One reason is that someone’s or a company’s income doesn’t always align perfectly with when they want to buy things.
When we're talking about financing the construction of a new downtown office tower, a new apartment complex, or the unexpected maintenance of your business's whole auto fleet, I can absolutely see the argument that credit is a mechanism of greasing the wheels of the economy and allowing things to happen that otherwise would not be able to happen if everyone had to wait until they were table to save all of the cash and pay upfront.
This logic doesn’t change just because the thing being financed is a burrito.
When we're talking about food, the absolute most basic human need, I start to question whether or not this is actually a good thing and is instead just a temporary band-aid over a much more serious economic problem that would be better off getting solved more permanently with a different economic or political tool.
ChadNauseam · 6h ago
Food is a basic human need, paying someone to make a burrito for you and then hand deliver it to your house is not. There is no shortage of food in america. In brazil, many people don’t eat meat because it’s too expensive, and get the vast majority of their calories from beans and rice. you can also do this in america, but almost no one does outside of college students because food is cheap enough relative to wages that people can generally afford to eat a wide variety of foods.
The bigger problem with BNPL, in my view, is that a lot of people are not able to understand the concept of credit. I knew people in my hometown who got a credit card, and their reaction to having a $3k credit limit was the exact same as if they had gotten $3k deposited into their bank account. I’m honestly not sure whether they understood that they didn’t just randomly get given $3k. I saw this happen multiple times. But it sounds very patronizing to say the “there’s a lot of poor people who don’t understand credit, so we need to prevent them from having access to any so they don’t get the chance to screw themselves”, so I understand why no one does.
lumost · 1h ago
Curiously, medieval societies struggled with “usury”. Effectively being a wage earner was a tough game as you might owe rent, have a bad month, or end up overly indebted. Most wage earners eventually became indentured servants or worse. This contrasts with peasants who had permanent land rights and owned everything they produced, and did not have a fixed rent.
It’s not just that people don’t understand debt, it’s that the vast majority of people live in precarious situations which make debt a temptation. A little debt to grease transactions and buy assets is good, a lot of debt is a burning crises.
wronglebowski · 5h ago
I agree entirely with this sentiment. It almost feels like it's our ages "Keeping up with the Joneses". Even if 30-50% of your social circle can afford it without incurring debt if it becomes the social norm we'll all keep doing it. It's unfortunate but I don't know how this generation learns this lesson.
phyzix5761 · 4h ago
Because its driven by something that transcends generations: human desire. Its a very powerful emotion that drives us to act (as is aversion). But, we can train ourselves not to react to this emotion and over time it does become weaker and, eventually, completely subsides. It does take time and practice though which most people are not willing to put in because they don't see desire as a problem.
poincaredisk · 3h ago
Why only poor though? There's plenty of middle class people living above their means by abusing credit too. They can deal with the consequences better, but it's equally financially harmful for them
ChadNauseam · 2h ago
Certainly, but there's less motivation to protect the middle class from poor financial decisions because it can be assumed that they have some financial leeway already and aren't going to be put on the street by one too many doordash orders. So they don't really factor into the discussion much
thanksgiving · 2h ago
There is really no such thing as a middle class though. We are all n missed paychecks away from being unhoused.
nkrisc · 5h ago
There are many, many stupid people who would benefit from being protected from themselves. How far down that path we want to walk as a society is an eternal debate.
tirant · 1h ago
The main issue is forcing that protection down the throat of whomever doesn’t want to be protected. Or in other words, believing that the government knows better than you on how you should live your life.
cryptonector · 3h ago
There is "protecting them from themselves" and then there is "protecting them from loan sharks who predate on their stupidity".
jhanschoo · 3h ago
I don't quite understand the full argument that you are trying to make. You seem to assume that it is more justified to "protect someone from themselves" than to "protect stupid people from loan sharks", and that the situation at hand resembles the latter more than the former.
To me the justifiability of these two imperatives seem to be reversed. But to the extent that "protecting stupid people from loan sharks" is unjustified, we also think that we should "protect weak people from robbers and bandits", and protect people from frauds.
cryptonector · 2h ago
> You seem to assume that it is more justified to "protect someone from themselves" than to "protect stupid people from loan sharks", and that the situation at hand resembles the latter more than the former.
I meant the opposite.
petesergeant · 2h ago
But sadly also a lot of not-stupid people who sometimes need to (or would benefit to) borrow on short notice, and it's better that they're doing that on a credit card with protections and that they can pay off. I've been both: easy credit in my youth ended up with me racking up a lot of silly debt that I had to spend several years living frugally to pay off, but also now that I'm much more financially secure, having some credit cards that work as a very cheap line of credit if I'm having a liquidity crunch is also very useful.
walrus01 · 3h ago
> Food is a basic human need, paying someone to make a burrito for you and then hand deliver it to your house is not. There is no shortage of food in america.
Do some googling about what is a "food desert", plenty of lower income people in the USA live somewhere that the grocery store options and fresh, nutritious ingredient shopping options are VERY poor. Or a costly distance away to drive on a regular basis.
I am not saying this excuses ordering $25 burritos on doordash or uber eats but it is an influencing factor.
ChadNauseam · 2h ago
The lack of food can be explained either by a shortage of demand or a shortage of supply. Many people assume that the demand is there and the supply is the problem - people are desperate for healthy food but no one wants to sell it to them for some reason (the reason is always left unsaid). Instead, they have no choice but to shop at 7/11. So presumably, as soon as a store selling fresh, nutritious ingredients opens up, it would be swarmed with people buying broccoli and chicken breasts. However there is some evidence that the reason no healthy food is being sold is because people's demand for heathy food is being provided by a supermarket a few miles away, or that they just have little demand for healthy food in the first place. Here is an article with more information: https://www.nyu.edu/about/news-publications/news/2019/decemb...
harrall · 1h ago
To support your point, I live in the complete opposite of a food desert but I know a lot of people who don’t know how to cook… like not really. “Cooking” to them going to Trader’s Joes and buying one of those frozen packs. If I gave them a bunch of chicken breasts and broccoli, they would struggle to make it tasty, even if I told them it load it up with fats and sugars.
Cooking — as in being able to make any set of common ingredients tasty, quickly, with few dishes to wash, and without looking up recipes each time — is the skill you need before you can “unlock” supermarkets. If I was still 19 and a new supermarket showed up, I would know f— all to do except browse the frozen section.
braingravy · 1h ago
It can also be explained by corrupt markets and societal coercion that perpetuate cycles bolstering cooperate profits.
shermantanktop · 5h ago
“Fear of sounding patronizing” sounds like a cocktail party problem. If that’s stopping someone - being made fun of by another member of their elite class - that’s a recipe for failure.
akoboldfrying · 4h ago
Being careful not to sound patronising towards the poor in public is one of the most ironclad unstated rules of wealthy social groups in the West. Breaking it immediately reveals one to be a member of the outgroup ("gauche"/"nouveau riche"/"tasteless"/"a philistine"), which will cause other wealthy people to break ties for fear of being tarnished by association. Since relationships with other wealthy people are a cornerstone of becoming and remaining wealthy, there is a massive incentive not to do this.
I think the underlying reason is that being patronised is very antagonising, and the poor generally outnumber the rich, who must ultimately depend on them in a variety of ways.
yreg · 1h ago
Convincing people to finance their groceries is absurd. Ideally, everyone should have a few months’ worth of income saved. And if they do, there's zero reason to finance a burrito.
In the Western world, if you have a job but no savings buffer, it’s usually not due to extreme poverty—it’s often a lack of basic financial literacy.
Klarna, et al. market in direct opposition to that education.
twoodfin · 39m ago
I finance all my burritos: It’s fantastically more convenient than cash, incrementally builds my credit rating, & I capture some of the efficiency surplus via rewards points.
The article makes the point that BNPL packages up almost the same product into a bite-sized, low-risk (for both the borrower and the lender) package, making it available to everyone. Indeed, that does sound like a good thing.
robocat · 8m ago
> everyone should have a few months’ worth of income saved
Do you have any friends that earn minimum wage? Do you understand the societal incentives that discourages saving anything? Have you seen what happens to minimum wage earners when they try to save?
Our society enables a few different niches before retirement age:
#0: out of work. Discussing this niche be dragons.
#1: $0 balance - spend money as you get it. Discourage savings by training people that saving doesn't help them (fines, thresholds, societal expectations). Can spend ~2 hours wages on pleasure for your 40 hours work. If you care for kids or elderly parents then expect to spend most of your spare money or time on them. Make sure that society blames the $0 workers for their state by saying "if they only did action Z then all their problems would be solved!". Society doesn't really encourage action Z.
#2: working to pay off mortgage. Requires tenacity, skills and often luck. Society makes the jump from #1 to #2 very difficult. A mortgage is one of societies ways to force savings. Those savings often taken away later in western societies (through different ways, including demographics, illness and means testing).
A) a friend working 40 hours, gets 1 hour wages (~$20) to spend on themselves after their bills (they don't buy tobacco or gamble, they might spend their $20 on beer). Not academically smart, spends any windfall money on unnecessary stuff. No car. Now retired. I'm not sure what society could have done to encourage them to become financially savvy?
B) a friend on benefit to bring up kids. Government applies thresholds to income or savings that heavily discourage both. They were good with money before kids. Most spare money spent on kids. Also spent some money on unnecessary stuff like new carpet or societaly encouraged addictions (smoking and wine). Couldn't spend money on many necessities (didn't find much time or $ spare). Old crappy car. Now kids are grown, they are working and much better with their money again.
As a financially sensible person, I'm unsure how I could have taught either to be better off financially. Their societal incentives were not aligned with that goal. Others might say they lacked the skills or lacked the drive. I suspect they both have ended up being better off by not chasing financial savings.
bcoates · 4h ago
There's two obvious "legitimate" reasons to use credit: to smooth out expenditure volatility (a big purchase like a house, an emergency) and to smooth out income volatility (a temporary lack of a job). If you are suddenly sans job and living on savings/unemployment/charity etc., but have a perfectly reasonable expectation of long-term average income much above your short-term situation, financing a burrito makes sense--you’re being cash-flow efficient (extending your runway, if you will)
Also, in my personal experience, a new job often brings various costs (food, clothes, transportation, relocation, etc) long before the paychecks show up. There was a time in the early 2000s where being able to klarna a tank or two of gas until my paycheck landed would have been extremely useful to me
nothrabannosir · 31m ago
If you can’t afford a luxury item, it is fiscally irresponsible to take out credit to buy it.
Credit is legitimate if you use it for an investment (or expense) which will get you higher returns than the interest payments. Not for luxury goods.
