How Apple will make money with 0% interest; care

We first learned about the plans for Apple Pay Later nearly a year before the company announced the new installment payment plan at WWDC. While no interest or fees are charged, a report today says Apple will still make money from the service.

An academic at a business school also warned consumers to be cautious when using the option…

Background

Apple launched a 0% financing scheme in 2019, but limited to iPhone purchases and only available to Apple Card users. It was later extended to other Apple products, but again only for cardholders.

Apple Pay later

Apple Pay Later is a completely new offering. It offers installment payments for literally any product or service you buy using Apple Pay.

Apple Pay Later offers US users a simple and secure way to split the cost of an Apple Pay purchase into four equal payments spread over six weeks, with no interest and no fees of any kind.

Integrated into Apple Wallet and designed with users’ financial health in mind, Apple Pay Later makes it easy to view, track, and refund Apple Pay Later payments within Wallet. Users can request Apple Pay Later at checkout with Apple Pay or Wallet.

Apple Pay Later is available wherever Apple Pay is accepted online or in-app using the Mastercard network

The option is, however, limited to paying just six weeks – rather than the two years you get on Apple products using an Apple Card.

How Apple Makes Money

With 0% interest and zero fees, it might seem like Apple isn’t going to make any money from the financing scheme, but business school associate professor Rajat Roy says that’s not the case, as he explains in The conversation.

Apple is trying to consolidate its position in the world of consumer finance and increase its profitability […]

As Apple customers increasingly use the Pay Later service, Apple will earn from merchant fees. These are fees that retailers pay Apple in exchange for being able to offer customers Apple Pay.

While the fees are relatively small, they exceed the cost of financing the credit offer for such a short period. Roy says Apple and its financial partner Goldman Sachs will also gain valuable spending data.

Apple will also gain valuable insights into consumers’ purchasing behaviors, which will allow the company to predict future consumption and spending behavior.

Consumers should be cautious

While the deal might look good for consumers, Roy says pay-after schemes involve two risks.

First, the potential impact on your credit rating. While Apple only does a “soft” credit check when you ask to use the service, which doesn’t show up as a loan on your credit reports, you can still hurt your credit score if you miss a payment.

Second, Roy says such schemes can encourage spending that is not sustainable.

Younger demographic groups (such as Generation Z and Millenials) and low-income families may be more vulnerable to the risks associated with using these services – and may accumulate debt as a result.

Purchases through buy now, pay later schemes can also be driven by a desire to own the latest gadgets and luxury products – a message conveyed to consumers through smart marketing. They can condition consumers to make purchases without feeling the pain of parting with cold, hard cash.

From a consumer psychology perspective, these services encourage immediate gratification and put younger people in the throes of consumption. In other words, they may continually spend more money on purchases than they can actually afford.

Affirm ‘not worried’

The CEO of popular “pay later” credit provider Affirm said Max Levchin in Bloomberg TV that he is “not worried” about Apple’s announcement, even though the company’s shares were down 5.5% on the announcement. In fact, Business hours notes that he argues that the company may even benefit.

“I don’t think there is much concern,” Levchin said Tuesday (June 7) in an interview with Bloomberg Television. “There is a lot of room for growth for everyone involved.” Buy now, pay later is used for less than 5% of US transactions, he said.

Affirm offers loan plans from 6 weeks to 60 months, compared to Apple’s plan to split Apple Pay purchases into 4 payments over 6 weeks, Levchin said. Apple’s service “creates a very good wind for us” by informing more people about the buy-now, pay-later services, he said.

Not everyone believes him.

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