July 14, 2024


General will live on forever

Apple pay-later foray blurs tech-finance boundary



LONDON (Reuters Breakingviews) – Tim Cook has crossed the banking divide. Big U.S. tech firms have so far largely kept out of the lending business. But on Monday Apple’s chief executive unveiled https://www.apple.com/newsroom/2022/06/apple-unveils-new-ways-to-share-and-communicate-in-ios-16 plans to use the $2.4 trillion company’s balance sheet to offer “buy now, pay later” loans to iPhone users. The push into financial services will keep traditional banks on their toes.

Apple has played around the fringes of finance for some time. Its Apple Pay service allows customers to use their devices to make swift payments. And in 2019 the company launched a credit card with much fanfare. The key difference this time, however, is that its Apple Financing subsidiary is making the lending decisions and will fund the loans with the backing of its parent company’s balance sheet https://www.apple.com/newsroom/pdfs/FY22_Q2_Consolidated_Financial_Statements.pdf, which included $193 billion of cash and securities at the end of March. Goldman Sachs, the lender behind Apple’s credit card, will in this case serve as the bank sponsor that allows Apple to access the Mastercard payments network.

Keeping the loans in-house should enable Apple to earn better margins. A typical pay-later transaction charges the retailer a fee of at least 4%. Jefferies analysts reckon Afterpay, now owned by payments firm Block, keeps about half of that after deducting credit card transaction fees, borrowing costs and loans that customers fail to repay. But Apple probably has lower borrowing costs than its rivals. Rising interest rates are squeezing pay-later providers such as Affirm and Klarna, which rely on wholesale credit and bank deposits. Meanwhile, data about users’ spending on its products may give Apple an edge when assessing the creditworthiness of borrowers, limiting future losses. Acting as the lender will allow it to keep a bigger chunk of the transaction fees.

Chinese tech firms like Ant, an offshoot of e-commerce giant Alibaba, have long mined user data to make loans. Fear of regulation, and the humdrum returns earned by most banks, have largely kept big U.S. tech firms out of the lending business. Even a successful foray into pay-later credit will barely register compared with fast-growing revenue streams like advertising, which research outfit Omdia estimates brought in $3.7 billion https://omdia.tech.informa.com/pr/2022-feb/omdia-report-finds-apples-ads-business-now-worth-3-7bn-per-year-following-idfa-changes for Apple last year. However, Cook’s decision to step decisively across the tech-finance boundary will have big banks watching with interest – and some trepidation.

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Apple on June 6 announced a “buy now, pay later” service, offering to split purchases into four equal payments over six weeks. The tech giant plans to fund the loans off its corporate balance sheet.

Apple said its treasury department will decide the exact mechanism it will use to fund the loans and funding sources may shift over time. Decisions about loans and the creditworthiness of borrowers will be handled by a wholly owned subsidiary, Apple Financing.

Apple’s pay-later loans will have zero interest and no fees of any kind. To judge creditworthiness, Apple said it plans to use consumers’ credit and other data, such as their purchase and payment history with Apple in both its stores and online services such as the App Store.

To use the pay-later service, Apple customers will have to connect a debit card to their Apple Pay account to fund repayment of the loans. A quarter of the purchase price for approved loans will be due at the time of purchase, and, like other debit card transactions, Apple will run an instant check to ensure the buyer has sufficient funds to cover the upfront payment.

Apple will offer the loans anywhere that accepts Apple Pay, both online and in physical retail stores. The payments to merchants will be made over the Mastercard network using payment credentials issued by Goldman Sachs, Apple said.

(Editing by Peter Thal Larsen, Streisand Neto and Oliver Taslic)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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