Whether a delivery burrito is a luxury good or a basic necessity is apparently up for debate.
intended · 2h ago
Yeah.
I get the argument for pricing risk. That’s a genuine improvement on the state of the art.
I dont get NINJA loans, because they represent an unfair fight - a sophisticated loan originator and sales team against people without the background and skills to judge that risk
fennecbutt · 5h ago
You're right, and anybody that tries to convince us otherwise is the enemy, or a friend of the enemy.
Now our world is all about maximum profit extraction. Interest.
How about no more public education, you get a loan for it. What, that's what your taxes pay for? Well, it's not enough, too bad. The masters say that you can't possibly pay enough tax to give your child an education. But they'll give you a loan for it, with interest.
Coming very soon to a reality near you. And I thought we were done with being peasants.
wyager · 6h ago
Expected debt levels are more a function of personal time preference/utility nonlinearity w.r.t. wealth than they are a function of ambient economic conditions. When broke people win the lottery, they usually end up broke again.
sweeter · 6h ago
I think that is about the most gentle way you can put it. This is an echo of 2008 and the notion that this is normal is so absurd to me. It comes off as super out of touch. Financing groceries is dystopian.
calmbonsai · 6h ago
I agree. Just because you can price, trade, and provide liquidity for "a thing" doesn't mean "that thing" can, or should, be financialized.
shermantanktop · 5h ago
But but but “complete market”!
The deployment of Econ-degree lingo doesn’t help the case.
calmbonsai · 6h ago
"This logic doesn’t change just because the thing being financed is a burrito."
Yes, it absolutely _does_ change. One might as well go all the way and start offering Oxygen or Water bonds. The immorality masking as morality here is insulting--not related, mortgage-backed CDOs during the financial crisis and "Pay Day" loans.
There are many, many fundamental individual needs and items (economic "utility") that, while financialization of them makes sense at the large scale (flood insurance, natural commodities trading, municipal infrastructure), makes zero sense (and is even amoral) on the individual and small scales.
Put another way, many bulk-health statistics (BMI, Blood Lipids, Heart-Rate) are useful to track for populations, but make little sense (and is wrong-headed) to extrapolate-down to the individual.
Just because you can, doesn't mean you should.
dalmo3 · 4h ago
You're right, financing a burrito is amoral. So what?
ivanbalepin · 3h ago
Enjoyed the article, but the author was correctly questioned in the substack comments how is this any different than a credit card for the borrower and what justifies the "interest-free" myth here, since the BNPL payoff period largely overlaps with the CC grace period. To which the author responds:
> Credit card float only lasts if you pay the full statement balance by the due date
but that is identical to BNPL, it's only interest free if you pay it off, just like a credit card past grace period. So why repeat the "interest free" marketing slogan? yes, initially it is, and so is the CC grace period.
> consumers have to only forecast the next six weeks of their life
yeah, good luck managing timing on the payments if you have 12+ of these, and it's not uncommon to have that many! Especially if, as author mentioned, you are living paycheck-to-paycheck.
I guess a marginal benefit for consumer is soft-forcing them to pay it off instead of revolving. Another one, correctly, was less hit to the credit score unless and until the bureaus get their hands on all BNPL data at some point in the future. But there is really no magic here for the consumer.
aaaaaaabbbbbb · 3h ago
Assuming one has access to a credit card and is financially literate, I agree that using BNPL is a hard sell (never having used it myself). But there is a large population--the unbanked--that lacks access to credit cards. For that population, the choice is not between credit card and BNPL, but BNPL and cash.
I found the article's description of how BNPL structurally differs from credit cards interesting, as it is a reasonable explanation for how BNPL can serve the unbanked and still have functioning credit risk models:
> Even with adverse selection for BNPL, the underwriting is for each transaction, not for all monthly spending like that in credit cards; so if a consumer misses a payment, the BNPL provider can stop lending immediately, as opposed to the credit card company which has to underwrite the person’s full ability and willingness to repay their debts. This tech-enabled granularity allows for legibility and hence greater precision and predictability.
ivanbalepin · 3h ago
Yes, that's a good point. However, how much of this finer-grain lending flexibility translates into more favorable underwriting (to help cover the unbanked) is not clear. The author did not mention any data to that effect.
aianus · 1h ago
You can pay the BNPL with a credit card to take advantage of both interest-free periods and get credit card points. There is really no reason not to use BNPL, even if you can pay cash.
zug_zug · 10h ago
I think this would be more informative if it dropped all moral pretense and just talked about the economics objectively. If we’re gonna call a spade a spade, bnpl is one of a dozen services that extracts money from those whose judgment we doubt (like gambling, lottery, junk food?, drugs, overpriced status-symbol vehicles, or even “digital goods”).
bcoates · 7h ago
But if you read the article, it doesn’t? bnpl makes its money off charging merchants a few points higher service fees than cards, which for a lot of merchants is worth it to close the deal.
(Unstated in the article is that richer people with better credit have regular access to no-interest/negative fee consumer loans on the order of 6-18 mos., so they have no reason to use BNPL)
pseudo0 · 4h ago
I seriously doubt the long-term viability of BNPL for merchants. Sure, in the short-term it boosts sales because people who don't have money are able to purchase stuff, but eventually those marginal consumers will end up exhausting their BNPL credit as well. Meanwhile the merchant ends up paying 5% on a bunch of transactions for people who could easily afford to pay now, but don't because it's "free". The only way this model works long-term is if they get enough leverage to force merchants to offer BNPL at the same price as cash, the same anti-competitive model used by credit cards.
poincaredisk · 3h ago
Only if we assume that the existence of BNPL won't change consumer habits.
I think food is easy to buy impulsively ("I'm hangover and hungry - let's order some pizza delivery"), and removing barriers like "I don't have money right now" may cause - hypothetically - some people to spend more on food delivery and (by necessity) less on other things. I'm not sure how sound this model is, but I think it can't be ruled out.
Needles to say, I'm not sure if such change would be a good thing.
inkyoto · 4h ago
> bnpl makes its money off charging merchants a few points higher service fees than cards
Restaurant food is a low to very low profit margin business that takes years to break even – with a good strategy and management.
Charging the merchant, i.e. the burrito service provider, means that they will inevitably have to pass costs onto the burrito consumer at the consumer's disadvantage.
ToucanLoucan · 7h ago
Why do we have to discard the morals of a business to judge it "objectively?"
calmbonsai · 6h ago
You don't and you shouldn't. GaaP even has regs for "intangible assets" which, among other things includes "branding wrt prevailing market mores".
Retr0id · 7h ago
Because morality is inherently subjective
nine_k · 7h ago
Game theory has an objection, your honor!
Some kinds of mores are more cooperative, and some are more destructive, and especially self-destructive. The good is usually associated with more cooperative and mutually supportive traits, and evil, with destructive. The good usually prevails in the long term because cooperation is more efficient than destruction.
So yes, there are objective correlates in good and evil traits, even though they are rather statistical than unequivocally causal.
pc86 · 7h ago
You state this as if it's a fact but I think most people would disagree.
If morality is subjective, then that means there is nothing objectively wrong with murder, rape, pedophilia, chattel slavery, or any number of things that most civilized people would find abhorrent.
I'm not even trying to make a religious argument about the source of some objective morality, I don't think it's necessary to solve that to answer the "objective v. subjective" question.
Retr0id · 7h ago
> If morality is subjective, then that means there is nothing objectively wrong with ...
Yes, this is a true statement. Subjectivity and objectivity are two different things.
But I will grant you, there are plenty who believe in an objective framework for morality. My earlier statement is not universally agreed upon.
gaganyaan · 6h ago
There isn't anything objectively wrong with those. You can still derive a functioning society from selfish principles. I don't want to live in a society where I can just get murdered, so I am fine with outlawing murder.
This is philosophically valid, but also has the advantage of being how moral systems are actually constructed in practice.
djoldman · 7h ago
This quickly devolves into semantics as you pointed out.
Do you mean that reasonably all people agree that murder, rape, pedophilia, etc. are bad? Aka if close to everyone thinks something, then that's an "objective" opinion? If so, that makes sense.
However, the parent comment may mean to say that wrong and right are qualities that humans place on things/events/communications... and I think that makes sense.
Physics/chemistry/math has nothing to say about vice and virtue.
gopher_space · 6h ago
> Physics/chemistry/math has nothing to say about vice and virtue.
Leaded gasoline.
dokyun · 7h ago
The ancient Romans had far less of a problem with all of those things than many people do now; would you consider them uncivilized?
eli_gottlieb · 6h ago
Then where does the subjectivity come from?
ToucanLoucan · 7h ago
Then the judgement will vary based upon the person. That doesn't make it inherently less credible.
Retr0id · 7h ago
Sure, but it absolutely stops it from being objective.
rtpg · 7h ago
Your statement is pretty subjective! Not going to defend gambling but "junk food" and "overpriced status-symbol vehicles"? Digital goods as an entire concept?
You can think it's all for the stupids, but I'm not seeing how it's some objective truth. Even if you're some stoic who thinks spending money on leisure is just incorrect at a fundamental level, but I think you're going to find yourself in the minority there.
socalgal2 · 7h ago
No, rather I think I can scrape by for the few days it takes to get ahead of the curve for something as cheap as a burrito and then next month I can afford 5 burritos for every 4+interest I could only afford before. Paying for a PS5 or TV on credit I can see because it might take me months to save. But saving for a burrito is arguably something I shouldn't even have to save for in the first place.
rtpg · 6h ago
To be clear I think the BNPL thing laid out here is Bad(TM), I just got there through my belief system about how society should be organized.
I do not believe that life is measured in how many burritos I can or cannot get access to, so the idea that not using BNPL means I'll get more burritos next month falls a bit flat on me.
simplify · 6h ago
To take it even further, why does being in the minority matter at all? Curious what your motivation is for mentioning that aspect.
rtpg · 6h ago
If you think that objectively spending money on leisure is bad, my claim is that you are in a minority with that thought process.
My implication here is not that being in a minority changes whether something is objectively true or not (it doesn't!). But I will outright say that I do not believe this, and I think that most people do not believe this.
Claiming to believe that leisure is bad objectively is, in my opinion, also a claim that you are "smarter" than the vast majority of people. After all, you have unlocked some reasoning to reach this, that other people seem to have missed. Do you believe to have unlocked some deeper truths through thought? Perhaps! I tend to assume I am far from the smartest person in the room.
Objectivity is the load bearing thing here, of course. If you merely think spending money on leisure is bad, then that's what you think. That can be one of your axioms in your belief system. Stating it as some objective fact is a much stronger claim, that I don't think really holds up to much scrutiny.
This is even before getting into the idea of "objective badness", which is a can of worms.
