Apple's BNPL: Impact on Fintech Startups

Apple's Entry into the BNPL Market

Recent reporting by Bloomberg indicates that Apple, a leading consumer electronics company increasingly focused on services, is developing a buy now, pay later (BNPL) service. This new offering will be integrated directly with its Apple Pay system.

The announcement resulted in a significant drop in Affirm’s stock price, declining over 10% on the day of the news and a further 2.5% the following day. Currently, the stock is down more than 61% from its peak following its initial public offering earlier this year.

Investors reacted by devaluing Affirm, a former fintech unicorn now a public BNPL company, due to the potential for Apple to disrupt its business. Increased competition from a major player like Apple could constrain Affirm’s future growth and, consequently, its profitability. Essentially, market participants adjusted their expectations regarding the present value of the company’s future earnings.

Impact on Public BNPL Companies

The impact isn't limited to Affirm alone. Afterpay, another publicly traded BNPL firm, also experienced a decline in its share value this week, falling by a comparable 10% since July 12th, the day preceding the Apple announcement.

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While Affirm and Afterpay are prominent examples, numerous other BNPL companies exist, ranging from small startups to large, privately held entities like Klarna. These two public companies offer a valuable perspective on how investor sentiment towards the BNPL sector is evolving in response to Apple’s plans.

A key question is how this news will affect startups, considering Apple Pay already processes approximately 5% of all global card transactions, according to some analyses. The answer, it seems, will depend heavily on the specific niche of each BNPL startup.

BNPL providers with a highly specialized focus are less likely to face direct competition from Apple. Conversely, more broadly focused BNPL companies are more vulnerable to Apple’s potential market entry.

Distribution and Customer Base

This difference stems from Apple’s advantages in distribution and customer expertise.

It’s important to note that this doesn’t signal the demise of Affirm, Afterpay, or other BNPL players. However, if Apple enters the BNPL market as expected, its Apple Pay service could facilitate easier customer acquisition through its established network.

Apple’s existing credit card linked to Apple Pay, along with its cash-management features in the U.S., could further encourage adoption, as consumers are increasingly comfortable using Apple for financial services.

Furthermore, Apple’s control over extensive digital marketplaces – and its global network of retail stores and online e-commerce platforms – provides additional channels for distributing BNPL services. Apple’s substantial sales of higher-priced products also create a strong demand for BNPL options.

These factors will undoubtedly impact certain startups. Let's examine which companies are best positioned to navigate this evolving competitive landscape.

Startups, BNPL, and Investor Interest

Recent analyses by The Exchange have examined the financial results of several late-stage Buy Now, Pay Later (BNPL) startups, covering periods like Q4 2020 and Q1 2021. This scrutiny followed a surge in funding rounds for BNPL companies that came to our attention.

Notable BNPL Funding Rounds

Several companies secured significant investment, demonstrating the initial enthusiasm surrounding the BNPL model.

• Dividio received $30 million in June 2021, focusing on a “white-label platform for retail finance integrating with e-commerce platforms.”
• Zilch secured $80 million in April 2021, a “London-based startup building an ‘over the top’ BNPL business through direct consumer agreements.”
• Wisetack raised $19 million in February 2021, offering BNPL services for in-person transactions.
• Scalapay, based in Milan, Italy, obtained $48 million in January 2021, providing BNPL solutions.
• Alma, a French startup, secured $59.4 million in January 2021, developing a “new installment payment option for higher-priced items.”

Furthermore, Klarna completed funding rounds of $639 million in June (at a $45.6 billion valuation) and $1 billion in March (at a $31 billion valuation). While currently private, an IPO is anticipated in the foreseeable future.

Considering these investments, has the recent news regarding Apple altered the perceived value of these companies? It’s likely, but the impact will vary.

BNPL companies catering to the general consumer base are potentially the most vulnerable to competition from Apple. For instance, Scalapay may encounter Apple’s future BNPL offering, given the availability of Apple Pay in Italy.

Similarly, Alma could face competition from Apple in France, where Apple Pay serves as Apple’s entry point into consumer financial technology.

However, Wisetack appears less susceptible to disruption. This is because it integrates with vertical SaaS platforms serving specific sectors of the real-world economy.

If a software provider for plumbers wishes to offer a BNPL option, Wisetack provides the underlying technology. It’s improbable that Apple will directly enter this niche market.

Shifting focus, let's consider the other major technology corporation entering the BNPL space.

What about PayPal?

The success of PayPal demonstrates that an established corporation can effectively penetrate the Buy Now, Pay Later (BNPL) market. Their “Pay In 4” installment credit service achieved notable results during the first quarter. Full Q2 data from PayPal is anticipated in the coming weeks.

These figures are quite significant. While PayPal and Apple operate on different scales, PayPal’s achievement with a BNPL system doesn’t automatically translate to similar outcomes for Apple. However, the data suggests that large organizations with extensive payment integrations can rapidly expand their BNPL services.

Interestingly, Apple currently lists PayPal as the sole third-party payment option within its online store, specifically in the United States. This arrangement could potentially be altered.

However, it’s important to consider a counterpoint. Despite PayPal’s entry into the BNPL arena, Klarna has continued to secure substantial funding, leading to a considerable increase in its valuation. This indicates a strong consumer demand capable of supporting the growth of both PayPal and Klarna, alongside positive results from companies like Affirm and Afterpay.

Apple possesses greater resources than PayPal, and the increased competition will likely affect even well-established BNPL providers like Klarna, despite their brand recognition and financial strength. Apple’s substantial financial capacity allows it to exert influence in any market it chooses to enter.

If Apple’s BNPL offering is gradually implemented in regions where Apple Pay is already available, the company could capture market share from more generalized BNPL services. Startups focusing on specialized or niche solutions are likely to be somewhat shielded from this intensified competition.

An initial indicator of investor sentiment regarding Apple’s impact on private BNPL startups will be Klarna’s initial public offering (IPO). The company’s pricing during the IPO will provide insight into investor enthusiasm for BNPL equity, beyond the recent 10% valuation reductions observed in Affirm and Afterpay. Further venture funding rounds will be needed to assess the impact on other startups.