The news that Apple would offer its own “buy now, pay later” service, which splits each Apple Pay account into installments, has hit the fintech lending world like lightning. But it turns out that the new feature, while simple for consumers, will require a bit of backstage reorganization at Apple, including an all-new subsidiary that will run it.
The new feature, called Apple Pay Later, allows users to pay for their purchases every two weeks in four equal payments, with no interest or fees. This “bilk me later” type of payment has been popular of late as an adjunct to online retail at checkout, where companies like Affirm and Klarna offered easy ways to overcome “confirm order” hesitation with similar schemes.
The point is, Apple is a consumer technology company, and loans and credits are financial services, part of an industry with its own distinct rules and regulations. There are standards for these matters which mean that an organization must meet certain requirements in order to secure its loans, qualify for certain interest rates, and so on.
While Apple has previously partnered with payment providers and others on the financial side to make Apple Pay and Wallet work, Pay Later marks the first time the company has handled the actual lending, risk management, and credit checks itself. This may come as no surprise to anyone looking at Apple’s recent moves into fintech, adding a contactless card payment option for iPhone-based checkout, then paying some $150 million in March to UK banking startup Credit Kudos. .
To do it internally, Apple had to create a wholly owned but separate subsidiary called Apple Financing LLC, Apple confirmed to Vidak For Congress after Bloomberg first reported the news today. This company will do the actual work of assessing and extending credit in accordance with customary requirements, and will obtain the necessary licenses to operate in any regulatory jurisdiction. And of course, if everything goes up in flames, only the LLC burns down.
It’s important to note that Apple hasn’t been given a bank charter for its new Financing LLC — while banks are often lenders, the reverse isn’t always true. It partners with Goldman Sachs as the Mastercard reference provider rather than taking on that role itself, and Pay Later uses the Mastercard Term Program as its foundation.
To sign up, you need a debit card – you can’t pay off credit with more credit. And Apple said it will conduct a “soft” credit draw to ensure you all look good in the eyes of the all-seeing, all-deciding credit gods without sounding the alarm.
The new feature is expected to cause a serious shift in the payments world as several BNPL startups are highly regarded. But Apple will take a huge bite out of their business with Pay Later; even if there are many businesses that don’t use Apple Pay and want to include installment plans, there will be competitive pressure to match Apple’s minimum terms and fees for merchants. Expect serious changes in this corner of fintech soon.