Tim Cook Risks the Apple Brand on Pay Later

When I first read that Apple (AAPL) was getting into the “buy now, pay later” business, I had to check myself. Was I reading this or just hallucinating?

Since CEO Tim Cook took over from Steve Jobs in August 2011, he’s delivered a ton of growth for the company and its shareholders. In the process, he’s become a wealthy man. According to Apple’s latest proxy, Cook owns 3.28 million shares of its stock worth $476 million at current prices. Only Chair Art Levinson owns more when it comes to company insiders.

In August, he will have been in the job for 11 years. Many CEOs don’t last that long. PWC found that the median tenure of the world’s 2,500 largest companies since 2000 hasn’t risen above 10 years. It’s gotten closer to five.

On the plus side, other data suggests that CEOs of S&P 500 companies have their best performance in years 11 through 15. If that’s the case, shareholders might want Cook to stick around for a few more years.

There is no question Cook has been a massive success as Apple’s CEO. 

For example, he stuck to his guns and pushed for more services revenue -- Apple TV+, Apple Music, iCloud, and the App Store -- in Q2 2022, they were $19.5 billion, accounting for 20% of the company’s overall sales. More importantly, the division’s gross margins of almost 73% are double the gross profits it generates from its hardware products. 

That alone has done much to push Apple stock higher. 

Not coincidentally, Apple Pay is part of its services business. Cook and his minions see dollar signs. I see nothing but grief. 

Here’s why.

Regulation Will Rain Down on Buy Now Pay Later

I’ll admit, I’m a fan of Block (SQ). The Square ecosystem and Cash App are significant revenue generators. The fact it paid $29 billion for Afterpay, one of the world’s largest BNPL providers, is a bit problematic. 

However, it’s a fintech, and BNPL’s one of the most significant financial products. Furthermore, Afterpay has a large group of customers outside the U.S. Block can put many of those customers into Square and Cash App. Its growth 101.

But Apple? Once Apple Pay came out, you knew Apple would leverage its customers to grow that business. But the regulation that will come with BNPL hardly seems worth it. 

The Verge recently highlighted who the core BNPL customer is: Generation Z. Approximately 73% of BNPL customers were born between 1997 and 2012. That’s 10 to 25 years of age. Of those Gen Zers, 43% have missed at least one payment in the past. Another survey suggests as many as 32% of all BNPL users (not just Gen Z) have had to skip rent or some other essential service to pay Afterpay or one of its BNPL peers. 

It used to be that credit cards were a convenient way for you to pay for things when you didn’t have cash in your pocket--and you got 20-30 days' grace. Now, they've become a get-out-of-jail-free card. Except that the average interest rate you pay on overdue balances in the U.S. is something like 18.32%, according to WalletHub. Where I live (Canada), it’s likely in the 20s.

BNPL is headed down this track. 

The one saving grace for Apple is that regulators have done little to curb payday lenders -- sometimes referred to as predatory lenders -- despite the fact interest rates run as high as 664% in places like Texas. 

They haven’t clamped down on this lending in the U.S. So, Apple may be betting they won’t interfere with BNPL. It might be right. 

BNPL Is Not the Right Thing to Do

When I think of Apple, I think of innovation and ease. My wife bought me a pair of Air Pods for my birthday recently. While I’m still getting used to them -- apparently, you don’t have to scream when making a call -- and can see why they’ve captured a big chunk of the headphone market. 

Launched in 2016, Air Pods has captured 34.4% of the U.S. headphone market in six years. Add in its Beats products (acquired), which controls nearly 50% of this market. That’s the Apple I know. 

I don’t have a problem with Apple being involved with financial services. I have a problem if they’re taking advantage of their most vulnerable customers. 

The Verge’s Emma Roth stated the following about BNPL and Apple:

“Attaching something as risky as BNPL to Apple’s brand puts Pay Later at odds with the company’s goal of providing customers with technology and services they can generally feel good about. As the big quote from Apple CEO Tim Cook on Apple’s Ethics and Compliance page reads, ‘We do the right thing, even when it’s not easy.’”  

I’m 100% in agreement with these comments. Getting into BNPL is not something you would associate with Apple. Unless it’s doing something to cap the late fees, it’s a distant cousin of usury.

What I do agree with is the Apple Card Monthly Installments. Phones aren’t cheap. But like anything bought on installment, you’ve got to keep up with the payments. If you don’t, your credit score would likely take a hit, but I’m not a credit score expert.

Lending Their Capital

Apple is creating a separate lending division to make the Pay Later short-term loans. According to CNBC, these loans will be capped at $1,000. That’s a good idea. 

How much could it make available for BNPL loans? 

It had $51.5 billion in cash and cash equivalents on its balance sheet at the end of Q2 2022. If it lent out 10% over the next 24 months, it could make as many as 51.5 million loans of $1,000. If they were all for iPhones, that would represent 21% of all the iPhones sold in 2021. 

It’s a big deal. 

But I still don’t think it’s a good idea. I hope I’m wrong.