Tag: Apple Pay Later

Weekly readings

Weekly reading – 11th June 2022

by MQDuongLeave a Comment on Weekly reading – 11th June 2022

What I wrote last week

Apple Pay Later

Business

Macy’s, Gap and Other Clothing Stores Are Stuck With the Wrong Items. An interesting report on how retailers got forecasting and inventory badly wrong. Macy’s, Walmart, Gap, Kohl’s, just to name a few, have a lot of inventory that they can’t sell at the moment or at least can’t sell fast enough. Remember that the executives at such companies are experienced and paid handsomely to nail down forecast. The fact that their calculations are so far off shows how unpredictable consumer behavior changes in this environment

Grocery’s Greatest Stories. Progressive Grocer has an interesting multi-part series on the history of grocers in the U.S, ranging from the start of Albersons or Walmart to the acquisition of Whole Foods by Amazon.

Axon Ditches Plans for Weaponized Taser Drones as Majority of Ethics Board Resigns. It’s a dangerous, revenue-driven and badly-conceived idea to develop drones to address mass-shootings. What are they trying to achieve with this kind of products? Who would fly these drones and could those drones even navigate through schools’ hallways? If a shooter knows about the drones, comes to a school, shoots people and leaves quickly before anyone could even fire up those expensive toys, what good would it be? More importantly, what if these drones fell into the wrong hands? I am happy that folks on Axon’s Ethics Board stood up for what they believed in and resigned in protest. As a shareholder of Axon, I am disappointed.

Charlie Munger: Full Transcript of Daily Journal’s 2022 Annual Meeting. It’s mind-blowing that Charlie Munger can be this clear in his thinking at 98. I am such a strong admirer of him.

Ferrari boss Mattia Binotto explains five-year journey back to top end of F1. It’s down to the people and the “no blame” culture, not the machinery. This issue is about the painful recovery of Ferrari. As the most famous and successful team in F1, Ferrari has disappointingly failed to win a title since 2008. 2020 was the worst year on record. The car was as slow as a tractor. However, Ferrari has bounced back amid the largest rule changes in the last few years. The Prancing Horse won the most poles this year, bagged two wins and are the two top teams of the paddock along with Red Bull.

How Two Africans Overcame Bias To Build A Startup Worth Billions. A sneak peek into the fintech startup scene in Africa. Much as I admire the two men on the cover, I was abhorred by the fact that a VC firm wanted a discount because Chipper Cash is from Africa.

Engineer Who Fled Charges of Stealing Chip Technology in US Now Thrives in China. Semiconductor is so important that whatever country “owns” it will have outsized influence in the world. China wants global domination and definitely doesn’t want to be beholden to any country for chips. Yet, semiconductor is the one area that it still lags behind other advanced nations. Hence, it resorts to theft of intellectual property to close the gap. It deserves every condemnation there is.

Behind Apple’s Megadeal for Brad Pitt Formula One Racing Film From Joseph Kosinski. “The key to the deal is a theatrical distribution component. But instead of a token release in a small number of theaters or a day-and-date opening, the movie would have an exclusive — and global — run of at least 30 days (one source says it could even go as high as 60 days) before heading to the Apple TV+ platform. In another first, insiders say the theatrical component is structured in a way that would see Apple and the filmmakers split the take from the big-screen release 50-50. The unique deal, in essence, pays the creative team three ways: their upfront fees, their hefty buyout fees and the theatrical backend.”

Other stuff I find interesting

Cao Bang – a green pearl in northeastern mountains. Imposing, magnificent and beautiful Cao Bang in Vietnam

How to buy a chicken sandwich in Shenzhen. Fascinating read on the livestream e-commerce space in China. Total Addressable Market is estimated at $100 billion. In 2021, there were 461 million people who shopped on livestream in China.

The New LaGuardia Is Haunted by the Mistakes of its Past. An interesting read on the redesign of LaGuardia airport. I was there a few months ago and I had to say that I was surprised to see the modernity of the airport. I still held onto this notion that LaGuardia was this old place in a decaying condition. Landing in the new Terminal B from Omaha was an eye-opener. Hence, it’s great to read the context on why the airport went through such a transformation

Adult Children of Work-Visa Recipients Forced to Return to Parents’ Countries. It’s just terribly sad to read that children of Dreamers have to voluntarily leave the US because they cannot get a valid status. It is NOT their fault at all. The only thing that is wrong for them is to spend most of their lives in a country with a broken immigration system. Look at the biggest companies in the US and in the world. From which country are their CEOs? India! Then, how come do we need to make them wait for years and years to get a Green Card? It’s insanely infuriating.

