Deep Dive
Shownotes Transcript
There is one company that 90% of U.S. lenders check with before they decide whether to give you a loan for a house or for a car. It's a credit rating agency called FICO. Now, this week, FICO announced that when it calculates your credit score, it's going to include, for the first time ever, your buy now, pay later purchases. Buy now, pay later purchases.
Buy now, pay later companies are everywhere. Klarna just partnered with DoorDash. You can put a burrito on payments. And if that seems unwise, well, Klarna's CEO told CNN, yes, he in fact agrees. Like, why even offer that option? Yes, and that is unwise. I would not recommend anyone to put a burrito on buy now, pay later, for clarity. Coming up on Today Explained, is burrito now, pay later a great deal or just another debt trap? How much is that burrito in the window?
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I'm Akilah Quigneau, and I'm a journalist at the Financial Times, British newspaper, and I'm now based in the U.S. covering consumer finance. One aspect of consumer finance that you've been covering recently is buy-now-pay-later services. What are those and how do they work? So buy-now-pay-later, or BNPL, is basically a type of lending that's provided by companies that
that call themselves fintech, so financial technology. But what they really are is just their lenders who allow shoppers and consumers to split their purchases into installments. And largely these installments are interest-free, so you don't pay an interest rate on them. Wait, if they're not charging interest, how do they make money?
Right. So it's not entirely transparent and each of them has a different sort of breakdown of how they make money. But essentially, they take a fee from the merchants. Merchants love BNPL because it gets people to buy more stuff. You need to book a flight. Today, the price is perfect. But you just paid all your bills and it's not really a good time financially. I have some options for you. I have...
I have spent $32,196.23 on a firm in Klarna since 2022. And the big question is what did I purchase? You know how much better I felt about myself financially knowing that I was paying $43 today as opposed to paying $170 today. My shelves are full of makeup. I can't really mentally justify buying more makeup, but I mean, Hey, it's only $43.
And some of them also make money from late repayment fees, which they call all sorts of funny names like snooze fees or reminder fees. But yeah, they're basically penalties that they take from consumers who don't pay on time.
2025 was my year of not buying crap online. I'm taking it very seriously. I've been pretty good. But on occasion, I have seen the option to pay with Klarna. But I actually can't remember where. Maybe Sephora? What kinds of stuff can you buy with Klarna?
BNPL? Well, so that's the thing. Pretty much now anything or at least a wide range of items. So, you know, people have always or, you know, for a long time been able to pay in installments for big purchases like, you know, a sofa. A couch. Yeah. A couch. Exactly. But now it's kind of
to makeup, fast fashion, online clothing, that's a big one, and even DoorDash. Like, are we not going to discuss the news headline that all of a sudden DoorDash and Klarna are going to allow you to pay for fast food in installments? So now you can get your expensive DoorDash sent right to your front porch, cold, mushy,
DoorDash person will probably farted on it, but now it's on a payment plan. Bad decision after bad decision after bad damn decision. Akilah, let's say I buy the burrito and then I decide I'm going to default on it. I'm not going to pay the $15 back. What happens?
So if you can't repay on time and you can't sort of honor the repayment plan that you've agreed to with one of the providers, often they'll charge late repayment fees. And so if you keep doing that, it's likely they won't approve you for more loans with them. And then another kind of contentious area of this whole debate is that for a long time,
defaults on buy now pay later plans were not reported to credit bureaus and so they wouldn't affect credit scoring which had
A lot of consequences, one of them being that people could stack up loans from different providers with each of the providers not knowing that the person would already have BNPL loans with others. But that's actually changing. So the sector has come under pressure from consumer protection groups. And there's also been a rise in defaults recently as people fear that the risks of a U.S. recession will...
are becoming higher. So now, actually, last week, one of the largest providers of credit scoring in the U.S. has announced that it will take into account BNPL, buy now, pay later. My first impulse when I saw Klarna was, nobody's going to do this, but I clearly was wrong. How popular is this?
