FINANCIAL FRESHMAN #049
TL;DR → Buy Now, Pay Later (BNPL) services, such as Affirm and Klarna, are booming in popularity. Due to their marketing practices and seamless integration with popular technology, young people are taking on most of the financial burden.
Finance Your…Food?
In case you missed this glorious piece of news, DoorDash recently partnered with Buy Now, Pay Later (BNPL) giant Klarna to, in shareholder-speak, allow DoorDash customers to “enjoy Klarna’s seamless range of payment options.”
Financing. They’re talking about financing. Your DoorDash order. I was floored that this was a real thing, so I made a DoorDash account just to see this from the inside. I set up my account, and added food from some random Chinese restaurant to my cart:
I hit continue to pick a payment method, and…oh my God, there it is:
I am one click away from financing my Chinese food. There’s not a chance that anyone has ever written those words down before. The absurdity of this actually took me a few minutes to process.
The rise of third party food delivery apps like DoorDash equipped us to get food without having to physically leave our houses. Now, you don’t even need to have the money either. Glorious. Imagine it’s 2045, and your mortgage loan application gets rejected because you defaulted on a McGriddle twenty years ago.
Joking aside, this is horrifying. And I would like to talk about it.
The Rise of BNPL
Affirm, Afterpay, Klarna, Sezzle…the list (unfortunately) goes on and on. These services are exploding in popularity, with Berkshire Hathaway research stating that the 10 largest BNPL providers are worth a collective $122B dollars today.
Fast Company published a report highlighting that the six largest providers—Affirm, Afterpay, Klarna, PayPal, Sezzle, and Zip—combined to originate over 250 million loans in 2022, for a total of almost $34B in consumer debt.
The debt burden has gotten so sizeable that the Consumer Financial Protection Bureau (CFPB) is starting to take notice. They published research in January of this year that had some pretty harrowing findings from calendar year 2022:
- Over one-fifth of consumers (21.2%) financed at least one purchase with a BNPL loan.
- Of this 21.2%, almost two-thirds of them (63%) had multiple BNPL loans at the same time at one point in the year.
- Nearly two-thirds of BNPL loan applications were from applicants with “subprime” (below 619) or “deep subprime” (below 580) credit scores.
- Among Americans aged 18-24, BNPL debt made up 28% of total consumer debt, compared to the average of 17% across all borrowers.
Most of my readers are between the ages of 18-24, so let’s unpack this last bullet a little bit further.
BNPL & Young Shoppers
Zooming in on young borrowers makes the current BNPL situation seem a bit more dire.
A BankRate survey revealed that 51% of GenZ consumers have used BNPL services by now, a number that has grown steadily year over year. Billboard recently highlighted the magnitude of the current BNPL economy, claiming that 60% of Coachella attendees this year financed their tickets using one of these services.
A plethora of research shows that these predatory financing practices are disproportionately harming young people, but why? Is it marketing, the current economic climate, or the technology itself? If you polled the experts, they would probably say “all of the above.”
“Our research shows that BNPL providers’ youthful marketing appeal and use of social media influencers, continue to encourage shoppers to sign up and potentially spend more than they can realistically afford.”
James Andrews, Editor at Money.Co.Uk, to HelloPartner
“People often turn to BNPL loans when they’re having trouble making ends meet. That’s not going to get any easier if they take on multiple BNPL obligations that they’re going to have to come up with the money for in the months to come.”
Richard Barrington, Financial Analyst, to Fox Business
“That convenience factor, the ease with which they can move through the BNPL payment process, through their online transaction, has really kept the growth persistent.”
Vivek Pandya, Analyst at Adobe Digital Insights, to NBC News
Above all else, I think it’s the ease-of-access that is most concerning. These types of services are literally a click away, with no resistance involved whatsoever.
Final Thoughts, For Now…
I have many more thoughts on this topic, and it’s far too much to cover in one week. Next week I’ll plan to cover the psychology of these types of services, and exactly why they can be harmful to your personal financial picture.
In the meantime, just remember that these companies being financially successful means that they have to be making money somehow. That may be collecting interest from you, charging you fees for missed payments, or charging retailers at check-out…but they are getting paid one way or another.