The epic story behind the Ferrari and Lamborghini rivalry. A great story and reminder that you should not piss off your customers

Stats

Average Order Value at the top-performing quartile grocers is 46% higher than that of the other stores

Walmart is building 4 next-generation fulfillment centers in the next 3 years that can provide next-or-two-day shipping to 75% of the US population

Nearly 20 million people watched the Jan 6. hearing

Pokemon Go surpassed $6 billion in lifetime player spending

Food-at-home prices in May up 11.9% from a year ago

Business

Apple Pay Later

by MQDuong2 Comments on Apple Pay Later

WWDC is where Apple shows off its new software updates and sets the expectation for what is to come in the next year. It kicked off on Monday with a flurry of announcements on iOS16, MacOS Ventury, watchOS 9 and iPadOS 16. Among these announcements, I want to focus on one that is really interesting from a financial product standpoint and, to me, the next step forward towards making Apple not just a consumer brand. Per Apple on Monday:

Apple Pay Later provides users in the US with a seamless and secure way to split the cost of an Apple Pay purchase into four equal payments spread over six weeks, with zero interest and no fees of any kind.3 Built into Apple Wallet and designed with users’ financial health in mind, Apple Pay Later makes it easy to view, track, and repay Apple Pay Later payments within Wallet. Users can apply for Apple Pay Later when they are checking out with Apple Pay, or in Wallet. Apple Pay Later is available everywhere Apple Pay is accepted online or in-app, using the Mastercard network.4 Additionally, with Apple Pay Order Tracking, users can receive detailed receipts and order tracking information in Wallet for Apple Pay purchases with participating merchants.

When the news on the service broke on Monday, it triggered a lot of questions due to the lack of details. Until yesterday when Apple agreed to disclose more information. Per CNBC:

A wholly owned subsidiary of Apple will check user credit and extend short-term loans to users for Apple Pay Later, the tech giant said. Apple has partnered with Mastercard, which interacts with the vendors and offers a white label BNPL product called Installments, which Apple is using. Apple Card issuer Goldman Sachs also is involved as the technical issuer of the loans and is the official BIN sponsor, the company said. But Apple is not using Goldman’s credit decisions or its balance sheet for issuing the loans.

Apple will run a soft credit check to ensure that borrowers are capable of paying back the loans, which will likely be capped at around $1,000, the company said. If Apple Pay Later loans aren’t repaid, then Apple will no longer extend those users credit. But the company said it won’t report the missed payments to credit bureaus. Apple will initially launch Pay Later in the United States

Per Bloomberg:

A wholly owned subsidiary will oversee credit checks and make decisions on loans for the service, which is called Apple Pay Later. The business — Apple Financing LLC — has necessary state lending licenses to offer the feature, though it operates separately from the main Apple corporation, the company said in response to Bloomberg questions. 

Apple has been working to move many elements of its financial services in-house as part of a secret initiative dubbed “Breakout.” In addition to taking on lending, credit checks and decision-making, Apple is working on its own payment processing engine that may eventually replace CoreCard Corp., Bloomberg reported in March. It’s also working on new customer-service functions, fraud analysis, tools for calculating interest and rewards for other services.

The company is also working on a longer-term “buy now, pay later” program called Apple Pay Monthly Installments, Bloomberg has reported. While the shorter-term Apple Pay Later offering doesn’t use Goldman Sachs or other major partners, the longer-term plan is likely to rely on an array of other companies — including Goldman Sachs — that could offer different plans and interest rates. 

The new revelations shattered some of my original assumptions. At first, I thought users could turn on the payment plan after the fact, just like what Affirm Debit+, American Express or Chase offers. Now, it seems shoppers have to choose upfront whether to use an installment plan. Second, I didn’t expect Apple to go as far as securing state licenses in order to offer loans. The report from Bloomberg suggested that the company had a long-term and ambitious plan regarding financial services, a plan that is big enough for them to take on more compliance work, the underwriting itself and possibly the loan balance on its balance sheet. Nonetheless, because this is Apple, a company known for being a control freak over user experience and key capabilities, its desire to underwrite loans, process payments and battle fraud are totally on brand.

Even though the newly reported details are helpful, I still have some lingering questions that I’d love to understand more:

  • The transaction amount is currently capped at $1,000. Is there a minimum limit? Can I still go to a restaurant and put my dinner expense of $20 on a payment plan?
  • Apple Pay Later is slated to go live in the US later this year; which is not a surprise. If there is a plan to expand internationally, how long will that take? Apple Card went live almost three years ago and it’s still exclusively available in the US
  • Costco doesn’t accept Mastercard at its stores. Can I still use Apple Pay Later there? That seems like a significant use case for shoppers in the US
  • What does the application process look like? I can’t imagine that any cashier or customer would wait comfortably for a two-minute in-store Apple Pay Later transaction
  • iPhone is very popular among young folks who don’t have a lot of credit history. This type of financial product definitely resonates with them. How much risks would Apple tolerate from this population?
  • What is the unit economics of a transaction? How much would Apple charge merchants?