A lot of work to try and claim objectivity on your side, when the much easier "my belief system is like this, and from that I conclude this other thing" is a perfectly respectable argument when discussing policy preferences.
Added bonus of being honest about what part of your argument is just a belief system is you can then more quickly identify why you disagree with someone else.
simplify · 6h ago
Sorry to press, but I'm not sure if you answered my question. Why mention that you think most people do not believe it? In your latest comment, you didn't justify, but you did "outright say" it again. What value does bringing it up have?
Not trying to be combative, just thought it's an interesting point in this discussion of objectivity vs subjectivity.
rtpg · 5h ago
I'm just saying I doubt that zug_zug has actually unlocked some chain of reasoning to say that all that stuff is objectively bad. If they did, what's stopping everyone else from doing it? I am expressing doubt.
Like if someone showed up and said "I can predict lottery numbers". Maybe I'm talking to someone who has figured it out. Maybe I'm talking to someone who is wrong. This isn't at the same level but the claim to objectivity feels pretty close to me!
I think zug_zug's claims are based in a worldview, and not derived from some objective truth. That's fine! We are allowed to inject our own preferences into these discussions! It feels intellectually dishonest to pretend that we're working off of some objective truth of how the world "should" be.
simplify · 4h ago
> If they did, what's stopping everyone else from doing it? I am expressing doubt.
This is a pretty interesting topic on human nature. Chain of reasoning doesn't always result in proper action. For example, my cousin has been having a lot of health problems lately. Logically he knows that alcohol is contributing to them. Yet, when he's out with his friends, he can't help but drink anyway, despite knowing (and likely ignoring for the moment) the consequences of doing so.
Similarly, things like junk food and overpriced status-symbol vehicles have objective costs that prey on the weaknesses of human nature. Whether to restrict such things, and by how much, is where the subjective aspect comes in.
This also all presumes we share the same values of "let's try to reduce human suffering somewhat". A libertarian, for example, would just say "live and let live".
rtpg · 3h ago
Right, totally see what you're saying. In the junk food example (assuming fast food a la McDs...) it feels fairly noncontroversial to say there's health costs. Just then you get into convenience discussions (or even just enjoyment discussions) and now you're weighing health vs convenience and these are totally not fungible quantities. So you're already veering into subjectivity if you're saying "on balance it's bad".
There has to be a point at which you pull in preferences. But at least then you can split the "objective" from the subjective, and think about the details in earnest. Even when conclusions differ.
fennecbutt · 5h ago
>If you think that objectively spending money on leisure is bad, my claim is that you are in a minority with that thought process.
Strawman. The topic at hand isn't about spending money on leisure but taking out a loan to pay for a fucking burrito.
rtpg · 5h ago
This is meandering a bit (and I'll once again state that I think Burrito Now Pay Layer is Bad(TM)), but the flow here is (forgive the paraphrasing):
- zug_zug said "we should talk about economics objectively" and claimed "bnpl is one of a dozen services that extracts money from those whose judgment we doubt" , giving examples of other services in that category
- I replied to that claim, saying that I believe their claim that, for example, junk food is a service that extracts money from whose judgement we doubt, is likely to be a subjective analysis and not an objective one.
- I further said that I think you could end up with a believe that it was an objective analysis if you are a person who has reached the conclusion that spending money on leisure is bad
- I am then claiming that I doubt that there's an objective chain of logic that gets you to "spending money on leisure is bad". My reasoning is that I believe that to not be the position held by many people, on top of my belief that generally most people are not extremely smart.
Absent the "spending money on leisure is bad" claim, I don't see a claim to saying that, _objectively_, junk food, sports cars etc is an indicator of people applying bad judgement. And so saying "well BNPL is objectively just yet another stupid tax" is not a well founded argument in my opinion!
"I think Burrito Now Pay Later is bad" is a fine statement, and doesn't try to apply a layer of objectivity that, in my view, crumbles pretty quickly.
BrenBarn · 16m ago
Rarely does an article make me think it's horse manure so early on.
> let the market decide who should hold the risk
Subprime mortgage crisis. . . (This is leaving aside the idea that letting markets decide any given thing is even a good idea in general.)
> financial innovation has been and will continue to be a massive net positive for humanity
Anyone who gets starry-eyed about "innovation" instantly makes me suspicious. Innovation in itself is neither good nor bad. The idea that "financial innovation" will be a positive independent of specific proposals is highly suspect.
The rest of the article looks like a bunch of economics mumbo jumbo that can easily explain why something looks good on paper and just as easily lead us into all kinds of trouble.
qq66 · 6h ago
> One reason is that someone’s or a company’s income doesn’t always align perfectly with when they want to buy things.
Financing should be used for things that provide value over the time horizon it takes to earn the money to fully pay for them. If you finance things for less than that time horizon, you just end up getting more and more underwater. If you finance something that delivers value for ~6 hours then you probably shouldn't be buying that thing or your fiscal solvency is really headed for the cliff.
twoodfin · 24m ago
What’s the source of this “should”, and why doesn’t it apply to the majority of businesses that finance the cash flow to sustain short-term operations?
coolcase · 10h ago
He brushes over ethical concerns of BNPL but draws the line at sports betting.
But BNPL by design encourages you to buy things you can't afford and complicates your finances with more timed bills to pay. It makes it more likely people don't budget well and form buffers.
A PNBL would be better, add 10% tithe to every purchase that goes to a checking account. Once that reaches $1k it overflows to an index fund.
He says it won't be like 2008 bundling this stuff up and that might be right or wrong. To be 2008 you need 2 ingredients: combined gambling and banking operations at the banks (a legalised FTX of sorts) and some liars in the system misrepresenting the risk. Maybe a 3rd ingredient is a crazy/frenzy driving up the gambling into the bubbled asset.
Veedrac · 8h ago
I've suggested a different take on PNBL in the context of gambling before, to protect people against addiction without outright making it illegal as is widely done today. The idea is if you want to gamble more than some unprotected quantity, you have to first allocate the money and leave it for a month or two. People with insufficient impulse control or financial security will find that hard, but light recreational users shouldn't be inconvenienced too much.
The same ideas can work for other things, though it's easiest to apply to predatory behaviour.
mbStavola · 7h ago
From the consumer pov, why would I opt for a PNBL option? If I have the money on hand, wouldn't I just make a regular purchase?
Not trying to be snarky, genuinely curious what the sales pitch is here.
ldoughty · 6h ago
That's effectively any membership service where you get a discount... e.g. Amazon prime, arguably... or Membership grocery stores.
Pay up front for benefits that are realized later, upon further action.
I have a membership with my local craft brewery that I love to frequent that similarly could be considered a PNBL like financial thing.
Arguably, it's also gift cards, though yeah, without any benefit, no one really buys gift cards for themselves.
apothegm · 5h ago
The sales pitch is for people who don’t have the money on hand. But hope they will later when their next paycheck comes in.
ipv6ipv4 · 2h ago
The biggest problem with burrito loans is that they are selecting for sub-prime borrowers. Someone who needs to explicitly finance a burrito is much more likely to be a sub-prime borrower. Just like with the sub-prime mortgage implosion, the product of securitized junk is junk. At least it won't be a systemic risk this time.
RainyDayTmrw · 5h ago
A lot of financial schemes sound like they could be above-board on paper, but in practice degenerate out of control. Securitization is a classic here. It's not that securitization is inherently bad or wrong, but it creates a lot more surface area for incentive misalignment and outright abuse.
Consider the United States subprime mortgage crisis of 2008. I'm actually willing to accept that broadening the borrower base had the potential to be a social good. In particular, throughout the 1990s and 2000s, home equity was a very real way for middle-class Americans to accumulate family wealth, and expanding access to that at least had potential for positive impact. But the actual way that the mortgage industry went about it was maximally wrong. Every layer was incentivized to finagle the numbers to work out, despite that the fundamentals never did. Every layer, from the loan officers to the underwriters, all the way on up, were incentivized to look the other way while they took their own cut. Loan officers fudged numbers, underwriters fudged numbers, and so on. At the core of this conflux was the mortgage-backed securities (MBS) machine. A lot of the financial engineering involved may have been valid on paper, with some set of constants. But it was clear, at least in hindsight, that the banks, ratings agencies, and brokers worked together to stack too many bad assumptions on top of each other, until the whole thing burst. We all know how that story ended.
Is BNPL, and the securitization thereof, the next big trap? It's too early to say with confidence, but certainly the signs are there. I only hope that, if it's going to blow up, it does so early, before regular people's pensions start buying into BNPL-derived securities.
cousin_it · 9h ago
I'm beginning to think that consumer debt simply shouldn't exist. If you don't have money to buy something, don't buy it. If you don't have money for necessities (food/housing/healthcare), putting you into debt isn't the right answer anyway. A safety net is the right answer.
msm_ · 9h ago
I agree, with exception of housing. Most people can't buy home with cash, and for many this is a necessity. But homes are an appreciating asset, which cannot be said about cars or food - this is an investment, actually. But for everything else - cars, phones, electronics, food, subscriptions, jewelry - I 100% agree. Consider two people:
* One person has $10k saved, invested into something safe and liquid. Then buys something for $10k, earns and invests that $10k back, and because of investing is a bit up (let's say now they own $10.3k)
* The other person borrows $10k, and repays $11k over time.
This buy-and-earn cycle will repeat, and each time the person that fronted $10k is $1.3k up (and due to interest, this is only growing with time). The difference quickly becomes staggering. Tragic, and a classic rich-get-richer situation. And the only difference is the starting $10k and some discipline.
blagie · 8h ago
Personally, I think we should have all rent-extracting industries nationalized.
Land, like in China, should be available only under a 99-year lease (perhaps with a modest homestead exemption). The government should own radio airwaves, natural resources, and banking. This doesn't mean that it couldn't hire private contractors to do the work (e.g. bidding on oil extraction), but Chevron and Exxon shouldn't own the oil field.
And I think the government should provide very basic, minimal, Soviet-grade housing free to everyone.
If you'd like your kids to have their own bedrooms, you pay. If you're happy with a 2-bedroom for a family of four (kids room, adults room), or dorm-style housing for adults, you can live there for free.
Having a free option would, in fact, drive costs down for everyone.
More broadly, we should rationalize what's nationalized. For example, a lot of parts of education make sense with a lot more open competition.
cryptonector · 3h ago
The U.S. has done something like this, which in the 80s was called "the projects".
Ekaros · 31m ago
House appreciation is a bad thing. Outside well inflation of replacement, but even there should be some depreciation with wear and tear and aging...
Rents not covering most of amortization would make lot more reasonable system to live in.
maxerickson · 7h ago
It's likely enough that 30 year mortgages contribute to asset appreciation more than affordability.
