Apple recently announced its new buy now, pay later (BNPL) service called Apple Pay Later. And although the company was a late entrant into the space, one expert said it will have a significant competitive advantage over other companies.
Apple Pay Later will allow users to split the cost of their purchases into four, interest-free payments anywhere Apply Pay is accepted. The new BNPL option will be available in the wallet app when Apple releases iOS 16 in September.
Apple’s data on individual consumers could give it a significant advantage of knowing who to offer BNPL options to, and when, TTV Capital Partner Sean Banks said at the FinTech South conference in Atlanta, Georgia.
"If you think about the future of underwriting, the amount of detail that Apple will have around one of its customers based on usage and performance within the device, which is the typical way people connect anyway, should allow them to have some of the best underwriting possible out in this space," Banks said.
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BNPL providers could focus on specific industries, consumers to remain competitive
BNPL providers — such as Affirm, Klarna and Paypal — partner with retailers to allow shoppers the ability to split the cost of their online purchases into multiple installments at checkout. These interest-free payments are generally due within a few weeks after the time of purchase. However, missed payments can result in late fees and other penalties.
BNPL providers that focus on a specific industry or have detailed consumer data will find it much easier to compete in the growing market, Banks said.
"Without having that consumer touch point, it's challenging because pricing from somebody who has more specific knowledge about what's going on with the individual person gives them a competitive edge," Banks said. "Now, there's nothing to say though, as we've had this entire evolution of fintech and the amount of connectivity in different sectors of the market, that we can’t bear those two together to get optimum pricing.
"I think there's still a lot of opportunity there," he continued. "I don't think there's a broad BNPL solutions set that doesn't have some sort of advantage, whether it's a consumer touchpoint or market touchpoint."
BNPL is quickly gaining momentum as an alternate payment option, with its global transaction value having reached $120 billion in 2021, according to a new report from GlobalData. And the sector is likely to continue growing — GlobalData projected the BNPL market could reach $576 billion by 2026.
As the payment option continues to expand, the market will still allow for new opportunities, even as competition heats up. As interest rates rise, this could diminish the competition from other lending products that charge interest.
"We continue to see rising interest rates that are really indicative of where people are willing to pay," Banks said. "And we have been in a cycle of pretty low interest rates for nearly two decades. A lot of these underwriting models have yet to be stress tested. So I'm kind of in a wait and see on what the payment is going to ultimately be."
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Short-term personal loans much less risky, expert says
Regulators have become increasingly wary of the BNPL market as its popularity grows. The Consumer Financial Protection Bureau (CFPB) recently opened an inquiry about the usage and safety of BNPL programs.
One suggestion for BNPL providers has been that they convert their offerings to include a short-term personal loan option, Banks said. Some providers have considered increasing the number of installments from four to six or 12. But while these longer installment loans may be safer, Banks said BNPL providers will likely keep the shorter time frame.
"Obviously short-term loans are less risky because we've got fewer chances for somebody to default on it," he said. "I think it's going to probably remain shorter because I think that those who start extending it as interest rates go up are going to start to see larger defaults."
While there are risks to BNPL and consumers’ ability to repay the debt, more providers have begun reporting their loans to credit bureaus. This will help providers keep track of consumer habits and prevent them from taking on too many short-term payment plans, according to Sherri Haymond, Mastercard executive vice president of digital partnerships.
Experian announced that it will debut a bureau specifically devoted to BNPL purchases and services, and is aiming to provide more transparency to the financial services industry. The company, which is one of the three major credit bureaus next to Equifax and TransUnion, stated that it's BNPL Bureau will better protect the financial health of consumers.
Experian said that amid the boom of BNPL usage among consumers, the new bureau will "provide real-time reporting of consumers’ BNPL activity." It will also help protect negative impacts to their credit scores.
If you have taken on too much debt through BNPL transactions, you could consider using a personal loan to help you pay it down and avoid a late fee. You can contact Credible to speak to a loan expert and see if this is the right option for you.
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