearly 2.5 million people in the U.K. had bought cryptoassets...This is a category of consumer that we are not used to engaging with – 18 to 30-year-olds more likely to be drawn in by social media. That's why we are creating an £11m digital marketing campaign to warn them of the risks." --Nikhil Rathi, chief executive of the U.K.'s Financial Conduct Authority, on a new marketing campaign to warn of the risks of crypto.
  • "GreenSky's careless business and customer service practices enabled its merchants to take advantage of vulnerable consumers who needed financial help." —CFPB acting director Dave Uejio, describing a fine for GreenSky.
  • "It has been nine months since we published our report on a digital euro. In that time, we have carried out further analysis, sought input from citizens and professionals, and conducted some experiments, with encouraging results. All of this has led us to decide to move up a gear and start the digital euro project." —European Central Bank President Christine Lagarde on the next phase of the eurozone's digital currency.

Need to Know

  • Fifth Third Bank opted for a new FIS product. The bank is using FIS's Modern Banking Platform, which has five public customers.
  • India banned Mastercard. India's central bank banned the payments company for violating data storage rules.
  • The Fed's chief said to expect a CBDC report in September. Jerome Powell said at a House hearing that a central bank digital currency report is in the works.
  • The Bank of England is scrutinizing cloud providers. Banks' reliance on cloud companies could threaten financial stability, the central BoE said.

Deal Flow

  • Neobank Revolut became the U.K.'s most valuable fintech. SoftBank Vision Fund and Tiger Global led an $800 million funding round valuing the company at $33 billion.
  • M1 Finance raised $150 million. SoftBank Vision Fund 2 leads deal at $1.45 billion valuation in the fintech app.
  • Railsbank raised $70 million. The maker of tools for embedded finance had Anthos Capital lead the round.
  • Cardless raised $40 million. The company produces customized co-branded cards for companies. First Electronic Bank issues the cards.

4 Questions With...

Frank Chien, CEO, PrizePool

What fintech trend are you most excited about?

Financial literacy, especially to teens and below 15 years old. Understanding money management, budgeting, investing, debt, etc. are all life skills that need to be taught earlier in life.

What's been your biggest professional blunder and how did it help you?

Leaving Facebook and starting a startup without a clear problem that we wanted to solve back in 2011. Experienced founders always say, "Never start a company to start a company." You should start a company that solves a big problem that either no one is solving already or is not doing a good job at it. When I started my first company, we wanted to be in the tech scene and starting a company is one of the hardest things to do. Eventually, we worked hard and got lucky a few times to make that company successful but it was one of the most stressful times in my life.

What fintech company — besides your own — have you been most impressed with this past year?

Definitely crypto and all the various DeFi plays. I'm always very impressed with the various ideas that are born in this space from interest-free loans to loans that self-repay over time. I'm excited to see what else comes from this space. Extra bonus points would be to bridge some of these ideas/solutions in the fiat world — that would be game-changing.

What fintech sector or company (besides your own) is most underrated right now?

Fraud/AML is very underrated in my opinion — especially since there is more fraud than ever now.

A MESSAGE FROM CHECKOUT.COM

Let's take Europe's online retail sector as an example. Checkout.com recently surveyed over 550 senior executives at top ecommerce retail organizations and found that 59% aren't getting a transparent breakdown of the costs of payments. A further 67% are not receiving any fraud or chargeback analysis.

Learn more

Data Point

£180 million

That's the amount of bitcoin seized by London's police in an international money-laundering investigation.

Thanks for reading — see you Tuesday!

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