Which doesn't mean you get rid of mortgages entirely, but maybe don't have the main policy intervention in the market be like that.
cousin_it · 9h ago
I think without mortgages most people would rent or rent-to-own, rents wouldn't be dragged up by housing appreciation, and affordable/social housing would be cheaper to provide because of lower opportunity cost.
api · 9h ago
Housing being an appreciating asset is a social ill. It means that housing can never be affordable, and that as it appreciates it locks out progressively more people.
This is true unless wages are also always going up, which is not the case unless it’s all just inflation in which case nothing is really appreciating.
buzzerbetrayed · 7h ago
Aren’t mortgages the number one reason houses cost so much? If mortgages weren’t allowed, the price of houses would plummet.
s1artibartfast · 6h ago
I beginning to think we should have separate legal systems for different people. One where people have more agency and responsibility for the consequences, and one where they are treated like children, but taken care of.
There is actually a fantastic sci-fi novel I highly recommend written by a professor of enlightenment philosophy that uses the as part of the premise. too like the lightning by Ada palmer. [1]
Or you could have one system where people are treated like adults and taken care of. The risk of getting into unmanageable debt isn't any better than the risk of a car crash, it should be minimized, not celebrated. "I drive without a seatbelt because I'm an adult and can drive responsibly!"
Except it's even worse. A car crash is terrible, but at least nobody profits from it. With debt you create a market for manipulating as many people into debt as possible.
hnthrow90348765 · 6h ago
>Is financing your lunch a sign of societal decay? Maybe, maybe not.
I'd have no problems with BNPL if wages kept up with necessities like housing, tuition, and healthcare, or if those services were provided to citizens for free in exchange for higher taxes. Or even if minimum wage would move, like, at all.
What I think this is a better sign of is this: a very lopsided finance industry against workers and borrowers due to the fact that paychecks only arrive on a two-week schedule but burrito debt is freely available at any time. And when they stack fees on top of a burst of interest, it is really, really looking like they are becoming an enemy.
I hope they fuck up the implementation and end up losing money to hackers.
wyager · 6h ago
> end up losing money to hackers.
How do you imagine this would work for a company using normal fiat payment rails?
hnthrow90348765 · 6h ago
Quite a lot of security problems are someone fucking up something they shouldn't have. But honestly I haven't a clue.
theamk · 3h ago
Imagine a validation logic error that allows an evil actor to pass credit checks with arbitrary personal details.
Hackers use this to make many orders using fake personal information. In BNPL, all losses are covered by the BNPL provider - so merchants get their money, criminals get random stuff for resale, and BNPL have to foot the bill.
snvzz · 6h ago
>I hope they fuck up the implementation and end up losing money to hackers.
That is quite ungrateful to money lenders.
They could, like, not lend money to begin with.
deadbolt · 6h ago
Please, won't somebody think of the money lenders?
No comments yet
SOLAR_FIELDS · 10h ago
This treatise, from someone obviously in the industry, is merely another payday loan shark attempting to justify the existence of their clearly predatory products. How many of the consumers of this product are even remotely able to comprehend the piece as-is described? The article describes a "complete market". Yes, a market that is completely able to extract as much money from an exploited, uneducated populace as possible. Is that the kind of market efficiency we should be advocating for?
The part of the "free market" that these fat cats always gloss over is that a cornerstone of a free market is that the consumers of the market are able to make educated decisions about the products that are available to them. If the populace is incapable of doing so in the way the products are presented to them, is that really a free market?
tecleandor · 9h ago
It's unhinged.
> Is financing your lunch a sign of societal decay? Maybe, maybe not.
Financing your lunch means you can't pay for your lunch. And then somebody comes to search profit in that. Yep, it's societal decay.
Ah, but he draws the line at sports bets, he doesn't like that.
margalabargala · 8h ago
> > Is financing your lunch a sign of societal decay? Maybe, maybe not.
> Financing your lunch means you can't pay for your lunch. And then somebody comes to search profit in that. Yep, it's societal decay.
Counterargument: almost always when I buy something, lunch or otherwise, I put it on a credit card, which I pay off always before the due date but essentially never on the same day I had the lunch. Viewed through the lens of a society that only paid up front in cash, what I do would be viewed as risky and irresponsible; but it is not.
BNPL as it currently exists, in the form described in this article, is exploitative. But the American credit card system, which is the same sort of thing mildly rearranged, is far less exploitative.
pseudo0 · 8h ago
The credit card company still takes a 2-3% cut, which absolutely gets passed on to consumers. You get part of it back in the form of credit card rewards and services (eg. fraud protection, charge backs) but it's still a tax on everything.
BNPL is worse, they take 5% and all you get is a small loan for a few weeks. Their whole business model relies on it being "free" for middle-class people who will pay back their loans, because the fee is hidden in the purchase price. This is an area where government regulation is actually required, all transaction fees should be disclosed and charged as a surcharge on the base purchase price, whether it's a credit card or BNPL, to provide a fair and competitive market for consumers and merchants.
poincaredisk · 2h ago
>This is an area where government regulation is actually required, all transaction fees should be disclosed and charged as a surcharge on the base purchase price, whether it's a credit card or BNPL
Btw. in Europe the card thing was solved differently. First, most people use debit cards, not credit cards. Second, card fees are capped at 0.2% which makes it actually a cost saving measure (cash processing is not free).
thaumasiotes · 7h ago
> Viewed through the lens of a society that only paid up front in cash, what I do would be viewed as risky and irresponsible
Are you sure about that?
I would be surprised if a society that only paid up front in cash had ever existed. For example, "if you do something for me now, I'll do something for you later" is a much more basic form of interaction than "if you do something for me now, I'll give you this money" is.
Financing your meals isn't an exotic concept; it has normally been known as "running a tab". But running a tab involves periodic settlement of whatever the tab has run to. It isn't broken down into individual transactions each on their own detailed payment plan. This is something that doesn't make sense for small purchases.
eli_gottlieb · 6h ago
> But the American credit card system, which is the same sort of thing mildly rearranged, is far less exploitative.
Than what? Have we actually checked what the level of fraud is by credit-card companies, or how they price various cards for various customers?
drivingmenuts · 7h ago
Interesting, because sports betting is waaaay more voluntary than eating.
Eating is voluntary, if only for short while.
Spooky23 · 7h ago
In the same sense as cigarettes. It’s a compulsive behavior.
sweeter · 6h ago
He doesn't want to admit to being the cause of the rot, it makes him feel bad (but not bad enough to not do it lol)
scubbo · 9h ago
Amen. It's been my experience that, for any innovation in financial technology, if you keep asking "and why is that beneficial?" for long enough, you will finally arrive (via tangents into "liquidity" and suchlike) at "it allows those with money to extract more money from those with less money".
blagie · 8h ago
I don't know that's quite true.
I've seen cases where it allows those with money to extract money from those with a lot of money too.
Take this situation:
Business A and business B are both doing well and competing with each other in a duopoly.
a) No credit: Each business needs to be in the black, and competition is sustainable.
b) Credit: Whichever business borrows more money to spend on buying customers is more competitive in the short term (which can lead to monopoly long-term). Both businesses run in the red are and brittle. In any downturn, tightening of credit, etc. both are liable to go under.
This competition to raise increasing amount of money to be competitive (to increasing devaluation and/or debt makes for a pretty broken economy), and makes traditional businesses (which invest in R&D from profits) increasingly unsustainable.
This even goes to government level. Historically, if e.g. two European powers were in a war, whomever could borrow more to buy weapons / hire mercenaries would have an advantage. Access to credit made for more costly, more deadly wars, and broken national economies. If neither side had access to credit, both sides would be strictly better off.
losteric · 7h ago
For the same reason, I’d argue mortgages are a bad thing for consumers by creating this prisoners dilemma around debt.
sologoub · 7h ago
In general, the availability of credit has been a positive economic factor that helps enable capital expenditures that otherwise would only be available to the wealthiest. Lack of such credit leads to capture of means of production and rent seeking behaviors in economic terms.
However, it’s become more and more clear that not all credit is created equal and what you spend the resulting capital on matters a lot. If one buys a house to live in or equipment to make money with - that’s generally good use of credit, assuming costs do not outweigh the benefits. I can’t think of a situation where buying lunch that one has to finance is a good thing (as different from credit card points harvesting/optimization). The implications of anything similar to payday loans going mainstream feels like a large societal risk.
Garlef · 7h ago
Exactly.
Key differences:
- Houses are gaining value over time while consumer goods such as food, phones, TV, cars are loosing value over time.
- A loan for a house can be paid back very slowly so that you effectively only pay your initial share of the price (and share the profits with the loan giver via interest). A loan for consumer goods must usually be paid back almost immediately.
s1artibartfast · 6h ago
It isn't just about appreciation. It is about utility and production.
A car loan can be a great investment if it gets you to a job you otherwise wouldn't have, even if it is going down in value.
Debt for an expensive degree that gets you a good job is the same, and entirely devoid of resale value. Debt for an expensive degree with no job prospects, not so.
tptacek · 7h ago
I have no idea what I think about BNPL products, but those "tangents into liquidity" basically eliminated most of the costs of trading. You can't negatively polarize me into thinking there's a social good to paying $50 to place a simple buy order; not having to do that is part of what "liquidity" means.
r053bud · 8h ago
Yes. That’s literally the economic system we have agreed upon in the United States States and continue to vote for.
tlonny · 10h ago
The product (from the perspective of the consumer) _is_ relatively straightforward IMO. What isn't straightforward is accurately modelling the credit risk of the bonds when this class of debt is securitized (the meat of this article). Thus I don't think understanding this article is a prerequisite for making educated decisions re: BNPL.
smallpipe · 8h ago
An industry of parasites, extracting money from people already down on their luck. Rats.
gtowey · 7h ago
Because the easiest person to extract money from is someone with no other option.
We are right back to feudalism.
ahajajakakaba · 7h ago
Usury is outlawed in many religions for good reason. This is a known problem with a known solution, but our society is run by billionaires who can put substantial capital to convincing the proles otherwise.
Simply bring up inflation is wrong and not necessary (outside of disaster, etc) and the US government should control its own monetary policy and not the fed. You’ll get downvoted and/or fed arguments from economists (modern day priests) about how wrong you are. And yet the wealth gap keeps growing while we’re the most technologically advanced and efficient we’ve ever been.
eli_gottlieb · 6h ago
Deflation is objectively pro-usurer.
skybrian · 7h ago
When the interest is paid out of a store’s marketing expenses, it’s pretty ambiguous who specifically pays it, but the money ultimately comes from the store’s revenue.
