The Bigger Advantage Of Apple Pay Later You Didn't Know About

Summary

• Apple Inc. has expanded its foray into consumer financing with the rollout of Apple Pay Later earlier this week.
• The rollout comes almost a year after the solution was first announced and at a time of rapid economic deterioration that has brought turmoil to the BNPL industry.
• But Apple may just have what it takes to reverse the narrative.
• Looking for more investing ideas like this one? Get them exclusively at Livy Investment Research. Learn More »

Justin Sullivan

Unveiled during WWDC 2022, the Apple Inc. (NASDAQ:AAPL) Apple Pay Later app has rolled out for use earlier this week across the U.S., allowing iPhone users to split Apple Pay-eligible purchases in app and/or online into four equal installments payable within six weeks at zero fees and interest. The development continues to underscore Apple's ambitions to further monetize its sprawling device installed base and bolster its ecosystem's reach through the provision of adjacent services.

Although "buy now, pay later" ("BNPL") services have been reeling from "sluggish revenue growth and [massive losses] amid rising interest rates" over the past year, Apple's foray in the field likely comes at an opportune time. Helped by its sprawling Apple Pay user and merchant base, the new consumer financing service integrates seamlessly into Americans' day-to-day settings at a time when tightening financial conditions are resulting in dwindling consumer savings and gradually rising debt burdens. It also complements Apple's aspirations in expanding its fintech footprint following the roll-out of supporting solutions like Apple Pay, Apple Card, and interest-free Apple device financing in recent years.

But while the newly announced BNPL service is expected to further expand Apple's foray into consumer finance over the longer term and create a new potentially high-margin revenue stream, the more immediately available incremental value enabled by Apple Pay Later is likely the incremental avenue for first-party consumer data collection valuable to its budding advertising business.

What is Apple Pay Later?

Apple Pay Later is the newly introduced BNPL service integrated in Apple Pay. Apple device users who have set up Apple Pay will begin receiving access to Apple Pay Later in the coming months. The consumer financing solution will allow purchases between $50 and $1,000 within apps or online stores supporting Apple Pay to be split into four equal installments payable over a span of six weeks at zero interest and fees to the user. Built on the introduction of Apple Pay's infrastructure in 2014, Apple Pay Later is the next major development for the tech giant in consumer financing following the Apple Card launched in 2019. All eligible purchases made through Apple Pay Later can be accessed and tracked within the Wallet App, allowing consumers to "track and manage loans seamlessly" in one place. All loans pertaining to Apple Pay Later will be extended via Apple Financing LLC, which is the company's in-house consumer financing subsidiary, effectively "cutting out other financial services firms" and bolstering the tech giant's oversight and flexibility on the service.

The rollout of Apple Pay Later underscores the competitive advantage of Apple's expansive installed base and massive chequebook in enabling new growth and cash flow generation potentials. The iPhone currently commands approximately half of the U.S.' smartphone installed base. And with more than 90% of iPhone users in the U.S. having already set up and using Apple Pay and more than 85% of American merchants supporting the payment method, the newest BNPL add-on solution is likely to bolster Apple's footprint in the consumer financing business, while also driving incremental value to adjacent service revenue streams (discussed in later sections).

Implications of Apple Pay Later

With Apple Pay Later being offered to users at zero interest and fees, much of the service's revenues will be generated from merchant fees charged on related transactions. As mentioned in the earlier section, the current economic backdrop could potentially be a favorable environment for the rollout and adoption of Apple Pay Later, unlike the deep turmoil experienced by rival BNPL offerings, given the solution's seamless integration with the massive iPhone installed base in the U.S.

Consumption has been weakening while savings are also dwindling at a rapid clip as consumer debt burdens are on the rise. Specifically, U.S. retail sales fell 0.4% in February from January, dragged primarily by a decline in purchases of big-ticket items as budgets for discretionary goods fall amid persistent inflationary pressures. This is consistent with plunging incremental personal savings rate since the pandemic era when bank accounts were flushed with federal stimulus and excess cash from reduced discretionary spend due to mobility restrictions at the time. Meanwhile, consumer debt burdens are also on the rise, ensuing from the combination of increased financing costs and contracting purchase power due to inflation.

Debt across all categories totalled $16.9 trillion, up about $1.3 trillion from a year ago, as balances rose across all major categories.

