When Apple and Goldman Sachs explore a new line of business, there is probably money in it. So the news that Apple, backed by Goldman, plans to add a “buy now, pay later” feature to Apple Pay shows that financial opportunity knocks.
Using a credit card is no longer the easiest way to delay making a retail payment in full, thanks to financial technology companies such as Affirm and Klarna. They let shoppers pay for anything from fashion to Peloton exercise cycles in interest-free instalments. With Klarna being valued at $45.6bn last month, Apple is on its trail.
If used wisely, buy now, pay later (BNPL) can be a clever innovation. It allows people to smooth out their bills over a few weeks or months without paying high interest charges on credit and store cards. Retailers cover the cost of credit to entice shoppers to spend more online or in their stores.
Given the profits that banks and other card issuers make, it is time they faced such a challenge. People who clear their balances monthly do not pay interest, but those who roll them over are charged heavily: US households carrying credit card debt will pay average interest of $1,155 this year, estimates NerdWallet.
The basic idea of credit cards has not changed a great deal since 1958, when Bank of America launched the first card featuring revolving credit (followed by Barclaycard in the UK in 1966). All kinds of extras have been attached since, from loyalty points to insurance and rewards, but rolling monthly credit remains the essence.
Credit cards used to be the most convenient way to make many payments, since writing a cheque or paying cash were the main alternatives. In the fractured US banking system, they also enabled travellers to settle restaurant and hotel bills easily in other states.
Technology has now altered the landscape: debit cards have overtaken cash as a payment method in the UK, with contactless transactions, including those on Apple Pay and Google Pay, growing rapidly in the pandemic. The drawback is that the smoothing function of credit cards is lost: payment is usually immediate.
This is where Klarna and rivals such as Afterpay come in, along with PayPal’s Pay in 4 (making a payment in four parts over six weeks). The concept of being able to make payments simply in interest-free instalments is so compelling that competition is growing rapidly. Afterpay’s shares fell sharply this week when PayPal announced it would offer Pay in 4 in Australia.
The idea works best for expensive goods — the kind of household items that were traditionally paid for on instalment plans, or in the US on layaway (making small payments to a shop but only collecting the furniture or washing machine when the whole bill was settled). Peloton’s partnership with Affirm to spread payments on its $1,900 bikes is a modern incarnation.
The proviso is, of course, if used wisely. Adam Smith, the 18th-century economist, observed in The Wealth of Nations that “the principle which prompts to expense is the passion for present enjoyment”. Buying on impulse is a powerful human instinct, encouraged by advertising and Instagram influencers used by brands including Klarna.
Many BNPL services have been used not to spread the cost of high value items, but to buy more cheap ones. The average outstanding balance on a UK credit card was £1,560 in March, while Klarna says that its average user balance is £48 — it is being used more like debit than credit.
Three quarters of the UK users of BNPL are aged between 18 and 36, and 90 per cent of transactions have been for fashion and footwear, according to a review this year for the Financial Conduct Authority that advocated regulating it. Paying in instalments makes cheap clothes seem very cheap indeed.
This lack of friction is exacerbated by retailers presenting deferred payment as the default option, a practice that was barred in Sweden last year. It can be easy to skip from shop to shop, running up a rolling balance on Klarna or its rivals without keeping in mind the bill that will eventually land.
Paying in instalments can also shade into paying for credit if the schedule stretches out — Klarna offers credit at an APR of up to 18.9 per cent for deferring payments from six to 36 months, while Affirm can charge between 10 and 30 per cent. They promise greater transparency than traditional cards, but the cost is still high.
Fintech excites investors, with the London-based start-up Revolut now valued at $33bn, but BNPL providers need to ensure that unwary shoppers can really afford their credit. A report for Klarna estimates that a fifth of UK adults used such services in the year to March: as with many inventions, the trick is to examine them closely.
The age-old flaws of credit cards mean there is plenty of space for shoppers to gain from an alternative. But if and when Apple Pay Later appears on iPhones, the usual warning applies: think before you tap.