If it results in higher prices, the people who actually use “buy now pay later” aren’t going to be the only ones paying more, since they pay the same price as everyone else. The costs are spread across all customers.
Depending on demographics, this could work as either a progressive or regressive “tax.”
benlivengood · 7h ago
Credit in general is an incredibly regressive tax; only the poorest end up paying much interest and it's a much larger fraction of their total cash flow. I can get between 2% and 4% cash back on all purchases on a credit card that I pay off monthly with a zero-fee ACH transfer, paying no interest or yearly fees. I literally take poorer or less financially secure people's money that they spend on credit card interest. While the prices I pay likely reflect an overhead of 1.5%-3.5% to cover merchant credit processing fees I potentially come out net positive.
Finally, if I had substantial investments, I would be earning returns for the ~month before having to liquidate assets to pay the credit card.
The bank financing my car loan is still paying me to have it because inflation is still so high and I got lucky with origination date.
In general I am skeptical of the overall societal benefit of new financial instruments for the above reasons. E.g. I can't imagine BNPL loans existing in a strong economy of mostly secure and economically savvy middle-class earners.
kweingar · 2h ago
Highly recommend this podcast by patio11 explaining that poor people are not funding credit card rewards programs.
Yes, regular credit cards work that way, but this is different.
In the “buy now, pay later” scheme, the person getting the loan doesn’t pay the interest, or at least no more than any other customer. They’re getting subsidized by other customers.
bcoates · 6h ago
Calling it a tax is about as enlightening as calling government insurance programs "ponzi schemes".
A tax is a deadweight loss in one sector that (hopefully) funds something else in a (hopefully) net-worthwhile way.
Calling a facilitating cost like marketing or finance or customer support a "tax" is like calling the need to pay to clean the bathrooms at your business a "tax", if you squint and look at it from far away it's kind of similar but it’s also totally uninformative.
In some abstract way, the social obligation for small businesses owners to send their kids to pricey afterschool classes is a "tax" paid by their customers, but that's probably not a useful way of analyzing a complex system
skybrian · 5h ago
Fair enough. My main point is that the interest expense is being paid collectively, not individually. The same could be said of all sorts of other things.
usefulcat · 5h ago
It sounds like a big part of the target market for this is people who are living paycheck to paycheck, but those are exactly the people who should not use it.
The less disposable income you have, the more careful you need to be about not exceeding it, because if you do it can be very difficult (not merely inconvenient) to dig yourself out of that hole.
littlestymaar · 4m ago
> Burrito bonds represent finance doing what it does best: unbundling risk, pricing it granularly, and allocating capital more efficiently.
What finance does best is “creating financial crisis” actually and that's exactly with that kind of tools that it happens. It looks like 2008 is now far enough (17 years, wow tome flies!) in the past that finance people now feel comfortable acting as if it didn't happen…
programjames · 9h ago
Why do finance bros like to call allocating all the resources to the maximal-dollar extracting process "efficient". It's not. All they're doing is turning the economy's entropy into dollar bills now, which stunts future growth.
jerf · 9h ago
In economics, "efficient" doesn't mean "produces maximal dollars". It means something much more like "an efficient economy has no arbitrage opportunities", because they've already been squeezed out. An efficient economy is one in which all the prices are correct, not one in which wealth-creation is maximized. Correct prices may help wealth-creation, but that would be a downstream effect.
kweingar · 8h ago
I keep hearing people express dismay that people are financing their lunch, sneakers, or concert tickets.
But this has been the norm for a while, no? I can't remember the last time I didn't utilize credit at a restaurant or retail store. If you use credit cards, it doesn't make sense to reflexively admonish people for using BNPL for everyday purchases.
To be sure, BNPL is in many ways a predatory innovation. But it isn't totally novel. It seems like a natural consequence of what came before.
recursive · 6h ago
A lot of people use a credit card like a debit card with fraud protection. You can pay off the balance every month and still get a benefit. The UX of paying is so smooth. Maybe that's possible with BNPL too (learned a new acronym today) but I haven't heard of it.
If there was a thing that worked like a credit card, but without the credit part, I'd probably be using that instead.
preciousoo · 6h ago
From what I've heard in passing, debit cards used to, but then some law made it regulatory or financially (again I've only heard in passing) hard for companies to keep offering that
poincaredisk · 2h ago
>But this has been the norm for a while, no? I can't remember the last time I didn't utilize credit at a restaurant or retail store.
I'm not saying you're wrong, but I want to highlight that this is US specific. I'm in Europe, in my 30s and I never owned a credit card. The same goes for all my friends. Even ones who had to get a credit card for a trip to US, or got one from their bank without asking, don't use them.
claytonjy · 7h ago
That’s one of the arguments in the substack post. BNPL is like credit cards, but more specific, and that specificity allows for more accurate pricing of the loan risk.
DonsDiscountGas · 6h ago
Most people pay off a credit card in full every month so it's really just about the convenience. BNPL is similar in fact, most purchases are paid off in installments over 30 days with no interest or late fees charged. As the article covers the merchant pays a slightly higher fee in exchange for slightly better terms than a CC, and customers buy slightly more then they would have otherwise.
wat10000 · 6h ago
A lot of people are very skeptical of credit cards, and it’s pretty common to see people recommending against them or outright calling them evil with pretty much the same arguments you see here.
Among those who like credit cards (of which I am one), the “credit” part is basically irrelevant. Paying for my stuff a few weeks later is nice, but it’s not why I use credit cards. If there was a card that offered an extra 0.5% cash back but purchases had to be paid immediately, I’d jump on it.
poincaredisk · 2h ago
It's clear that this extra 0.5% is there, because the company hopes to make it up on late payment fees extracted from less financial savvy people, or the high fees.
shusaku · 7h ago
It blows my mind that people use these food delivery services at all. The prices are wild. You hear people complain about how hard it is to make ends meet these days, yet they waste their money on these kind of luxuries. At least before you could wave it off as “well people buying Uber eats and complaining about the economy are separate groups”, but the existence of loans specifically for this blows up that argument.
kmnc · 6h ago
This is pretty standard. Poor people end up paying more for worse. Poor people buy poor quality which needs to be replaced more often. They go into debt and pay interest paying far more than the original price. They spend money on convienent options like fast food and food delivery because they have no time for other options. Or they are actually depressed and taking efforts to save money and be healthier just are not chosen.
brudgers · 9h ago
<I am not an economist>
The arguments sound like the rationals commonly ascribed to subprime mortgage burritos twenty years ago. So if the ultimate results for wealth and the unwealthy wind up being similar, I won’t be terribly surprised.
</I am not an economist>
darkwater · 10h ago
> Picture Alice, who forgets a $25 installment on her $100 DoorDash transaction. She’s hit with a $7 late fee, tacked onto her next payment. Annoying, but it probably won’t push her down a debt spiral.
This is so disconnected from reality that it's not just worrisome but despicable.
Why did Alice missed a 25$? Maybe, just maybe, because she struggles to make ends meet, so if she had problems paying 25$, now she will have MORE problem paying 32$.
Yes, she could have not chosen to use Klarna and she could have not chosen to buy something at all, but hey, who is gonna pay that IPO now?
immibis · 10h ago
Alice missed the $25 payment because her balance was zero, triggering a $7 late payment fee, $30 failed payment fee and $30 overdraft protection fee. Alice used the service more than once, so she missed not just this payment, but 20 simultaneous payments, having $1340 taken from her in total, eating her whole next two paychecks. During the time of those next two paychecks, it will be time to pay the next two instalments, triggering the same fees each time.
zug_zug · 10h ago
Is this really how this works? Do you have a source?
Also… in this situation does klarna get any of that 1340 or does Alice just delete the app?
dmayle · 9h ago
This is a bit of an exaggeration, but otherwise correct...
Alice has $100 in burrito debt at 0%, but misses one payment, which automatically reverts to a 30% interest rate, back-tracked to the start of the "loan".
She also receives a $7 late payment fee, which is equivalent to about 90% interest for the time covered.
Her bank will often re-order operations on a given day in order to maximize the fees charge (yes, this happens, yes, this is legal), so even if she had her paycheck arriving on the same, the operations will often be sequenced with largest debits first, followed by credits, so that the overdraft hits as early as possible, and the most possible number of failed payment fees can be extracted, followed by the credit, which is now greatly reduced
(I actually had this happen to me as a student once, five late payment fees because of re-ordering, which caused me to both never let this happen again, and change banks immediately for one which wasn't as predatory).
Burrito loans are like payday loans, but even more predatory... They are neither ethical, nor moral (usury is even covered in the old testament, for christian folk).
sgerenser · 4h ago
I believe reordering of transactions to maximize NSF fees was made illegal by the CFPB, but Trump recently rescinded the rule.
alright2565 · 9h ago
It is exaggerated, particularly the 2 $30 fees: a $30 "failed payment" fee sounds like a bounced check, and doesn't really apply here, and there's been a general crackdown on overdraft protection fees.
But it doesn't need exaggeration! A missed payment accelerating the loan to 46% APY effective is already usury and bad enough!
s1artibartfast · 6h ago
They did say probably.
What percent of people who miss a payment get sent into a debt spiral from a $7 fee?
darkwater · 46m ago
Missed a payment of TWENTY-FIVE dollars, not 250.
DiscourseFan · 10h ago
A well-written, if cringey and uncritical article. Obviously a “complete market” assumes that risk can be fully accounted for, and that our world is not full of inherent contingencies and things which escape our immediate perception.
guywithahat · 6h ago
I feel like the comments are misunderstanding what's happening. Historically luxury food has been nice ingredients but now that's everywhere, and what consumers really want is delivered food. They want the thing they want, only made 6 miles away, hand delivered to them and still warm. This is a luxury good, and like many luxury goods may now be financed.
Cheap food is not going away; my lunch every day costs ~55 cents to make. In this context of luxury goods, the article makes more sense and isn't some dystopian nightmare like people are implying, it's just another luxury good you may buy.
bagels · 5h ago
What are you eating for 55 cents per meal?
titanomachy · 5h ago
I don’t totally disagree, but it’s a little different because continuous access to food is necessary in more so than any other good. If you obscure the fact that someone can’t actually afford to eat hand-delivered burritos for every meal, they may do so to their detriment. Easy access to credit obscures the unaffordability of luxury goods, especially for those with low financial literacy. If I _can_ press the burrito button any time I want, it’s tempting to do it every time instead of eating cheap buttered noodles. If I get an error saying “you have no money left”, I will make the damn noodles.
nighthawk454 · 9h ago
This is blatantly just increasing debt load. What does a business do if they need forever growth, but can’t increase their prices further without losing net revenue? Raise prices anyway and push people to finance it.
