If the economy is truly as abysmal as the pundit class claims it is, consumers evidently have not yet gotten the memo. Half of all holiday shoppers told PayPal that they would finance their purchases with “buy now, pay later” schemes, spending over $10 billion in November. According to Adobe, total holiday spending financed by BNPL schemes is projected to be 11% higher by the end of 2025 than it was last year.
Financial analysts have used the 23% increase in BNPL-funded Black Friday purchases as evidence of an increasingly impoverished consumer, and Democratic state attorneys general have begun formally questioning BNPL providers, with Illinois Attorney General Kwame Raoul insisting that BNPL firms disproportionately victimize “individuals who are facing financial hardship.”
The reality, however, is the opposite. BNPL behemoths aren’t screwing over idiot consumers; instead, the consumers seem to be getting over on the baby brains behind BNPL. And instead of serving as evidence of mounting consumer poverty, the popularity of BNPL is best understood as the product of indulgent consumer profligacy.
TRUMP’S REVOLUTIONARY CHILD SAVINGS ACCOUNTS
The central business model behind Klarna, the global leader of BNPL that maintains more than a third of all market share, goes something like this:
Step One: Charge participating merchants a combination of flat transaction and variable percentage-based sales fees in exchange for access to consumers whose purchases are immediately paid for by Klarna. Note that Klarna charges vendors at least twice as much as Visa or Mastercard does.
Step Two: Klarna, which has taken on the risk of debt from consumers without conducting credit checks, issues consumers a zero-interest payment schedule to follow. If consumers fail to fulfill the payment schedule, Klarna charges them late fees and eventually sends outstanding debts to collections in the hopes of…
Step Three: ???
Step Four: Profit!
Of course, there is no profit. Klarna, which reported a staggering 45% increase in American sales relative to November of last year, still posts a -3.5% profit margin. The publicly-traded company has lost 31% of its value since its September IPO and around 80% of its value since its 2021 peak valuation by SoftBank, a recurring character in financial tragedies such as the collapse of BNPL.
In an attempt to juice its business, since clearly scalability isn’t enough, Klarna is now offering two prepaid membership tiers. For $19.99 per month, the Premium plan offers 1.5% cash back with random perks such as access to nine airport lounges, while the Max tier charges $44.99 for 2% cash back and these same perks.
To break even, a Premium subscriber would have to spend $1,333 on Klarna, while a Max client would have to spend $2,250. Crucially, Klarna, like the rest of the BNPL industry, partners exclusively with discretionary and luxury retailers, which undermines the notion that Klarna is being used by the financially vulnerable.
Klarna and the rest of the top BNPL providers partner with Victoria’s Secret, Sephora, GameStop, West Elm, Saks Fifth Avenue, and Airbnb. They do not partner with nearly any of the nation’s leading grocery stores, gas stations, or pharmacies. The closest exception I could find is that Klarna can be used on essentials, such as infant formula, at Amazon or Walmart; however, Walmart groceries are explicitly ineligible for Klarna. Company policy forbids Klarna from covering rent, medical care, car repairs, or government bills.
If the popularity of BNPL was a product of immediate and crushing financial distress, Klarna and its competitors would be financing prescription medications and gallons of milk, not Xbox systems, designer clothes, cosmetics, and vacations.
The irony of BNPL’s popularity is that a free tool already offers customers a short-term, interest-free loan. It’s called a credit card.
Klarna’s most popular features are the two payment plans that allow customers to pay off a purchase in one month or six weeks without paying any interest. Consider, for example, the zero-frills Apple Card.
The tech giant’s flagship credit card charges zero annual or monthly fees, and charges made in one month are not due until the end of the following month. With virtually any plan, this translates to a two-month loan with zero interest, and it provides consumers with 3% cash back in the process.
BNPL defenders will claim that an Apple Card user would then be charged interest if they fail to pay their full bill by the 30- to 60-day deadline after incurring the original charge.
However, this is precisely what Klarna does to delinquent customers within the same time frame.
The only difference is that Apple Card users maintain their access to credit and actually see their credit scores improve after they pay down their balances, whereas the waning path to Klarna’s profitability means that Klarna immediately shuts down purchasing power for delinquent customers, who not only lose their line of cash but also see their credit score collapse, with zero potentially improvement even after they pay Klarna back.
The kicker, of course, is that the highest APR charged for the least creditworthy Apple Card customer is 27.99%. In the fine print, Klarna concedes that its top APR is 35.99%.
Alexander Hamilton, who famously celebrated moderate federal debt as a “national blessing,” correctly warned that for the United States to “borrow upon good terms, it is essential that the credit of a nation should be well established.”
LOW HOUSING SUPPLY REMAINS TRUMP’S BIGGEST OBSTACLE
The same holds for the average consumer. In the best of times and circumstances, credit cards offer a consistent cash return on spending that consumers wouldn’t receive if they paid with debit, and in the worst circumstances, credit cards provide a stable, predictable, and unyielding line of emergency funds that should be repaid as soon as possible. In all of these cases, credit cards help build credit, giving consumers the credit scores that enable them to secure mortgages and achieve home ownership.
Investors are issuing a clear warning about the long-term solvency of Klarna, and the rest of the BNPL bunch may never actually make it to the New York Stock Exchange. Consumers who use BNPL may enjoy the immediate gratification of Klarna-sponsored shopping sprees at Bergdorf or Best Buy. Still, the bill always comes due, and the ability to borrow never comes free for long.