Artwork: Erik Carter
Let’s role play. It’s March 2021. You’re 23, a year out of college. Your last semester was ruined by the pandemic, but now you have a job at a company that’s “reinventing commerce” in a loft with reclaimed wood and catered lunches. The bars are open, your friends are coming back to town, and your bank balance looks good, even healthy: COVID means living on the cheap, with free government money and no student loan repayments. You rent an apartment and start wandering the markets – they’re all buzzing. You get tips on Reddit, trade on Robinhood, buy crypto. One of your chips turns a small bet into real money almost overnight. In the summer, your college team is planning a meeting, and it’s time to invest in an adult wardrobe to signal your budding success. It’s weird spending hundreds of dollars on outfits, but now there’s an app for that. On TikTok, Shein’s essays teach you a killer financial hack: “Buy now, pay later.”
He seems intelligent, almost responsible. You know credit card debt is how boom economy consumers destroyed their finances. And BNPL isn’t credit – it’s debit with fixed payments taken directly from your bank account, and you’re told there’s no interest or late fees. It helps you plan your spending, allowing you to spend more now, what you do. You use Afterpay to buy Reformation sneakers, and Klarna to defer payments on Live Nation tickets, and Affirm to get Peloton. Your approach to spending resembles the New Economy — the traditional laws of finance don’t apply.
But now we are in May 2022. Inflation is at its highest level in 40 years, there is war in Europe and the NASDAQ has just recorded its worst month since 2008. Crypto is awash with scams; unicorns talk about layoffs. And soon, when the student debt vacation ends, you’ll start getting a three- or four-figure bill every month. Good luck finding the money to make the payments you still owe on fast fashion and this Peloton.
OK, hypothetical. Schadenfreude can feel especially good when talking to people who still have their hair and can close a bar and walk to work with a smile the next morning. But we should all have a little more sympathy for the cash-strapped youth, especially because their BNPL-fueled mistakes could contribute to a prolonged (or worse) downturn in the wider economy. The construction of the loan introduces a real risk into the system: consumer debt jumped by $52 billion in March, the largest increase on record. In California, 91% of consumer loans made in 2020 were BNPL loans. Over 40% of Gen Z consumers will have used BNPL by the end of the year, the highest penetration of any age group. And now those debts are bad.
BNPL isn’t the only fintech fad disrupting the finances of a generation. Apps like Robinhood that gamify day trading and call it investing can be worse. Options trading accounts for nearly half of the company’s revenue. But making these kinds of bets can be more dangerous than casino gambling – you can easily and unwittingly bet far more than you have, and structural inefficiencies put amateur investors at a disadvantage to pros. (Disclosure: I’m an investor in Public, a trading app whose business model I think alleviates these concerns.) At least the newly popular sports betting apps are honest about gambling, and maybe few doesn’t matter what you call it. if the dopamine rush is good enough. US sports betting grew 165% in 2021 to a record $57 billion. Crypto in all its forms, from bitcoin to pictures of monkeys, still has many young people convinced that blockchain is the future of money. To spin it all, billions of venture capital have been spent on cutting-edge behavioral science and cutting-edge design to make deft applications to harvest for private gain one of humanity’s most powerful resources: l optimism of young people.
The BNPL seduced a generation with a good pitch. The companies are positioning themselves as a financially responsible alternative to credit because, according to the former executive director of Afterpay, young people “don’t want to be on credit”. If the first rule of marketing is “Give people what they want”, a corollary is “Give them what they want”. don’t want – just call it something else. Calling debt “a better way to pay” is masterful, tapping into young people’s desire for innovation at the most vulnerable point: payment. Traders love BNPL because it increases basket size (up to three and a half times) and purchase frequency. (Perhaps they learned it from my industry, higher education, which has been selling young people “college now, pay later” for decades.)
My NYU colleague, Aswath Damodaran, says the best regulation is life lessons, and getting financially out of skis can be part of growing up. However, in an educational system where you are more likely to take the yearbook as an option than personal finance, we are sending lambs to the credit slaughter. When tested on financial concepts, only a quarter of Americans between the ages of 23 and 35 demonstrated basic knowledge. Four out of five BNPL customers said they used the service to avoid credit card debt. And now almost a third of them cannot pay the BNPL debt. A late-paying Klarna customer told the BBC: “I wasn’t too worried because my credit rating was quite good. The next time I checked it had almost halved.
What happens when you convince a generation to spend more than they can afford? We have already seen this film. Literally. the big court, based on Michael Lewis’ book on the 2008 mortgage crisis, features Steve Carell and his hedge fund lieutenants talking to mortgage brokers about home loans. “Are candidates sometimes rejected? The brokers laugh. “If they’re rejected, I suck at my job.” Carell asks if their customers have any idea what they’re buying. “I focus on immigrants,” responds one of them. “Once they find out they’re getting a house, they sign where you tell them to sign. Do not ask questions, do not understand the rates. Someone adds, “Fucking idiots.”
Sound familiar? Money-obsessed finance brothers covering their eyes as they exploit financial illiteracy? Good times – as long as the lines on the charts are all pointing up. But when the market turns, the contagion spreads. US job losses in 2008 were the worst in half a century. Millennials are still digging out of the crater of the economic explosion. Now their younger siblings are wondering what is that ticking in their inbox. This is the arrival of Klarna’s overdue notices. Listen, because when that debt bomb explodes, the shrapnel might scatter away.
Klarna racked up $700 million in losses last year, 65% of which came from credit defaults. Affirm lost nearly the same in the past 12 months, while its marketing spend tripled to $427 million. Any hope of profitability hinges on overwhelmed consumers making their payments somehow and keep mashing the BUY button. What is more likely is that the precarious finances of the 20-something generation will soon fall into the precipice, and there is a big risk of collateral damage. The 24-year-old who defaults on his payments to Klarna isn’t just going to ruin his credit score. The 27-year-old who lost all her money trading options on Robinhood and is trying to get it back online isn’t going to be a fair leech his parents when she zeroes in. The 35-year-old mother who refinanced her home to buy bitcoin won’t just cost his daughter her college fund.
Even if it is not the triggering event of a global crisis, the gutting of a generation’s finances will suppress innovation and economic growth. Western capitalism once fueled the greatest increase in prosperity in history, giving us technological advances that would have seemed like magic a few generations ago. What do we do with this abundance? Devising ever more insidious ways to get young people to buy disposable clothes. Burnt credit scores and growing debt deter people from starting families and businesses. They are the building blocks of our society and our economy, and without them we will all pay later.