This is broadly not good for people. Financing things like your food or your rent (seriously - that’s a thing here) doesn’t help if they’re recurring. It’s not like people are gonna need to just finance one month’s rent payment and then they’re solvent and paying off the next 4 months normally plus installments. Really, what could structurally change in someone’s personal finances over a 6-8 week term? If you couldn’t afford a burrito or rent this week, what possible belief is there that next month you can afford that plus debt service.
The loans are just gonna stack and stack. Which will drive people into more debt, and more need for continued financing. This isn’t a multi billion dollar business because people just need a temporary boost once every year or two because their paycheck timing is off. It’s a flywheel money extraction machine.
Securitizing these debts doesn’t make them a good idea for the consumers. It makes it good for the industry so it can scale it up larger. Which means more people in more debt more of the time with “investors” extracting wealth from it.
Plus then there’s the whole systemic risk of people not paying back. They bake into the rates some percentage of defaults, and the larger the pool size the safer that gets. This systemically is a bet that no more than X% of loans will default at once. Basically shorting loan defaults.
Which is cute and all until any economic situation hits where a bunch more people suddenly can’t pay at the same time. In which case the whole thing unwinds brutally. And given that the play is to literally sell financial products that increase pressure on people’s ability to pay… this is probably super unwise. Combine that with any of the major structural economic issues we have ongoing and you’re poking a sleeping pressure cooker.
The only real questions are how much can be extracted before it explodes, and who is the ultimate bag holder at the end?
“If you thought 2008 was fun, well hold my beer…” - finance, probably
rybosome · 3h ago
Thank you for clearly and concisely articulating why this is dangerous from the securities aspect.
I think the immorality of it for consumers is obvious on the surface, but the backend financial stupidity of it is slightly less obvious. At least to me, I felt that it was risky but couldn’t clearly articulate why until reading this.
The only difference may be how many people buy into these. I don’t imagine BNPL securities to have the reach of 2008 for a few reasons, but perhaps I’m being naive.
cyrnel · 9h ago
BNPL is only "good" if your definition of "good" is about GDP, market flexibility, high-performance index funds, and other things that have nothing to do with human happiness.
I'll believe that BNPL is good when all the companies become non-profits that use excess funds to cancel debts rather than lining the pockets of rich investors.
lordnacho · 9h ago
I have a background in options trading and fixed income markets, basically the kind of professional education one gets while participating in the "financialization of everything".
I'm not sure it's great.
It's definitely useful for people to be able to unbundle risks. Or rather, it's useful to someone who knows what they are doing. Something like what's described in the article, for instance, where there's a mutual benefit to executing the financial transaction.
But what I really worry about is that where there's a game to be played, there are chips to be lost. Financializing everything creates a million little games, and the games favor people who know the rules.
If you're living in the old world, and someone offers you a university place, you just take it if you can afford it. What happens? Kids who can afford it will take it. If they do well, they make the surplus. If they can't afford it, that's tough, but they also aren't out of pocket. If you take a degree and things don't go as planned, you lost the capital, but you aren't in massive debt as well.
In the new world, what happens? Well, you can now take a loan. That's you taking a bet on your future income being sufficient to pay off the interest on your loan, and hopefully also the principal. You are basically mortgaging your education. More people can go in this model, but the extra people are also more likely to be the marginal people. They get a roll of the dice that they didn't have, but even though as a group they are going to roughly break even, some will end up in trouble that they could not ever have ended in without the loans. People who win in this game are still paying out part of their winnings: you're a doctor, but you still gotta pay your loans. People who lose are in deep trouble.
Both the winner and the loser are paying the financial market.
Now throw in a non-bankruptcy law for these loans and watch the whole market eat itself as lenders figure out that they can really be quite casual about who to lend the money to.
The same thing happens with actual mortgages. If you lived in a world where nobody lent money for a house, a house would cost a lot less. Instead, you get to compete with other borrowers to bid up prices. You're taking a bigger risk for the same house that someone a hundred years ago might have considered to be for the poorer people in the city. (Look at restrictions on building for an underlying reason why the market flies.)
The same happens with cars. The same is happening with BNPL.
Who wins with these games? Financial intermediaries. The vast economy of marketing the loans, turning them into derivatives, trading those derivatives, administrating them, all sorts of ancillary functions.
Also, deeper pockets. Much like insurance, if you can bag together a bunch of risks, some of them will offset each other. The individual who is taking a degree cannot normally derisk it by some portfolio effect, and he certainly can't just offload it with a phone call.
It's like everybody has to ante up to sit at the poker table of life. You can't just let the button come to you, you have to play all the time. You can't just be a doctor or a lawyer, everyone needs to be a trader.
jerf · 9h ago
I have an extremely difficult time imagining that these BNPL loans are being shoved into bonds and offloaded on to the market in a way that even resembles a result in which the buyers of those bonds are fully educated about the risks and making optimal choices. It sure looks to me like the BNPL companies have every motivation to shove off their liabilities into these bonds in a way that gets them artificially rated far higher than they should be, and turn other people not into refined, educated consumers selecting their financial investments through enlightened wisdom, but into bagholders for debt that they were basically lied to about.
The numbers coming out of these companies are simply implausible, especially their claimed delinquincy rates; unsecured debt agains subprime borrowers that up until recently wasn't reported to any credit agency, basically a perfect storm of debt that won't be paid off, but it was doing far, far better delinquincy numbers than credit card debt? Implausible. But the market, in its current mood, believes it enough for them to get away with it.
pkul · 9h ago
While I agree with your sentiment of the "old world", I'm not sure that I can entirely agree with your views here.
What I do notice and do agree on is the fact that our society has become too financialized, there are too many people working in the financial sector that spend their days studying and trading financial products that oftentimes stem from debt.
But I also can't imagine our society without debt, how will we give the chance for people to attempt to create enterprises and businesses without it? Where would you draw the middle ground here?
edmundsauto · 9h ago
If houses sold for a lot less, there would probably be fewer built, which would drive up the housing prices due to increasing scarcity. But now people can’t take on debt to buy them, so everything just sort of… stagnates.
s1artibartfast · 6h ago
>The same thing happens with actual mortgages. If you lived in a world where nobody lent money for a house, a house would cost a lot less.
I'm more skeptical. I think housing would be radically different in such a world. More people would be renters, more housing would be hereditary, and more would be corporate owned. Houses that were owned would be much smaller and more affordable.
Keep in mind there is a vast amount of areas where new housing can be built controlling the prices.
morelandjs · 7h ago
Being fully leveraged is great for capitalism and horrible for your mental health and general well being. Ever live under crushing debt? It’s awful. Step back for a minute and look at the big picture. People are taking on debt to eat lunch. That’s insane. The author acts like it’s zero sum and if BNPL isn’t the one offering the short term loan someone else will at worse terms. That’s just not true and hand waves over the fact that people who are uneducated are unwittingly being coaxed into making bad decisions with glittery UX and one click checkout.
janosch_123 · 9h ago
I didn't understand this section, why would they pay $73 for $75 and where do the $25 come from?
"Investor Economics: Assume a $100 BNPL loan. $25 is paid upfront by the Consumer, so an Investor pays $73 for a $75 loan, discounted for risk, fees, and return expectations. The Investor receives $75 from customer repayments over 6 weeks minus servicing fees of $0.25. A $1.75 profit on $73 investment over 6 weeks is a 2.4% return, or 22.8% annualized (52 weeks/6 weeks = 8.67 periods each year; annualized return = (1+0.024)8.67 - 1)."
dustincoates · 9h ago
For why the investor pays $73, it's right there in your quote:
> an Investor pays $73 for a $75 loan, discounted for risk, fees, and return expectations
The investor doesn't expect to get 100% of that $75 back on average.
The $25 is the first payment, which is made immediately.
throwaway7783 · 9h ago
The article says "one" reason of why credit exists is to bridge the timing of money. But assumes fully later that that's the only reason, with no regards to how extractive credit can become, fueling bad habit. You can of course blame the individual for this, but ultimately it becomes societal.
ary · 9h ago
> Despite skepticism from Volcker and Buffet, financial innovation has been and will continue to be a massive net positive for humanity.
Juxtaposing yourself with Warren Buffet and then hand-waving away his wisdom is probably the reddest of flags when discussing finance (not that Buffet is always right). "Innovation" in payday loans is akin to inventing new ways to feed living, breathing things into a meat grinder. In this case it's the poorest among us. The author goes on to say:
> Is financing your lunch a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Market Completion.
This is undiagnosed sociopathy.
There is a point when making a thing that you must ask "what affect will this have on the world?" or you risk destroying far more than you create. Finance types have learned absolutely nothing since Buffet laid down his "newspaper test":
"I want them to not only do what’s legal obviously, but I want them to judge every action by how it would appear on the front page of their local paper written by a smart but semi-unfriendly reporter who really understood it to be read by their family, their neighbors, their friends."
rybosome · 3h ago
> Is financing your lunch a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Market Completion.
Yeah this is a fucking crazy statement, as if the “but” justifies the former statement because it touches a Proper Noun.
“Is getting beaten to death in broad daylight a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Practical Fitness.”
xg15 · 9h ago
This. Also, I like the term "net positive" in articles like this. If you lose everything, but I win even more, it's technically still a "net positive". Even if only one person would be happy about it.
Tyr42 · 7h ago
Yeah you want Pareto Optimal or whatever. Which means everyone is better off, rather than surplus utility generated.
neilv · 9h ago
I'm happy someone else also had the same thoughts, and put it better than I could.
Incidentally, regarding Buffet's sensibilities, I once felt it worthwhile to write to Berkshire Hathaway's little office, about a new shady thing one of their holdings was rumored to be doing towards employees, and whether that fit BRK's standard of good management. My note almost certainly got tossed into the crazy-people round-file, but it'd be nice if Warren Buffet called up a CEO or Chair, and said, "Hi, Bob. This is Warren. What kind of shop are you running over there?"
solatic · 50m ago
> Credit cards account for 63% of all US retail purchases but bundle all sorts of non-discretionary and discretionary purchases together. Your $30 takeout order is bundled with “financing” for a new coffee machine, Uber rides, airline tickets, gym membership, dry cleaning, a tire change, and maybe even your monthly rent. Additionally, your credit card rate is also obscured by complex fee structures, variable interest rates, reward points, hotel points, and airline miles. So it’s hard to precisely price the risk of that $30 loan. BNPL disentangles these purchases. Each loan is for a specific item, with a fixed repayment schedule over a very short term (usually 6-8 weeks).