Source: CNBC News

Close to $1 trillion of consumer debt in the U.S. were attributable to purchases made on credit cards during the December quarter - the biggest quarterly increase in more than two decades at $61 billion and the most substantial annual increase on record at $130 billion. This continues to underscore the increasing demand for short-term financing solutions - including BNPL services. Meanwhile, delinquency rates on consumer credit card debt are also rising at a rapid pace, with more than 4% of related loans considered "serious…which means failing to pay for 90 days or more". And with the Fed's aggressive rate hike cycle aimed at taming generation-high inflation, the resulting surge in credit card interest rates towards 20% is making Apple Pay Later's zero interest and late payment fee structure an appealing choice for American consumers. The solution's seamless integration with the sprawling Apple device installed base is simply the cherry on top to ensure the demand potential translates into actual usage, with each "tap" under Apple Pay Later being an increase to merchant transaction fee revenues on the tech giant's services P&L.

While uncertainties remain on how Apple plans to mitigate its BNPL solution's credit risk exposure, especially as payment delinquency rates across all segments on consumer debt increase amid deteriorating macroeconomic conditions, we view the perpetual value created by the feature for the company's adjacent services as a potential compensatory factor. The bigger opportunity enabled by Apple Pay Later is the potential new avenue for 1P customer data collection forged, which will be valuable to directing strategic decision-making processes across the company's consumer-focused product and services businesses, while also complementing its budding advertising business.

Although Apple's ad business has historically been relatively nominal when compared to industry leaders like Alphabet Inc./Google (GOOG/GOOGL) and Meta Platforms, Inc. (META) - with annual revenue estimated at approximately $4 billion, or 1% of consolidated revenue, during fiscal 2022 - it has long played a gating role in the booming digital sector. For instance, the recent implementation of "App Tracking Transparency" underscores Apple's tight grip on the digital advertising industry, as well as its ability to level-out the playing field back to the starting line as it ramps up its own efforts in capitalizing on burgeoning opportunities available:

[ATT] is estimated to have wiped out about $16 billion in app-based ad spending over the past year, with less than a quarter of global iOS users that have updated to iOS 14.5+ providing tracking permission to apps. This has effectively turned social media into the slowest growing ad platform this year as it suffers a double-whammy from ATT signal loss and cyclical weakness in ad spending…With a device installed base of approximately two billion, and paid subscriber count of more than 900 million, Apple continues to benefit from a massive trove of valuable 1P data that can bolster its competition for the growing pool of digital ad dollars despite near-term macro headwinds. It also aids Apple's growing ambitions of spreading its digital ad sales from App Store and Apple News to other branded apps like Maps, as well as its growing Apple TV streaming business.

Source: "Can Apple Dodge A Holiday Quarter Disaster?"

And incremental 1P data on consumer spending habits and preferences collected from Apple Pay Later will likely help the tech giant better navigate the broader adoption of rising user privacy features implementation across the digital economy - in addition to ATT, Google will soon be eliminating cookies on its Chrome browser, while the Android operating system will be implementing a similar app tracking blocker next year. The incremental 1P data generated will accordingly ensure improved targeting in ad delivery, as well as related engagement and performance measurement as Apple expands its foray across various digital advertising formats and defend against stiffening competition in the industry despite near-term cyclical headwinds.

Is Apple Pay Later a Bullish Development for Apple?

Despite still being in the early stages of rollout limited within the U.S., Apple Pay Later is likely to contribute favorably to both the company's top and bottom lines in the long run. Specifically, the solution will expand Apple's revenue-generating opportunities in consumer financing, while also bolstering its reach into the pool of fast-expanding digital ad dollars despite near-term challenges in the inherently macro-sensitive industry. The high-margin nature of said revenue streams is also expected to reinforce Apple's margin expansion trajectory - especially in digital advertising, a lucrative vertical in which Apple aims to achieve "double-digit billions of dollars" in annual sales over the longer term.

While Apple Inc. stock's recent rally may appear as a disconnect with the anticipation for further fundamental weakness in the near term due to the recession-prone nature of Apple's consumer-centric business, the latest rollout of Apple Pay Later continues to highlight the tech giant's advantage in boasting one of the strongest balance sheets alongside substantial influence over the consumer amid global digitization trends. This, accordingly, reinforces market expectations for a sustained trajectory of favorable fundamental and valuation prospects at Apple over the longer-term ex-macro challenges.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.