TechThursday: BNPL

Remember the excitement when Apple announced Pay Later? Well, blink and you missed it—because it’s already gone. In just two years after its announcement at WWDC, Apple’s U.S. only Pay Later feature has been discontinued.

Pay Later’s life was extraordinarily short, having officially launched in late March 2023. However, the move isn't entirely surprising considering what is happening in the industry. Apple revealed at last week’s WWDC 2024 that users would now be able to access loans through the third-party app Affirm via Apple Pay.

Formerly known as Debit+, Affirm is approaching this market with the Affirm Card, a debit card that offers consumers the flexibility to pay upfront or request to pay over time through the Affirm app. Users can choose a payment plan for eligible purchases before checking out or link their bank account to pay with the Affirm Card via the app. Unlike BNPL cards issued by competitors like Klarna and Apple Pay, Affirm underwrites transactions made using its debit card.

Once a niche form of credit, BNPL exploded during the 2020 pandemic and has continued to grow, with some dubbing it "the future of finance for Millennials." Indeed, the revolution has been driven by Millennials and Gen Z, who make up more than 75% of BNPL customers. Contributing to BNPL's popularity is the demand for flexible payment options and an aversion to traditional credit cards.

The Buy Now, Pay Later services essentially offer the same benefits as using credit cards but without the long-term commitment and interest fees. Users can start using the services instantly without any application processes or background checks. They can also defer payments for longer periods than monthly credit card billing cycles, providing more freedom in managing cash flows.

However, despite its growth, the BNPL landscape is facing challenges. Apple's Pay Later has closed its doors, Klarna struggles to scale operationally in Europe, and PayPal faces issues in fully dominating its Pay Later scheme. Rising delinquencies have hit the BNPL sector hard. In the UK alone, default rates have surged by 20% over the past year, prompting regulators to step in. These challenges are largely due to increasing delinquencies and stringent regulations as governments strive to ensure that consumers can afford the loans they take out and avoid spiraling into debt.

According to a recent survey by Credit Karma, 34% of BNPL users have fallen behind on one or more payments. This highlights a significant risk associated with these services, prompting calls for more robust consumer protections.

So, what sets Affirm apart? Unlike other BNPL services, Affirm underwrites its transactions, potentially reducing the risk of delinquencies. However, whether this approach will lead to greater success in the long term remains to be seen.

BNPL services were like the cool new kids on the block until they had to face the principal’s office of regulatory scrutiny. It will be interesting to see how companies like Affirm navigate these challenges and what the future holds for the BNPL industry.