So it's increasingly popular. It's rising really fast, particularly with young people initially, but it's also spreading beyond that demographic. And it's so popular because it's so easy. So, you know, that's the kind of fintech element. These companies have been really good at creating like a very seamless,
payment flow online. So if you're shopping, you don't even have to really plan for it or think about it ahead of time. You'll just see a button to click on and then very easily you can get that loan.
And it's also popular because people want to buy a lot of stuff. Like, you know, we were all targeted with these ads online and we all know about the rise of influencers. Today, we're finally doing my bedroom makeover on a budget with the help of Klarna. You don't have to have all of the fancy new things to run. But if you're looking to invest in something for your running journey, Klarna is a great tool. Y'all, don't sleep on Klarna. I just bought some new kitchen appliances and I've been obsessed. What's the weirdest thing that you've seen?
The most probably concerning from a consumer protection perspective and from a financial stability sort of perspective is groceries. So, you know, if people start to pay, which they are, but like, you know, paying for food and various essential items with loans, I think is pretty wild. Yeah.
Yeah, buying groceries on payments is uncomfortable to think about. So are these services more popular with people who are low income and really need them to spread the payment out?
So we don't have a ton of data, so it's difficult to say for certain what the breakdown is in terms of the users. However, we do know that people who can get approved for these loans might not get approved for other loans or credit cards. So there is an understanding among economists and analysts that it's more socialized.
subprime population than other consumer lending areas. And so what this means is that the people who are using these services to buy groceries are probably higher risk customers. And so if the economy turns
there is a higher risk of default from that population. One of the things that people are watching at the moment is unemployment, the unemployment rate. So at the moment, employment still remains strong, but, you know, that could change and that could sort of create problems for those consumers. Americans tend to accept debt with few reservations, indeed.
even in a lot of cases, if we can't pay it back. And there are probably a million reasons for this, but if someone says, I'm going to give you a $30,000 credit limit, we're like, yes, I'm going to spend $30,001. So buy now, pay later is not shockingly new. We've always had, you know, layaway at the furniture store. But Klarna and these other
Payment systems are everywhere now and they're easy. Do you think this is going to lead to people racking up more debt just because they can?
So I think there is a really interesting tension where these products have the possibility of offering flexibility and be another financial tool in people's lives, specifically people who don't easily have access to credit or funding. And so that has the potential of being great. It also has the potential of spiraling into a potentially unsustainable financial situation for these people.
And I think that often we look to regulation to kind of find that right balance between consumer protection and financial freedom and kind of managing the incentive that these companies have to grow their businesses versus protecting the economy. One of the big concerns with this at the moment is that this industry is so new that it's not regulated as credit in the US.
Credit cards are strictly regulated. Mortgages, the mortgage market is strictly regulated. And there was a push to regulate buy now, pay later as credit, the same way credit cards are regulated in the U.S.,
That's been stripped away because of leadership changes in the CFPB, the Consumer Financial Protection Bureau, installed by the new administration. So perhaps that's the kind of missing piece in the puzzle that makes it a potentially...
more dangerous tool or it might not fulfill its potential as it would if there was proportionate adequate regulation. You basically want it to be a system where it can be used as a tool but the people who use it as a tool understand the risks that it comes with and the consequences it can have on their financial lives. Akilah Kino of the Financial Times coming up. No judgment, but...
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This is Today Explained.
So I am Kyla Scanlon. I'm an author and an economic content creator. So my first book, In This Economy, came out last year. And I make videos across social media, have written for the New York Times opinion section, Bloomberg opinion. And my main goal is to help people understand the economy so they can make better decisions about their life. You and I have never met. You do not know anything about me. But I
I do not like buy now, pay later. You tell me why that is. Why you don't like it? Why am I so suspicious of buy now, pay later? I think a lot of people are suspicious.
When Klorna teamed up with DoorDash, I made a video about it because I was freaked out. This gets into something that I've written a little bit about too, the convenience contradiction, where we're optimizing for this effortlessness. When everything's like really easy, the less resilient that people become.
