Why we want to pay as we go — for everything

As we wrote last week, Apple’s iPhone upgrade plan charges folks a premium for paying for their phone over time, provides insurance, and gives them the option to get a new phone every year.

A lot of people responded to the post saying they still thought it was a fair deal, especially considering the convenience of having a predictable payment level and hassle free upgrading.  Now, Samsung is rumored to be rolling out a similar plan.

Both Apple and Samsung are being driven by a broader trend.  Many have argued we have entered a post ownership society here in the US as millennials reject their parents’ stuff-filled lives.  As one example, many people are finding that Uber is cheaper than owning a car in the Bay Area.  This realization, among other factors has led to a stall in nationwide vehicle registrations (see chart below).  Finally, in a “gig economy” where the smartphone becomes a means of getting and doing work, paying for it on an incremental and predictable basis feels a lot more natural than a large, upfront expenditure.

Ironically, this movement is already well underway in other parts of the world, and in many ways, the US is just catching up.  

When Doug, our CEO, was in Africa selling D.Light solar systems in 2009, he found that the up-front cost was a significant hurdle for people with limited cash.  He developed a remote management technology to meter small scale solar systems and accept monthly payments.  A $200 device became a $20 per month device, sales ballooned, and millions of people were able to afford electric light for the first time.

Solar is also financed and paid monthly here in the US (again, paying over time allowed the industry to explode), but it is based on credit scoring and to some extent home ownership.  The D.Light system worked without these onerous requirements.

This is important because even minor technological improvements can have a massive impact on customers that are typically ignored or overlooked.  Solar may help lower electricity bills for folks in California, but it is a revolutionary source of electricity for millions in developing countries.  Similarly, smartphones are a great work tool for many of us in the US, but are the most important lifeline for refugees and many people’s only computer.

This is what makes PayJoy such a powerful concept.  We have devised a smartphone-based, pay-as-you-go system that works for any device, anywhere.  We are beginning by allowing people to collateralize their smartphone, but eventually, we can enable them to pay over time for any device on easy installment plans, without requiring extensive credit checks or collateral.

The iPhone upgrade plan — deal or no deal?

This week Apple announced for the first time that it would be offering consumers the option to pay monthly for a new, unlocked iPhone every year “from $32 a month.” (details below)

I wouldn’t go so far as to call this deal diabolical, but it is probably only a helpful option for those who don’t qualify.

First of all, Apple is actually offering a monthly installment plan, just like we enable at PayJoy, and just like carriers are offering all over the US.  Installment plans have replaced the carrier subsidy regime, spelling an end to two year contracts for most customers and ushering in an age of people paying for devices over time.  Apple is the first large OEM to offer these directly, and differentiates it from Sprint, which is offering a lease option for iPhones for $15 per month.

Let’s assume you clear the credit check and sign onto the cheapest possible 24 month installment plan of $32.41 per month for the iPhone 6S.  After 12 months you will have paid $389 (note the price for an unlocked iPhone 6 right now is $600).  At that stage, you will have the option to return the phone to Apple for free and get a new device.  Apple is likely to turn around and sell this device (in Asia old iPhones are more desirable than the latest Android phones) and you will not see any of that revenue.  You will then pay another $389 for the next year of the next device.  Ars Technica put together some excellent charts showing the different options.

If you use a normal installment plan, from a carrier or through PayJoy, you can pay out the remainder of the plan anytime and own the device outright.  This means you can get back the money you paid by selling the phone yourself, and then start a new installment plan.  Ultimately this turns out to be cheaper on most carriers except AT&T (below).  With Apple, the only scenario where you can get ownership of the phone is if you hold onto it for 24 months.  (I have verified this by talking to a number of folks from my local Apple Store.)

So where is the difference?  

If you are buying this, you are effectively pre-buying AppleCare+ and agreeing to a subscription without being able to get ownership of the device (unless you hold onto the device for 24 months, which would be even more costly).  Even folks who argue the upgrade plan is cheaper than going on a carrier plan with insurance recognize the carrier insurance actually covers more.  There is fundamentally no economic benefit besides the ability to pay over time for an unlocked and insured phone (and not having the hassle of reselling your phone).  Or, as the WSJ points out: “If you know you want the phone for two years or longer, T-Mobile’s current promotional offer of $20 a month for 18 months seems the best bet.”

In short, if you qualify for the Apple payment plan, it probably isn’t for you.

So what’s Apple up to?

Apple obviously is drawn to having more subscription revenue from its user base, adding onto Apple Music, HBO Now, and a number of other monthly services.  But it seems this may also be more about gaining leverage over carriers, initial adversaries and then willing partners in the iPhone’s stunning growth.  Through a direct commercial relationship with customers, and the ability to set prices independent of carriers, Apple can continually push carriers to comply with new pricing plans, require bundling of insurance, subscriptions, etc.

This is a big win, but Apple is ignoring a big opportunity.

Apple, just like the other carriers, is still ignoring the 40% of American adults that don’t have a credit card. Many of these people would actually be sound customers but the mainstream economy does not yet know how to serve them. At PayJoy, we are forging a new path to the consumers that Apple and others are ignoring. These customers want the same, high-end smartphone technology but lack the access to credit that many of us take for granted. With PayJoy, these customers can use the same device they are purchasing to securitize a loan for it. This allows them to access the phones they want at a reasonable price, building a credit history in the process.

So, while the new offer from Apple is a good way to pad the bottom line and capture more wallet share from existing consumers, it does nothing to reach out to the new consumer base that PayJoy is serving.