Smoking wasn’t popular among women until Edward Bernays, the father of public relations, rebranded it. In 1929 he capitalized on the feminist movement and repositioned cigarettes with a “torches of freedom” campaign. Bernays hired women to march down Fifth Avenue smoking as a public display of emancipation and rebellion. Within six years, women were purchasing 1 in 5 cigarettes, up from 1 in 20 in 1923.
The strategy is simple: If people associate something negative with your product (e.g., cancer), change the conversation — “You’ve come a long way, baby.”
Facebook’s rebranding to Meta is your mom at Thanksgiving when your brother begins bragging about all the “honk” he was making selling meth in rehab … just ignore all actions and words leading to that point, and change the subject as if the entire natural state has been suspended. Philip Morris and Blackwater are also good at this. New names attempt to divert our attention from teen depression, lung cancer, and murder, respectively.
A low-calorie version of this is unfolding in the payments space. The stale product formerly known as a loan has been rebranded as “Buy Now Pay Later,” or BNPL. The premise is simple: Buy a product for a fraction of its cost at checkout and pay the rest of it off over a few weeks or months. The good news: Debt is not as bad as cancer. Though it can trigger depression and even revolution. But that’s another post.
BNPL is one of the hottest trends in finance: 1 in 5 Americans used one of these services in the past year, with U.S. spending on BNPL increasing 230% since 2020. By 2025 global BNPL spending is projected to double to $680 billion. In August, Square acquired BNPL pioneer Afterpay for $29 billion in the largest-ever acquisition of an Australian firm. (We had the Founder/CEO of Afterpay on the Prof G Pod, and he’s an impressive young man.) Swedish BNPL giant Klarna is getting ready for a $50-billion-plus IPO, with a current valuation on par with ING or Lloyds Banking Group.
The target market is young people. Klarna’s frontman is rapper A$AP Rocky (who was paid in equity, not debt) — many BNPL brands rely on social media influencer campaigns. In the U.S., three-quarters of users are Gen Zers or millennials; it’s projected that nearly half of Gen Z will be using BNPL services by 2022. Their attraction to BNPL coincides with an aversion to banks and the credit they offer. This is a generation that came of age just before or in the wake of the Great Recession, a global economic crisis precipitated by … way too much credit. Young people love BNPL because, according to the former director of Afterpay, the vast majority of them “don’t want to be on credit.”
He’s not wrong. As Klarna reported in an investor factsheet, 1 in 3 millennials’ biggest fear is credit card debt. That’s more than name death or war. Deployment to Afghanistan is bad, but an unpaid balance on your Discover Card is (apparently) worse.
There’s one problem: Buy Now Pay Later is (wait for it) credit.
Hiding in Plain Sight
By most measures, BNPL services aren’t even good credit offerings. With a traditional credit card, you pay nothing up front, then you’ve got, on average, five weeks to pay without incurring any fees or interest. Closer to two months if you manage your billing cycles carefully. Carrying a balance will cost you, though, 1%-2% in interest per month. Miss a payment, and you get a late fee, about $30 — on which you’ll also pay interest.
In the short term at least, BNPL terms are worse. Take Afterpay. When you buy your new jeans, you have to come up with 25% of the money at purchase, then the lender gives you six weeks to pay off the remainder, in three installments. Miss an installment, and Afterpay hits you with a late fee. Continue in arrears, and the late fees increase, up to a cap of 25% of the purchase price. Also, you need a debit or credit card to make payments to Afterpay. Other providers have different fee and interest structures, but the basic model is the same. It’s credit.
BNPL companies market these limitations as features, not bugs. Because credit cards let you roll over your balance for a low monthly interest charge, you can rack up an insurmountable debt, which is harder to do with BNPL. Afterpay further limits customers’ risk by cutting them off once they start missing payments. It’s credit with training wheels, really. But it’s still credit.
BNPL marketing is Don Draper in Allbirds and a Patagonia vest, messaging for a modern age that generates irrational margins for the brand. Afterpay promotes that it charges “no interest!” However, miss one installment and you’re likely paying more, whether it’s called interest or a late fee. Afterpay competitor Affirm advertises the opposite: “Simple interest and no fees.” It then reiterates the message: “We don’t charge fees of any kind — not even late fees.” Bottom line, they’re all charging you the same thing: money.
So what’s the harm? Why not have a credit card with training wheels to ease young people into their journey toward a lifetime of debt? Especially as some of the costs are borne by the retailer in exchange for the consumer buying more sooner. Might Buy Now Pay Later even be training consumers to develop better purchase habits?
