Illustration: 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’ve got a job with a firm that’s “reinventing commerce” in a loft with reclaimed wood and catered lunches. Bars are open, your friends are coming back to the city, and your bank balance looks good, healthy even: COVID means living cheap, with free cash from the government and no student-loan payments. You lease an apartment and begin dabbling in the markets — they’re all surging. You pick up tips on Reddit, trade on Robinhood, buy crypto. One of your tokens turns a modest stake into real money almost overnight. By summer, your college crew is planning a reunion, and it’s time to invest in an adult wardrobe to signal your budding success. It feels weird to spend hundreds of dollars on outfits — but now there’s an app for that. On TikTok, try-on hauls from Shein teach you a killer finance hack: “Buy now, pay later.”
It seems smart, almost responsible. You know credit-card debt is how boomer-economy consumers wrecked their finances. And BNPL isn’t credit — it’s debit with fixed payments taken right from your bank account, and you’re told there’s no interest or late fees. It helps you plan your spending, letting you spend more now — so you do. You use Afterpay to buy sneakers from Reformation, and Klarna to defer payments on tickets from Live Nation, and Affirm to get a Peloton. Your approach to spending feels New Economy — the traditional laws of finance don’t apply.
But now it’s May 2022. Inflation is at a 40-year high, there’s war in Europe, and the NASDAQ just registered its worst month since 2008. Crypto is awash in scams; unicorns are talking layoffs. And soon, when the student-debt vacation ends, you’re going to start getting a three- or four-figure bill every month. Good luck finding the cash to make payments you still owe on fast fashion and that Peloton.
Okay, hypothetical over. Schadenfreude may feel especially good when it’s directed at people who still have their hair and can shut down a bar and roll into work with a grin 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 an extended recession (or worse) in the broader economy. The borrowing construct is introducing real risk into the system: Consumer debt jumped $52 billion in March, the largest increase on record. In California, 91 percent of consumer loans made in 2020 were BNPL loans. More than 40 percent 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 going bad.
BNPL isn’t the only fintech fad that’s fubaring the finances of a generation. Apps like Robinhood that gamify day trading and call it investing may be worse. Options trades make up nearly half of the company’s revenue. But making these kinds of bets may be more dangerous than casino gambling — you can easily and unwittingly wager much more than you have, and structural inefficiencies put amateur investors at a disadvantage to the pros. (Disclosure: I’m an investor in Public, a trading app whose business model I believe mitigates these concerns.) At least the newly popular sports-betting apps are honest about being gambling, and maybe it doesn’t matter what you call it if the dopamine rush is good enough. U.S. sports betting was up 165 percent in 2021 to a record $57 billion. Crypto in its many guises, from bitcoin to monkey pictures, still has plenty of young people convinced that the blockchain is the future of money. Making it all go round are billions in venture capital spent on cutting-edge behavioral science and top-drawer design to make apps deft at harvesting for private gain one of humanity’s most potent resources: the optimism of young people.
BNPL seduced a generation with a great pitch. The firms position themselves as a financially responsible alternative to credit because, per Afterpay’s former executive director, 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 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 right at the point of greatest vulnerability: checkout. Merchants love BNPL because it increases basket size (by as much as three and a half times) and purchase frequency. (Maybe they learned it from my industry, higher ed, which has been selling young people on “college now, pay later” for decades.)
My NYU colleague Aswath Damodaran says that the best regulation is life lessons, and getting out over your skis financially may be part of growing up. However, in an educational system where you’re more likely to take yearbook as an elective than personal finance, we are sending lambs to the credit slaughter. When tested on financial concepts, only a quarter of Americans between 23 and 35 demonstrated basic knowledge. Four out of five BNPL customers said they use the service to avoid credit-card debt. And now nearly a third of them can’t afford the BNPL debt. One behind-on-her-payments Klarna customer told the BBC, “I wasn’t too worried because my credit score was quite good. The next time I checked, it had nearly halved.”
What happens when you convince a generation to spend more than it can afford? We’ve seen this movie before. Literally. The Big Short, based on Michael Lewis’s book about the 2008 mortgage crisis, features Steve Carell and his hedge-fund lieutenants talking to mortgage brokers about home loans. “Do applicants ever get rejected?” The brokers laugh. “If they get rejected, I suck at my job.” Carell asks if their clients have any idea what they are buying. “I focus on immigrants,” one responds. “Once they find out they’re getting a home, they sign where you tell them to sign. Don’t ask questions, don’t understand the rates.” Someone adds: “Fucking idiots.”
Sound familiar? Money-obsessed finance bros covering their eyes as they exploit financial illiteracy? Good times — as long as the lines on the graphs are all pointing up. But when the market turns, contagion spreads. U.S. job losses in 2008 were the worst in half a century. Millennials are still digging out of the economic blast crater. Now their younger siblings are wondering what that ticking sound is in their inboxes. It’s the arrival of past-due notices from Klarna. Listen, because when this debt bomb detonates, the shrapnel could disperse far and wide.
Klarna racked up $700 million in losses last year, and 65 percent of it was from credit defaults. Affirm lost almost the same over the past 12 months, while its marketing expenses tripled to $427 million. Any hope of profitability depends on overextended consumers somehow making their payments and continuing to mash the BUY button. What’s more likely is that the precarious finances of the 20-something generation are going off the precipice soon, and there’s a big risk of collateral damage. The 24-year-old out there defaulting on his Klarna payments isn’t going to ruin just his credit score. The 27-year-old who lost all her money trading options on Robinhood and is trying online gambling to get it back isn’t going to be a leech on just her parents when she zeroes out. The 35-year-old mother who refinanced her home to buy bitcoin isn’t going to cost just her daughter her college fund.
Even if it isn’t the triggering event of a global crisis, the evisceration of the finances of a generation 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 are we doing with that abundance? Engineering ever more insidious ways to get young people to buy disposable clothes. Torched credit ratings and mounting debt deter people from starting families and businesses. Those are the building blocks of our society and economy, and without them, we will all pay later.