BNPL providers usually charge 2-6% of a transaction amount. These providers argue that they earn this cut because they raise the average order volume (AOV) as well as bring more leads to a business. While Apple Pay Later will also help merchants increase the AOV, what would Apple do to generate more leads at the top of the funnel? We already see promotional emails like this from Apple, but will Apple add a Deals tab somewhere in the Wallet?

Implication for Apple’s future

For the argument sake, let’s assume Apple will earn in revenue 3% of all Apple Pay Later transaction amount, including the 0.15% cut it already has on every Apple Pay transaction. Affirm did $13 billion in loan volume in the US in the last 12 months. If Apple Pay Later had the same volume, a 3% cut means that the company would earn almost $400 million in revenue, before expenses. It’s not nothing, but it’s still essentially a rounding error for a machine that generated $365 billion in revenue last year.

The bulk of the value that Apple Pay Later brings is to increase the stickiness of the Apple ecosystem. Existing users have one more reason to stay locked in. Those on the fence have one more reason to lean towards Apple. Merchants will be more motivated to add Apple Pay to their checkout pages. Regarding merchants, I do think Apple has a big plan in place to become more than just a consumer brand.

Going back to the first announcement, buried inside the text and overshadowed by the installment product is the fact that consumers will soon be able to track orders from Wallet on Apple Pay purchases. For this to happen, Wallet will effectively become an ordering system where merchants can process orders and have the delivery status updated. Instead of having an iphone as a payment reader and another software as an ordering system, Wallet can function as both. All a merchant needs is an iPhone. Here is how I see it:

First, Apple launched Apple Business Essentials, a subscription program that helps small companies manage their Apple devices. Then, the company introduced Tap To Pay with iPhone, which allows merchants to use their iPhone as a payment terminal without any extra hardware. A few days ago, Block (Square) said that they would bring Tap To Pay with iPhone to Square sellers who can use their Square POS app on an iPhone to receive payments in stores. Next, Apple Pay Later offers another payment option to shoppers and all the benefits that BNPL can bring to sellers, including higher average ticket value and conversion rates. Last but not least, merchants can use Wallet as an ordering system. Can you see the picture now? Payment is an integral part of doing business nowadays. If Apple devices and services can become integral to companies’ payments, Apple will have a stronger case for Apple Business Essentials. Far-fetched? Perhaps, but I am curious to see if my prediction comes true.

Implications for other BNPL providers

CEOs of Klarna and Affirm already got on TV to appear defiant and confident in the outlook of their business. But I suspect that the last few days already triggered some serious discussions in the boardrooms. How could they not take this seriously? Apple has some advantages that none of these BNPL firms have. First, Apple is one of, if not the most, recognizable and talked about brands in the world. It doesn’t have the brand awareness debt that a newcomer in this space would have. Second, Wallet is a native app that lives on Apple devices by default and requires no further download. If shoppers don’t have BNPL apps downloaded beforehand, the only way these firms can process loans is through merchants’ checkout pages. Unfortunately for them, Apple Pay is at least as popular a checkout button as any. Plus, if Apple can manage to push Apple Pay Later to Apple Watch, I don’t see how Affirm or Klarna or PayPal can get there to compete. Third, some BNPL firms are required to pay interests and expenses on the loans they generate. Apple, on the other hand, has an otherworldly balance sheet and generates cash as well as any company in the world. That should give Apple advantage in terms of unit economics. For now, Apple only offers one flavor of BNPL, but as Bloomberg reported, there are more to come. Hence, whatever advantage on product offerings that the likes of Affirm or Klarna have over Apple may soon evaporate.

Do I believe that this is a winner-takes-all space? No. BNPL firms will still have their space with their loyal followers and non-iOS users. However, their growth will likely be capped with the introduction of Apple Pay Later. I expect that we’ll see moves from these providers in the near future as they will try to bolster their positions while Apple Pay Later gets its feet wet.

In short, as someone who is interested in payments and invested in the future health of Apple as a company, I am excited about Apple Pay Later. Not only the service, but also what Apple does to launch it the way they do, I believe, will have an impact on the business. Personally, I am curious to see if my prediction on Apple Business Essentials will ring true. I also want to see how the BNPL space will change with the arrival of Apple Pay Later. Some already cast demise on BNPL providers as they are now just a feature that Apple offers. But I am skeptical of that view. The space is big and just because you compete with Apple, it doesn’t mean you can’t survive or grow.