This is a non-sequitur argument. Your credit card issuer knows who you are, your credit profile, and they know you spent $30 at Chipotle. There's nothing preventing Visa and Mastercard from taking the debts on these individual $30 purchases at Chipotle + McDonald's + Domino's etc, bucketing by FICO score of the borrower, and working with banks to securitize that "Fast Food Takeout" debt, just the same as Klarna or Affirm are doing. It's not a fundamentally different product.
What the author is really claiming is, Visa and Mastercard don't have entrepreneurial cultures so they're not really interested in or willing to internally commit to this kind of new product (i.e. debt securitization), so it took some new Fintech companies to come to market and push the gauntlet, who are trying to get a foothold in the market by marketing to underserved segments (customers who were denied credit cards) and by juicing their initial offering to consumers with unsustainable benefits (not reporting initial defaults to credit bureaus). For which, you know, fine. But at some point the credit card companies will wake up and take second-mover's advantage, which is really anyway their incumbent advantage, where they're taking less of a fee than Klarna/Affirm are.
edit: by the way, HNers who push for UBI, this is exactly how the private market would effectively create it. Consider someone with a junk credit score who never intends to make any payments whatsoever. This would allow the credit card company to issue a card (say, with a $300 limit), take the charges to that card and securitize them into a bond with a C rating, and see if there are any high-risk buyers. Why would anyone purchase a bond like that? Because bundled into the security will also be other people with junk credit ratings who do intend to make repayments so that they can start to build their credit score. But for people who never intend to make any repayments, that's effectively $300 free every month, financed by hedge funds looking for return on high-risk bonds.
elliotto · 6h ago
Terrible post, seemingly chatgpt generated for large sections (see chapter What Happens When Borrowers Miss Payments) and disappointing to see on the front page of HN. This is the quality and calibre of analysis I would expect to find on a LinkedIn feed post.
whatever1 · 7h ago
Let’s permanently destroy the credit scores of those in need and send AI collections their way and drive them to suicide. It’s good for the completion of the market.
Then act surprised when the elections turn out the way they turned.
narrator · 9h ago
Pffft... loans to buy burritos? Wake me up when I can make a burrito and take out a burrito equity loan using it as collateral. I will gladly start making burritos.
No comments yet
Igrom · 8h ago
How is everyone so sure this is not satire? Consider the subscription prompt:
>To receive new posts and support my grift, please become a subscriber.
The article reads straight, but this line and the highly generic and corporate name of the blog ("Enterprise Value") make me question that.
_QrE · 8h ago
Props to the author if it is. I'd have a link to donate to a food bank after the article so that people can do something more productive than write angry comments.
mattnewton · 10h ago
> If you think the price of oil will be $120 after a year, you can use futures or options on futures to make this bet. If you think the S&P 500 will be over 6,500 within 2 years and the yield on 10Y Treasury bonds will be 4.25%, investment bankers will help you express this view for a fee.
I’m sorry but I think the either the author or I have entirely lost the plot. Finance is a game we play to make humans better off, not to “express their views” - if you think that being able to bet on everything makes society better off, that’s an argument you can make, but it is not self evidently good to me and it is not an argument the article seems to make.
fernmyth · 6h ago
It is useful for humans if a farmer can lock in the price for their crop at planting time, rather than get a nasty surprise when they harvest. In financial terms, this is "selling a futures contract". It's also useful if the farmer sees a low futures price and chooses to plant something better. Likewise every producer and consumer of every crop, metal, hydrocarbon, etc.
Agreed that this author and the industry as a whole go too far in the direction of finance for finance's sake.
JackFr · 6h ago
In commodities and certain derivative markets, hedgers need to be matched with speculators. Hedgers are offsetting risk to speculators. Thus a farmer can insulate themselves against a drop in the price of corn and an airline can insulate themselves against a jet fuel hike. To do that someone has to take that risk. It might by to satisfy their risk appetite which will be tied to returns.
mattnewton · 6h ago
I think I understand that. I don’t see how it self evidently is good for hypothetical burrito sellers to financialize their industry follows from that. There are a lot of differences between agricultural crops and take out, and financialization has costs.
Being able to bet on something isn’t inherently good, but the article seems to treat that as axiomatically true without offering an explanation about the problem financialization is solving in the BNPL burrito delivery space, like you have for airlines and farmers.
andy99 · 9h ago
Trading one thing for another is expressing your view that the latter is more valuable than the former.
pinkmuffinere · 10h ago
The author is writing creatively. s/express this view/bet on this
dankwizard · 7h ago
And remember folks creatively does not equal good.
karamanolev · 10h ago
I really wish I could downvote it, but then I again I would prefer people see it, get appalled and decide that BNPL is even worse than they previously thought. Is there a "begrudgingly upvote" option?
ghuroo1 · 9h ago
same here, it’s one of the few times I wish I could downvote an “article” on HN
yapyap · 43m ago
Is this article high level financial sarcasm?
If you are seriously thinking about financing a burrito u should rethink some aspects of ur life
thuanao · 5h ago
> Is financing your lunch a sign of societal decay? Maybe, maybe not.
Yes it absolutely is, and everyone involved is a piece of shit.
eli_gottlieb · 6h ago
Debt makes sense for building assets, not for purchasing consumable commodities.
pxndx · 10h ago
Absolutely unhinged content from someone who needs to touch grass. Payday loans are scams that prey on the poorest, most uneducated people. This industry is actively harmful to society.
But hey, I'm sure writing this helps you sleep at night.
skybrian · 4h ago
This looks better than a regular payday loan since it’s zero interest. The interest expense is still there, but paid collectively, much like the cost of a store’s generous return policy or of its advertising.
It seems like quite a racket, but doesn’t look like “preying on the poorest.”
howard941 · 9h ago
The payday loan people are very nice and friendly. Seriously. Maybe the only friendly finance people those struggling talk to. Even so yes they are actively harmful.
63stack · 5h ago
Of course they are, it's just a part of the job.
proof_by_vibes · 9h ago
Speak for yourself. I've got $10mil riding on put options for Jane Doe's pizza that she bought for her child's birthday party last week. People like you spreading FUD is threatening my portfolio.
idontwantthis · 7h ago
Why do people use these instead of a credit card?
an0malous · 9h ago
> Is financing your lunch a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Market Completion. As a financial engineering and market completion enjoyer, I think this is great. A Complete Market is one where every risk can be priced, traded, or hedged. i.e. every risk has a price, every future has a counterparty.
This is a great example of how sociopathy is useful for building businesses. The tech version of this is:
"Will it destroy society and the job market? Maybe, maybe not. But it's definitely going to get us AGI."
People just openly admit that their business will hurt a lot of people but that it's great for some abstract goal that has vague-at-best upside.
_QrE · 8h ago
> "Despite skepticism from Volcker and Buffet, financial innovation has been and will continue to be a massive net positive for humanity."
I'm not an economist by any means, but most 'financial innovation' I've seen has resulted in new regulations to rein it in and/or block it, which is not a good look for the entire sector. Strong start.
> "To free up capital, the provider bundles many $100 loans and sells them to investors for 95 cents on the dollar through securitization. This allows the provider to recycle funds into new loans, continuing to earn fees."
> "In exchange for fees, banks structure these loans and quickly move them off their balance sheets and to investors."
Even if we ignore the morality of providing predatory loans to people who can't afford to pay for groceries up front, you would think that someone making a good-faith argument would realize, upon writing stuff like the above, that no, this is not a good financial product actually.
If the author actually read some of the stuff they've linked, they'd come across stuff like this:
> "A larger proportion of interest-bearing loans will put the BNPL platforms under tighter regulatory scrutiny, since there are rules and regulations to cap interest rates and to ensure sufficient disclosures to consumers, said Stephen Biggar, director of financial services research at Argus Research."
> "Warehouse facilities tend to have the highest cost compared to other funding sources, while selling the receivables as asset-backed securities is generally cheaper but more volatile and risky, depending on investors' sentiment, Lucas said."
I'm sure the author would say that the fact that there's an appetite for this justifies the offering existing, and I'm looking forward to their next article about all the positive value that loan sharks provide, or why all the failures derived from high-risk assets falling through are perfectly fine.
> "Non-Systemic Risk (possibly famous last words but we’ll see)"
> "Do I want to see a Sports Betting BBS Index? No. Will it happen? Definitely. Sports betting does a lot of damage to the finances of American households but when the loans backing them are securitized, they will make for a great fixed income product because because gambling is a somewhat recession-resilient industry, much like other ‘sin sectors’ like alcohol and tobacco (BBS indexes for alcohol and tobacco will also happen, and around here is where I may get tired of winning)."
I hope that this entire article is a joke that flew over my head.
> "Late Fees: Miss a payment, and you’ll likely face a modest fee, often capped to keep things reasonable. Picture Alice, who forgets a $25 installment on her $100 DoorDash transaction. She’s hit with a $7 late fee, tacked onto her next payment. Annoying, but it probably won’t push her down a debt spiral."
Yes, I'm sure that tacking on a 30% late fee to a person who can't pay $25 is reasonable.
> "In Design, the principle of Universal Design focuses on creating inclusive systems and tools that improve usability for all. Autocorrect, text-to-speech readers, dark mode, and subtitles all came from Universal Design. Similarly, lending that makes credit more affordable and accessible for lower-income individuals will reduce credit costs for all borrowers."
This is such a bad-faith argument, I'm frankly surprised to see it written.
The _least_ I can say about the article is that I am unconvinced, and that I'd be happy if I never got the chance to meet the author.
ljouhet · 5h ago
It is a satire, right?
I don't know what to think anymore
Spastche · 5h ago
"I'll gladly pay you Tuesday for a hamburger today" from Popeye came to mind
The bigger problem with BNPL, in my view, is that a lot of people are not able to understand the concept of credit. I knew people in my hometown who got a credit card, and their reaction to having a $3k credit limit was the exact same as if they had gotten $3k deposited into their bank account. I’m honestly not sure whether they understood that they didn’t just randomly get given $3k. I saw this happen multiple times. But it sounds very patronizing to say the “there’s a lot of poor people who don’t understand credit, so we need to prevent them from having access to any so they don’t get the chance to screw themselves”, so I understand why no one does.
It’s not just that people don’t understand debt, it’s that the vast majority of people live in precarious situations which make debt a temptation. A little debt to grease transactions and buy assets is good, a lot of debt is a burning crises.
To me the justifiability of these two imperatives seem to be reversed. But to the extent that "protecting stupid people from loan sharks" is unjustified, we also think that we should "protect weak people from robbers and bandits", and protect people from frauds.
I meant the opposite.
Do some googling about what is a "food desert", plenty of lower income people in the USA live somewhere that the grocery store options and fresh, nutritious ingredient shopping options are VERY poor. Or a costly distance away to drive on a regular basis.