And so the more fragile the system is, the more anxious people are. And so you reach for even more convenience in order to soothe yourself. I think that just encourages bad behavior. Like there's like, you know, buying a moisturizer from Sephora. You're going to use the moisturizer. It's part of a skincare routine. Like that's a little bit more commonplace. But the fact that people might be financing the quote unquote private taxi for their...
burrito, like that's just encouraging bad financial habits. DoorDash is incredibly expensive. And if you have the option and the ability to go and get your food from the restaurant itself, that's something that we should be probably encouraging people to do so they don't incur those extra fees. And so I think things like that, where it's encouraging people to spend more money than they have for a service that they don't necessarily need. That's when...
Things can get really bad. And there was a lot of jokes during that Klarna DoorDash partnership announcement. It is true, ladies and gentlemen. You can now finance your DoorDash. Collateralized burrito obligations. I know y'all ass is not going to debt for some extra guacamole and chips. Could we have a bunch of people who are just so overextended?
on credit and they're ignoring their payments because there's elements of financial nihilism where we really do have a massive problem on our hands. And so I look at things like that. I view that a little bit differently than like a moisturizer from Sephora as something that could be quite bad in the future. It sounds like you were sounding a warning. What else did you say in that video to your to your viewers?
What I talked about in that video was sort of the poor impulse control economy. Because what happens when you remove all friction from consumption is that the meal that arrives to your doorstep has no social ties to you. It requires no planning and it leaves nothing behind but packaging waste. So I talked about meme coins, I talked about sports betting and how companies can collect the data on the vices that we have.
And so when everything becomes totally frictionless, like when you can order a private taxi for your burrito, that sort of behavior can stem out into things that are probably a lot worse for us, including like gambling on meme coins, gambling on a baseball game. Some people think that I'm crazy because I'm trying to make six figures on a two figure or less budget on FanDuel. The biggest scam that's plaguing the community right now is sports betting, mainly in reference to these fantasy apps. What I just witnessed
in the last leg of our Hail Mary parlay is the most disgusting, the most despicable, the most sickening thing I have ever seen
And so that's what I worry about, is that the convenience and the impulsivity that it allows for, allows for the expansion of the grift economy of a world where people are spending money on things that they don't need to, and they're just totally lost in that cycle. You're a commentator, you're a public intellectual, you're also a Gen Z-er, and you talk directly to Gen Z-ers who are operating in the economy. How is that?
How is your generation using BNPL? A lot of Gen Zers have had very common interactions with debt. Student loan debt is a big part of the life of a Gen Zer. You know, medical bills, anything involving a credit score. Like, debt has been so normalized for the younger generation that when they see something like BNPL, it's like, oh, this is just casual debt. Hi, my name is Diva, and I am $107,000 in debt.
I am the Affirm and Corner Girl. There's a point when you realize that the consequences of not paying a loan are actually not like that bad. And so I think for young people, they've been raised in the shadow of the 2008 crisis, you know, student loan debt, like I said. So it's just...
sort of what they do with their money. This is interesting that debt has always been available to Gen Z. If you're an older millennial like I am, that's not really the case. You kind of remember getting your first credit card when you were like 22, but there was no Apple Pay. You couldn't just pay for stuff on your phone. And it strikes me that like my nieces and nephews who are teenagers, they can do that. They have this ease with paying for stuff and taking on debt for stuff that
never occurred to me would be an option when I was young. Yeah, I mean, I think a lot of that is structural. So in 2020, their government sent out unemployment checks. I am asking Congress to amend this bill and increase the ridiculously low $600 to $2,000 or $4,000 for a couple. It's the biggest ever, ever approved in Congress, $6.2 trillion in
So, you know, we used to get used to the billion. It used to be a million, then it was a billion, now it's a trillion. In 2021, the Fed had rates really close to zero. Like, we're always talking about the deficit. We're always talking about how much money the United States as a country owes. The national debt
stands currently at about $36.2 trillion. Moody's has lowered the United States credit rating because of an increase of government debt. And so I think for everybody, they're just looking at that and they're like, well, you know, if the government owes all this money, like surely I can have a little...
