Apple Inc (NASDAQ: AAPL) is taking its first steps into the finance market, announcing the introduction of a buy now, pay later feature to Apple Pay.
The addition of BNPL to Apple Pay was announced at the company's Worldwide Developer's Conference, where iOS 16 and other upgrades to existing Apple products were also unveiled. Pay later support is also quite a standout compared to other product announcements made by Apple this year, from native live captioning on iPhones to the brand-new Mac Studio desktop.
What further makes Apple's announcement a standout is the company's intent to keep loan processing in-house at Apple Financing, unlike Apple Credit, which is supported by the lending power of Goldman Sachs (NYSE: GS). According to Apple, the company's extensive balance sheet will provide the necessary funding for paying out loans. While not providing financial backing to Apple's BNPL venture any longer, Goldman Sachs is still involved as the tech company's sponsor for access to the Mastercard (NYSE: MA) network.
Cutting out the middleman has many benefits for Apple, though the most obvious is that the company will be able to significantly trim back the potential overhead of relying on an outside lender. Trimming back costs is becoming increasingly essential to successfully scaling a BNPL business model, given the razor-thin margins that many popular operators such as Klarna or Afterpay (parent company Block, (NYSE: SQ)).
The popularity of BNPL among consumers has become a double-edged sword, which heaps increasing overhead costs onto operators as customers increasingly rely on them, requiring more personnel and resources to support demand. The pressures of scaling have resulted in companies such as Klarna facing operating expenses rapidly eclipsing income.
While Apple will inevitably face its own pressures when attempting to scale its operations, eliminating the hefty processing fees that come with relying on an outside lender will undoubtedly strengthen its margins. The strength of Apple's balance sheet and the nativity of its BNPL service within Apple Pay (putting it in the hands of millions of customers on launch) provide the company with a rock-solid foundation to take its first steps into finance. A successful launch could be grounds for other tech giants such as Amazon (NASDAQ: AMZN) to develop similar services, posing further threats to existing BNPL companies like Afterpay and Klarna.
While there have been no rumblings from the White House of disapproval of Apple's pay later services, it is still worth noting that the Biden administration's more attentive stance towards antitrust matters does present some potential for concern later down the line. Apple already faces scrutiny for anticompetitive practices in numerous countries, and it seems unwise to rule out the possibility of American or foreign regulators probing an Apple BNPL scheme being potentially anticompetitive.