10 Minute Text

Buy now, pay later, shop forever, everything is fine?

Updated May 2, 2023, 2:07pm EDT

“Buy now, pay later” has gone mainstream, particularly among millennial and Gen-Z shoppers.

PayPal, Afterpay, Klarna, and Affirm have built big businesses letting shoppers make their purchases on installment plans, paying a fraction up front and often little or no interest over the life of the loan. Apple launched its own offering earlier this year.

Loans grew from $2 billion in 2019 to $24 billion in 2021, and 17% of consumers have used one, according to the latest data from the Consumer Financial Protection Bureau.

They pitch themselves as a friendlier and cheaper alternative to credit cards (often pitching no-interest loans, they are certainly the latter). Critics say it’s simply debt by another name and is contributing to the financial strapping of a younger generation. BNPL borrowers are more likely to be under 35, have lower credit scores, carry balances on their credit cards, and overdraft on their bank accounts, according to a CFPB last month.

I talked with David Sykes, Klarna’s chief commercial officer, about where the industry is going from here, whether he’s scared of Apple, and how AI could revolutionize shopping.

Liz Hoffman said:

Hi David, can you send a selfie and tell me where you are right now?

David Sykes said:

I’m sitting in my home in Tribeca, NY.

Liz Hoffman said:

Wait I’m also in Tribeca. We could have done this in person. Not really in the spirit of the format though.

David Sykes said:

Ha! Next time.

Liz Hoffman said:

Buy now pay later is credit. But it isn’t captured in traditional credit scores and isn’t picked up in most data or credit landscape pictures. Are we creating some hidden risk?

David Sykes said:

I don’t believe so. It’s popular in part because it’s the opposite of traditional credit. It’s incredibly consumer friendly. When we think about BNPL it’s rarely through the lens of comparing it to the status quo - the traditional credit cards.

Liz Hoffman said:

It’s cheaper than credit cards (to the consumer) but it also encourages people to spend more than they otherwise might or maybe should. Do you think people actually understand the product they’re using?

David Sykes said:

I don’t know about that. Our average order value is $100 in the US and we make a [creditworthiness] assessment on every transaction. Compare that to a credit card where you get $1000s upfront, assessed one time.

David Sykes said:

More than 60% of Americans carry a balance month to month. And then you get 20 offers in the mail to take on more credit card debt.

David Sykes said:

The reason is there’s so much money to be made in that model when you’re charging 30% interest. In our model, the merchant pays. It’s fundamentally different in terms of the behavior it seeks to encourage.

Liz Hoffman said:

Ok but isn’t the cost just passed on to consumers in higher prices? BNPL fees are generally higher than credit card swipe fees.

David Sykes said:

I don’t think so. The value of a new customer is huge. Certainly 1% extra in payment costs for most merchants isn’t moving the needle. Many of our partners pay 10-30% in affiliate revenue.

Liz Hoffman said:

Apple showed up in your space in a big way recently. They’re in 1 billion pockets. Is this an internally competitive space yet, or just all of you against Big Plastic?

David Sykes said:

I think it’s validation of the model. I don’t think anyone feels like Apple is here trying to get consumers to overspend. And more and more traditional banks are also offering these services.

Liz Hoffman said:

Do interest-free loans work in a world of higher rates? Your own cost of funding must be going up.

David Sykes said:

It’s a really small cost for us. Without getting too technical, we cycle capital very quickly. That means we turn over a $ very quickly when people are paying you back over a 6 week period.

David Sykes said:

Within 14 days we have 50% of the amount repaid. Compare that with a 30 year home loan or 5 year car loan.

Liz Hoffman said:

Just because I’m a Wall Street nerd, does a repayment cycle that short mean BNPL loans won’t get sliced and diced and securitized like other consumer debt? I ask because it seems like that’s usually where bad incentives get injected into otherwise fine financial products.

David Sykes said:

No, I don’t think that’s a risk like it was in 2008. One - we’re a bank which means we can lend off our own balance sheet which is important.

David Sykes said:

Two - even when you do see these types of products securitized I think there’s a lot more sophistication in the market than there has been in the past. I don’t think there’s the same risk in risky debt getting high (unjustified) ratings grade like we saw with home loans during the global financial crisis.

Liz Hoffman said:

Do you have other plans for that banking license? Will we see Klarna mortgages and small business loans?

David Sykes said:

I don’t think so any time soon. Our focus is much more on the shopping experience side. If you look at our product launches it’s an ad management platform, comparison shopping services, wishlists.

Liz Hoffman said:

You should buy Pinterest.

David Sykes said:

Ha! They’re a little pricey.

Liz Hoffman said:

…Pinterest should buy you?

David Sykes said:

They couldn’t afford us 😉

But more importantly, we built this functionality ourselves and it’s much more contextual because ppl are in the Klarna app to shop. With AI in particular I think how we shop is about to be transformed.

Liz Hoffman said:

I’ve been saying this! I should be able to give ChatGPT my vibes, have it design a room, and then have it tell me where to buy everything.

David Sykes said:

Watch this space.

David Sykes said:

The combo of a truly AI shopping assistant combined with a highly personalized shopping experience. I can see a world in the very near future where Klarna recommends highly relevant products to you and then purchases them without you having to lift a finger.

Liz Hoffman said:

Chatbots have to pay for all that compute power somehow…

Liz Hoffman said:

Thanks for doing this, David. This was fun.

David Sykes said:

Same. Thanks again.