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Why Apple’s BNPL efforts could mark a ‘tipping point’ in lending

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By Emily Bary

Apple Inc.’s expansion into buy-now pay-later financing could be just the beginning of an attempt to shake up the traditional payments system.

The consumer-electronics giant has made other ventures into financial services before, including through its Apple Pay payment technology and a co-branded credit card done with Goldman Sachs Group Inc. /zigman2/quotes/209237603/composite GS +3.31% . However, Apple’s /zigman2/quotes/202934861/composite AAPL +2.53% BNPL launch, announced in June at its WWDC developer event , is notable because the company has decided to take on lending functions itself through a new in-house finance arm.

The endeavor suggests Apple may have greater financial ambitions down the line and could be looking to disrupt not just the BNPL market that encompasses players like Affirm Holdings Inc. /zigman2/quotes/223715966/composite AFRM +12.62% and PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL +4.59% , but also the broader banking and financial-technology landscape.

“It could be very much a tipping point in consumer lending,” said Tom Noyes, the managing partner of the Starpoint LLP advisory business and a Citibank veteran.

For Pay Later, Apple is leveraging Mastercard Installments, a program by the card giant that lets lenders make installment offers to customers , and Apple’s new finance arm will maintain state lending licenses. Goldman will be the issuing bank, but “in name only,” according to Noyes, since the smartphone giant is creating a new Apple Financing LLC lending entity that will make credit decisions.

The establishment of an Apple lending unit is “really big news,” Noyes continued, but also a bit of “back to the future.”

Before Visa Inc. /zigman2/quotes/203660239/composite V +1.00% and Mastercard Inc. /zigman2/quotes/207581792/composite MA +2.09% came about and created open-loop cards that could be used nearly anywhere, stores would offer their own credit to customers in a closed-loop model, Noyes said. Now, Apple could be moving to get the best of both worlds: Its forthcoming, open-loop Apple Pay Later product will let consumers split purchases into interest-free chunks at any retailer that accepts Apple Pay, but the company may also see its expansion into lending as a way to help customers better finance the purchase of iPhones and other Apple devices.

By enabling consumers to more easily afford devices, Apple could boost its sales, expand its ecosystem, and offer a type of financing in BNPL that is gaining steam, especially among younger consumers, despite some concerns that it may cause shoppers to spend beyond their means .

Apple is also reportedly exploring the creation of in-house payment-processing technology and infrastructure , Bloomberg has said. And longer term, through lending and other endeavors, the company might look for chances to eat away at the traditional banking system given the economics of card transactions.

When consumers make credit-card purchases at any merchant, that retailer will pay its bank a discount rate, meaning that the retailer doesn’t receive the full price of the item purchased. Then the merchant’s bank divvies up that discount fee into an interchange fee paid to the card-issuing bank, cuts for Mastercard or Visa, and an amount for itself.

Because Apple is a massive retailer, its card fees add up, and the company may see opportunities to reduce what it pays by getting more involved in the transactional process itself.

“The reason banks exist is as someone to vouch for you and take on risk in transactions,” Noyes said. “Today Apple, Google, and Amazon know you better than any bank does, and they’re all looking for ways to improve how the financial services that you need are delivered.”

Instead of paying card fees while its customers also rack up credit-card interest, Apple may be looking at the current financial system and realizing that it “could build this business just from expense savings alone,” Noyes added.

He noted that emerging markets such as India and Brazil feature payment systems without the fee models that people in the U.S. are used to. “In the U.S., we need to start preparing for days where interchange is going to zero,” Noyes said.

Even if such a move were to bring success for Apple, it’s an open question whether other retailers could realistically follow the company’s lead in financial services and lending.

“It takes a fairly big organization to pull this off,” Noyes said. He highlighted that Target Corp. /zigman2/quotes/207799045/composite TGT +2.54% has seen strong adoption of its RedCard, though he sees that happening more so on the debit side.

Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +3.63% and Alphabet Inc.’s Google /zigman2/quotes/202490156/composite GOOGL +2.68% /zigman2/quotes/205453964/composite GOOG +2.77% have shown growing ambitions in fintech, but they seem less likely to build their own internal lending businesses.

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