Here’s a good reason to be skeptical. (Let’s be honest, I’m skeptical about pretty much everything.) Pretending to be debit when you’re credit is an awesome business. BNPL firms take a larger cut of merchant sales than any other credit card company. Even AmEx — which charges merchants high interchange fees because its wealthy clientele are likely to spend more — gets a smaller share than Klarna, Affirm, and the like. Why would retailers do this? Because this technology/branding/sleight of hand convinces people to spend more than they would otherwise … full stop.
The business model is predicated on this fact: BNPL customers spend more money. Klarna boosts the average consumer basket size by 45%. Affirm increases it by 85%. Afterpay reports a 17% larger shopping cart, as well as a 12% uplift in overall sales. This is the psychological masterpiece at the heart of BNPL’s success: While fear of debt draws consumers toward Buy Now Pay Later, the model inspires them to spend more.
BNPL marketing teams are careful not to emphasize this with consumers. But on the merchant side, it’s the main event. More and more retailers are installing BNPL offerings at checkout, because they know consumers will load up their shopping carts. As a result, Afterpay’s merchant network has grown 500%+ since 2018.
Buy Now Pay Later firms are quick to tell you that this is where they make most of their money — off merchants, not millennials. That’s true. But the business model only works by capitalizing on the instinct for immediate gratification. And younger neurons are more vulnerable to this marketing than older ones. The prefrontal cortex — the part of the brain linked to dopamine control and release — only finishes maturing at around 25 years old. As a result, younger people are far more likely to engage in risky behavior in search of instant gratification and quick dopa-hits. This is what makes trades on Robinhood, likes on Instagram, and purchases on BNPL so much more rewarding to young adults: They’re engineered to satisfy their neurocognitive architecture.
The problem is the companies are putting these people in debt. (Something I do every day: “NYU Professor of Marketing”. But I digress.) Australia’s financial regulator found 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 had to cut down spending on essentials to make them. In 2019, Australian BNPL providers raked in $43 million in revenue from late fees, up 38% from the previous year. At a major U.K. bank, 10% of customers making BNPL payments overdrew their checking accounts in the same month. The authors of one study dubbed BNPL users “Generation Debt Trap.”
Some young people are beginning to catch on. TikTokers are dancing to the caption “crippling debt” after showing themselves purchasing new clothes with Klarna. Will a late BNPL payment hurt your credit score? Some of the companies say it won’t, others say it might. But a recent study found that a third of U.S. BNPL users have fallen behind on one or more payments, and 72% of them said their credit score dropped.
In countries with functioning governments, regulators have recently started to take action. After the U.K. announced a crackdown on BNPL, Klarna decided to reword its marketing to make it “absolutely clear” that it’s offering credit and not debit. Sweden recently prohibited credit payment options from being presented before debit options, sending BNPL options to the bottom of the check-out screen. In July, TikTok banned financial services brand advertising from its platform, including BNPL products.
U.S. regulation is trickier, as consumer credit laws vary by state and BNPL companies structure their offerings to elude many of them. Keep in mind, the last president is one of history’s most prolific debt-defaulters. And our current president was nicknamed “the senator from MBNA” for his good work ensuring that credit card debt (and student loan debt) couldn’t be escaped via bankruptcy. Young people aren’t wrong to be concerned about credit. They’re just being lied to about it.
Your Social Movement Is My Benjamins
Social change has become a marketing veneer to create shareholder value, vs. actual … social change. We have entered into a consensual hallucination with the marketplace that our most pressing challenges can be solved by a college dropout who will make us rich in the process. No. Climate change, teen depression, income inequality, and profligate debt have made a lot of people exceptionally wealthy. And the cost to unwind the damage will be expensive … for all of us.
The electric vehicle market, for example, has been flooded with capital on the premise that the TAM is not electric cars, but climate change. (I see no other explanation for a $100+ billion valuation for a company that does $0 in revenue.) Robinhood built a $24 billion cache turning the stock market into a slot machine with shiny buttons and fake confetti, while claiming it was “democratizing finance.” And Facebook’s mission is to “bring the world closer together.” One insurrection and extreme dieting site at a time.
Today is Black Friday. I expect our Gen Z representative to blow next month’s paycheck on a box of $6 sweaters made in a Chinese labor camp, then lecture us on how our eight-year-old (paid off) Toyota is ruining the planet. Get. Off. My. Lawn.
Life is so rich,