bit of debt too. And then credit scores have become such a core part of the American identity. It really informs a lot of how you can buy a house or, you know, if you can even get certain loans that I think people view debt as structural to them as a person. And that's just
increased. And I think it really has a lot to do with the environment that Gen Z has grown up in and the fact that these tools are so readily available and they're so easy to use. Talk to me a bit about how you think about debt. Is it dangerous? Well, I think when you look at debt,
systemically right. Debt's not inherently a bad thing. Like most things, it's a tool. Like social media, you could say it's bad, but it's a tool. It's all about how you use it. Same with debt. You know, BNPL in itself isn't evil, especially if you can pay it all off without having to face those high interest rates. Credit cards themselves aren't evil, but it's really about the system that encourages these sorts of products to be created. And
So, you know, real wages were stagnant for a really long time. The entry-level labor force is really deteriorated. It's very tough to get a job right now. If you're graduating from college and the college wage premium has eroded quite a bit, you know, rent is high because we don't build enough housing, groceries are up.
And so I think people are just looking at the very high prices, the impossibility of ever buying a house, the struggles that they might be facing in the labor force. And it's really like, well, sure, it might be irresponsible to use BNPL to get a moisturizer from Sephora, but literally what else am I going to do? I don't see a solution before me. And so I think that's been the
Big thing with debt is that we've used it as a tool in order to navigate some of the hairier parts about being in the United States right now.
It strikes me that what you're talking about is where traditionally like a safety net would grab somebody, right? You need a bridge between last month's paycheck and this month's first paycheck. And I think historically you might say, and I think this is a valid question, look, you can't afford the Sephora lotion right now. So why don't you just wait?
And it sounds like what you're saying is that's a bit of a privileged or maybe old fashioned idea of how paying for things works.
Right. And I think why don't you just wait ignores some of the ladder issues that we're facing, like Gen Z, younger people, honestly, millennials in some capacity are facing this really like broken ladder problem where it's like, okay, sure, you know, they could wait to buy that moisturizer, but that would require the entry level labor market to free up again. That would require wages to really speed up. That would require the housing market to
And so I think a lot of people blame younger people for, you know, using debt and using BNPL. And I think you should be careful. Like, I don't think you should be living above your means in an extravagant way, but it really is like a psychological buffer of sorts.
where people are just like, well, I don't know what else to do, so I'm going to go and buy this thing. It is an element of instant gratification, the same thing that we see in social media. But for Gen Zers and younger people, there isn't that stability, that expectation of stability in the traditional sense.
And so I think these little small luxuries matter, like buying that moisturizer matters because it is indulgent in a certain way, but it's also a flex of agency in an economy that doesn't feel like it's allowing you into it. It does feel a little bit like there is some...
American ethos here that says to live is to be in debt and we've all accepted that. Yeah, I mean, that's kind of the only way you can get by sometimes. You know, there's that misquoted statistic about paycheck to paycheck. Like, it's not 60% of Americans living paycheck to paycheck. It's far lower. But I think, you know, a lot of people just feel like one wrong move and the whole thing could come tumbling out beneath you. Like,
And so we just have these issues that are outside of the realm of consumer packaged goods being delivered, whereas as many policymakers and politicians and pundits have written about where we have to really start thinking through actual solutions to these problems because they're just not going to fix themselves. The incentives are too misaligned.
Kyla Scanlon, she's the author of the book In This Economy. You can find a link in our show notes. Miles Bryan and Gabrielle Burbe produced today's show. Amina El-Sadi edited. Laura Bullard fact-checked. Patrick Boyd and Andrea Christen's daughter engineered. Thank you, Matt. It's Today Explained. I'm Noelle King. ♪
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