Apple sidelines Goldman and goes in-house for new lending service

Apple is making its biggest move yet into finance by offering loans directly to consumers for its new “buy now, pay later” product, taking on a role played in its other lending services by banking partners such as Goldman Sachs.

Short-term loans made through the iPhone maker’s new Apple Pay Later service, announced on Monday, will be made through a wholly owned subsidiary, Apple Financing LLC, the company said.

Apple Pay Later will be accepted at the millions of US retailers that already accept the iPhone’s mobile and online payments service, giving it a broad reach and an enviable customer base who can already afford to splash out on its latest smartphone.

Big Tech’s move into the core banking business has been long feared on Wall Street after years of an uneasy alliance in areas such as mobile payments. In the past, Apple has worked with Goldman to issue a credit card in the US, as well as with banks such as Barclays in the UK to offer financing for purchases of its own gadgets. However, those banks’ roles are diminished in its latest financial product.

Goldman Sachs is facilitating Apple Pay Later by allowing Apple to access Mastercard’s network, since the iPhone maker lacks a licence to issue payment credentials directly. But Apple is handling the underwriting and lending using its new subsidiary.

In a statement, Goldman said it was “excited about our partnership with Apple, which will only continue to grow”. 

The set-up allows Apple to earn interchange fees from each transaction, as well as giving the company more control over data and international expansion plans. However, if a customer fails to pay back the loan, Apple must swallow the loss.

Currently, Apple Card, which it developed with Goldman, is only available in the US. Swapping partners like Goldman for an in-house operation will help accelerate international expansion of Apple’s financial products.

The company is used to rolling out its other online services such as Apple Music, iCloud and TV+ to dozens of countries at the same time that they launch in the US or soon after, but financial services expansion has moved more slowly.

Though the company declined to disclose its specific financing mechanism, Apple can easily afford to lend off its own balance sheet, especially for short-term loans. It had net cash of $73bn at the end of March, according to its most recent quarterly results.

The “buy now, pay later” service is the latest addition to a growing suite of Apple financial services, all managed through the Wallet app that comes pre-installed on every iPhone.

Apple Pay, which debuted in 2014, allows iPhone and Apple Watch owners to use their credit and debit cards by tapping their devices to wireless readers in stores. In 2017, Apple added the ability for users to make peer-to-peer payments through a service now called Apple Cash.

Apple said it does not see a need to apply for a banking licence at this time.

Several tech companies, including Amazon, PayPal, Stripe, Shopify and Block — formerly known as Square — offer financing to small businesses who sell through their platforms. However, few Big Tech firms beyond specialist fintech companies such Klarna and Affirm have extended loans to consumers for general purchases, as Apple is planning to offer.

Buyers of Apple’s premium-priced gadgets tend to have higher incomes than other tech customers, making them less of a lending risk. Apple can also use customer data, such as how long they have owned an iPhone or how often they buy apps from the App Store, to help determine whether a customer is in good standing.

Apple said that its decision to go it alone was in part taken to avoid sharing that sort of personal data with third parties. The company will not charge fees for late payments, in line with Klarna and Affirm, but will restrict access to further short-term credit.

In March, Apple bought UK-based fintech Credit Kudos. The start-up uses machine learning to create an alternative to traditional credit scores, which have been criticised as a way to accurately assess a consumer’s financial situation.

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