AAPL stock: Is the push into the Buy Now, Pay Later space a mistake?

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Whereas Apple (NASDAQ:AAPL) unveiled several new features, services and products at its annual Worldwide Developers Conference earlier this month, it planned to launch a buy now, pay later (BNPL) service which attracted the most attention. But Wall Street’s response has been muted, with AAPL stock having fallen about 6% since the news broke.

Called Apple Pay Later, the new service will allow US consumers to spread the cost of a purchase into four equal payments over a six-week period without incurring interest or fees.

Many analysts were quick to criticize the move as a bridge too far for the consumer electronics giant and a distraction from its core business. So, has Apple bitten off more than it can chew with its BNPL service?

Regulators seek to crack down on predatory lending

Buy now, pay later is not a new concept. Department stores used to offer “layaways,” which allowed customers to pay for items in installments over a set period of time.

Nowadays, an increasing number of companies offer the services of BNPL as an alternative to traditional credit cards and other consumer loans, and these are mainly targeting young consumers and minority groups who often use the service to pay for small items such as clothes, shoes, and in some cases, even meals. BNPL’s industry-leading companies include To affirm (NASDAQ:AFRM), PayPal (NASDAQ:PYPL), To block (NYSE:SQ) and private Klarna.

The industry has come under intense scrutiny for engaging in predatory lending practices that trap young adults and teens, as well as minority groups, in an endless cycle of debt and fees and related charges. A New York University marketing professor, Scott Galloway, recently published a scathing article on the BNPL industry in New York magazine with the title “Buy now. Pay (and pay, and pay, and pay) later.

This paragraph from the article sums up the growing problem with BNPL: “Consumer debt jumped $52 billion in March, the largest increase on record. In California, 91% of consumer loans made in 2020 were BNPL loans. Over 40% of Gen Z consumers will have used BNPL by the end of the year, the highest penetration of any age group. And now those debts are bad.

The article goes on to detail how BNPL’s business model is not going as the companies involved had hoped. For example, Galloway notes, “Klarna racked up $700 million in losses last year, 65% of which came from credit defaults. Affirm lost nearly the same in the past 12 months, while its marketing spend tripled to $427 million. Any hope of profitability hinges on overwhelmed consumers making their payments somehow and keep mashing the BUY button.

The US Consumer Financial Protection Bureau launched an investigation into BNPL programs late last year because they feared they would push people into accumulating excessive debt.

So far this year, shares of publicly traded BNPL executives have been gutted. AFRM is down 80% year-to-date, while PYPL is down 62% and SQ is down 60%.

Whether this is due to concerns about their business model, increased regulatory scrutiny, the wider sale of fintech, or all of the above, it begs the question: why would Apple want to get into this mess?

Apple continues its push into finance

Apple’s foray into the buy now, pay later space is part of the company’s growing push into finance. Its Apple Pay service allows consumers to use their iPhone to make quick payments. In 2019, Apple launched a credit card in partnership with an investment bank Goldman Sachs (NYSE:GS).

With Apple Pay Later, slated to launch in September, the tech giant has a few things play in his favor. First, because it can be integrated with Apple Pay and Apple Wallet, it won’t need a third party to facilitate transactions. Second, Apple is able to fund the BNPL loans using the $51.5 billion in cash on its balance sheet.

Naturally, Apple’s push into the BNPL space has other companies shaking in their boots. And clearly, Apple sees an opportunity in the space.

The global BNPL market exploded last year, more and more tripling for reach $120 billion, according to market research firm GlobalData. And it is expected to grow to a Compound annual rate of 26% to advance.

Some analysts say the push to BNPL is Apple’s attempt to provide another service that will keep consumers in the company’s orbit longer. Others say Apple will leverage BNPL loans for consumer data.

But will the potential for bad debts, indebted consumers and the resulting negative publicity be worth it for Apple?

The basics of AAPL shares

Apple is clearly looking for ways to diversify its business and sees finance as a legitimate avenue to pursue. But the world of buy-it-now, pay-later is a messy one, and the companies that have engaged in it have not done well so far.

Maybe Apple, with its deep pockets and massive customer base, can make BNPL work. However, if this goes wrong, the BNPL business will likely represent a small enough share of Apple’s overall business that any loss will prove immaterial. As long as Apple remains focused on its core revenue-generating products like the iPhone, Apple Watch, and Mac computer, the company and its shareholders should be fine.

As of the date of publication, Joel Baglole held a long-standing position with the AAPL. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a reporter for the Wall Street Journal and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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