I am not saying this excuses ordering $25 burritos on doordash or uber eats but it is an influencing factor.
Cooking — as in being able to make any set of common ingredients tasty, quickly, with few dishes to wash, and without looking up recipes each time — is the skill you need before you can “unlock” supermarkets. If I was still 19 and a new supermarket showed up, I would know f— all to do except browse the frozen section.
I think the underlying reason is that being patronised is very antagonising, and the poor generally outnumber the rich, who must ultimately depend on them in a variety of ways.
In the Western world, if you have a job but no savings buffer, it’s usually not due to extreme poverty—it’s often a lack of basic financial literacy.
Klarna, et al. market in direct opposition to that education.
The article makes the point that BNPL packages up almost the same product into a bite-sized, low-risk (for both the borrower and the lender) package, making it available to everyone. Indeed, that does sound like a good thing.
Do you have any friends that earn minimum wage? Do you understand the societal incentives that discourages saving anything? Have you seen what happens to minimum wage earners when they try to save?
Our society enables a few different niches before retirement age:
#0: out of work. Discussing this niche be dragons.
#1: $0 balance - spend money as you get it. Discourage savings by training people that saving doesn't help them (fines, thresholds, societal expectations). Can spend ~2 hours wages on pleasure for your 40 hours work. If you care for kids or elderly parents then expect to spend most of your spare money or time on them. Make sure that society blames the $0 workers for their state by saying "if they only did action Z then all their problems would be solved!". Society doesn't really encourage action Z.
#2: working to pay off mortgage. Requires tenacity, skills and often luck. Society makes the jump from #1 to #2 very difficult. A mortgage is one of societies ways to force savings. Those savings often taken away later in western societies (through different ways, including demographics, illness and means testing).
Need to avoid: https://www.astralcodexten.com/p/come-on-obviously-the-purpo...
My two examples are:
A) a friend working 40 hours, gets 1 hour wages (~$20) to spend on themselves after their bills (they don't buy tobacco or gamble, they might spend their $20 on beer). Not academically smart, spends any windfall money on unnecessary stuff. No car. Now retired. I'm not sure what society could have done to encourage them to become financially savvy?
B) a friend on benefit to bring up kids. Government applies thresholds to income or savings that heavily discourage both. They were good with money before kids. Most spare money spent on kids. Also spent some money on unnecessary stuff like new carpet or societaly encouraged addictions (smoking and wine). Couldn't spend money on many necessities (didn't find much time or $ spare). Old crappy car. Now kids are grown, they are working and much better with their money again.
As a financially sensible person, I'm unsure how I could have taught either to be better off financially. Their societal incentives were not aligned with that goal. Others might say they lacked the skills or lacked the drive. I suspect they both have ended up being better off by not chasing financial savings.
Also, in my personal experience, a new job often brings various costs (food, clothes, transportation, relocation, etc) long before the paychecks show up. There was a time in the early 2000s where being able to klarna a tank or two of gas until my paycheck landed would have been extremely useful to me
Credit is legitimate if you use it for an investment (or expense) which will get you higher returns than the interest payments. Not for luxury goods.
Whether a delivery burrito is a luxury good or a basic necessity is apparently up for debate.
I get the argument for pricing risk. That’s a genuine improvement on the state of the art.
I dont get NINJA loans, because they represent an unfair fight - a sophisticated loan originator and sales team against people without the background and skills to judge that risk
Now our world is all about maximum profit extraction. Interest.
How about no more public education, you get a loan for it. What, that's what your taxes pay for? Well, it's not enough, too bad. The masters say that you can't possibly pay enough tax to give your child an education. But they'll give you a loan for it, with interest.
Coming very soon to a reality near you. And I thought we were done with being peasants.
The deployment of Econ-degree lingo doesn’t help the case.
Yes, it absolutely _does_ change. One might as well go all the way and start offering Oxygen or Water bonds. The immorality masking as morality here is insulting--not related, mortgage-backed CDOs during the financial crisis and "Pay Day" loans.
There are many, many fundamental individual needs and items (economic "utility") that, while financialization of them makes sense at the large scale (flood insurance, natural commodities trading, municipal infrastructure), makes zero sense (and is even amoral) on the individual and small scales.
Put another way, many bulk-health statistics (BMI, Blood Lipids, Heart-Rate) are useful to track for populations, but make little sense (and is wrong-headed) to extrapolate-down to the individual.
Just because you can, doesn't mean you should.
> Credit card float only lasts if you pay the full statement balance by the due date
but that is identical to BNPL, it's only interest free if you pay it off, just like a credit card past grace period. So why repeat the "interest free" marketing slogan? yes, initially it is, and so is the CC grace period.
> consumers have to only forecast the next six weeks of their life
yeah, good luck managing timing on the payments if you have 12+ of these, and it's not uncommon to have that many! Especially if, as author mentioned, you are living paycheck-to-paycheck.
I guess a marginal benefit for consumer is soft-forcing them to pay it off instead of revolving. Another one, correctly, was less hit to the credit score unless and until the bureaus get their hands on all BNPL data at some point in the future. But there is really no magic here for the consumer.
I found the article's description of how BNPL structurally differs from credit cards interesting, as it is a reasonable explanation for how BNPL can serve the unbanked and still have functioning credit risk models:
> Even with adverse selection for BNPL, the underwriting is for each transaction, not for all monthly spending like that in credit cards; so if a consumer misses a payment, the BNPL provider can stop lending immediately, as opposed to the credit card company which has to underwrite the person’s full ability and willingness to repay their debts. This tech-enabled granularity allows for legibility and hence greater precision and predictability.
(Unstated in the article is that richer people with better credit have regular access to no-interest/negative fee consumer loans on the order of 6-18 mos., so they have no reason to use BNPL)
I think food is easy to buy impulsively ("I'm hangover and hungry - let's order some pizza delivery"), and removing barriers like "I don't have money right now" may cause - hypothetically - some people to spend more on food delivery and (by necessity) less on other things. I'm not sure how sound this model is, but I think it can't be ruled out.
Needles to say, I'm not sure if such change would be a good thing.
Restaurant food is a low to very low profit margin business that takes years to break even – with a good strategy and management.
Charging the merchant, i.e. the burrito service provider, means that they will inevitably have to pass costs onto the burrito consumer at the consumer's disadvantage.
Some kinds of mores are more cooperative, and some are more destructive, and especially self-destructive. The good is usually associated with more cooperative and mutually supportive traits, and evil, with destructive. The good usually prevails in the long term because cooperation is more efficient than destruction.
So yes, there are objective correlates in good and evil traits, even though they are rather statistical than unequivocally causal.
If morality is subjective, then that means there is nothing objectively wrong with murder, rape, pedophilia, chattel slavery, or any number of things that most civilized people would find abhorrent.
I'm not even trying to make a religious argument about the source of some objective morality, I don't think it's necessary to solve that to answer the "objective v. subjective" question.
Yes, this is a true statement. Subjectivity and objectivity are two different things.
But I will grant you, there are plenty who believe in an objective framework for morality. My earlier statement is not universally agreed upon.
This is philosophically valid, but also has the advantage of being how moral systems are actually constructed in practice.
Do you mean that reasonably all people agree that murder, rape, pedophilia, etc. are bad? Aka if close to everyone thinks something, then that's an "objective" opinion? If so, that makes sense.
However, the parent comment may mean to say that wrong and right are qualities that humans place on things/events/communications... and I think that makes sense.
Physics/chemistry/math has nothing to say about vice and virtue.
Leaded gasoline.
You can think it's all for the stupids, but I'm not seeing how it's some objective truth. Even if you're some stoic who thinks spending money on leisure is just incorrect at a fundamental level, but I think you're going to find yourself in the minority there.
I do not believe that life is measured in how many burritos I can or cannot get access to, so the idea that not using BNPL means I'll get more burritos next month falls a bit flat on me.
My implication here is not that being in a minority changes whether something is objectively true or not (it doesn't!). But I will outright say that I do not believe this, and I think that most people do not believe this.
Claiming to believe that leisure is bad objectively is, in my opinion, also a claim that you are "smarter" than the vast majority of people. After all, you have unlocked some reasoning to reach this, that other people seem to have missed. Do you believe to have unlocked some deeper truths through thought? Perhaps! I tend to assume I am far from the smartest person in the room.
Objectivity is the load bearing thing here, of course. If you merely think spending money on leisure is bad, then that's what you think. That can be one of your axioms in your belief system. Stating it as some objective fact is a much stronger claim, that I don't think really holds up to much scrutiny.
This is even before getting into the idea of "objective badness", which is a can of worms.
A lot of work to try and claim objectivity on your side, when the much easier "my belief system is like this, and from that I conclude this other thing" is a perfectly respectable argument when discussing policy preferences.
Added bonus of being honest about what part of your argument is just a belief system is you can then more quickly identify why you disagree with someone else.
Not trying to be combative, just thought it's an interesting point in this discussion of objectivity vs subjectivity.
Like if someone showed up and said "I can predict lottery numbers". Maybe I'm talking to someone who has figured it out. Maybe I'm talking to someone who is wrong. This isn't at the same level but the claim to objectivity feels pretty close to me!
I think zug_zug's claims are based in a worldview, and not derived from some objective truth. That's fine! We are allowed to inject our own preferences into these discussions! It feels intellectually dishonest to pretend that we're working off of some objective truth of how the world "should" be.
This is a pretty interesting topic on human nature. Chain of reasoning doesn't always result in proper action. For example, my cousin has been having a lot of health problems lately. Logically he knows that alcohol is contributing to them. Yet, when he's out with his friends, he can't help but drink anyway, despite knowing (and likely ignoring for the moment) the consequences of doing so.
Similarly, things like junk food and overpriced status-symbol vehicles have objective costs that prey on the weaknesses of human nature. Whether to restrict such things, and by how much, is where the subjective aspect comes in.
This also all presumes we share the same values of "let's try to reduce human suffering somewhat". A libertarian, for example, would just say "live and let live".
There has to be a point at which you pull in preferences. But at least then you can split the "objective" from the subjective, and think about the details in earnest. Even when conclusions differ.
Strawman. The topic at hand isn't about spending money on leisure but taking out a loan to pay for a fucking burrito.
- zug_zug said "we should talk about economics objectively" and claimed "bnpl is one of a dozen services that extracts money from those whose judgment we doubt" , giving examples of other services in that category
- I replied to that claim, saying that I believe their claim that, for example, junk food is a service that extracts money from whose judgement we doubt, is likely to be a subjective analysis and not an objective one.
- I further said that I think you could end up with a believe that it was an objective analysis if you are a person who has reached the conclusion that spending money on leisure is bad
- I am then claiming that I doubt that there's an objective chain of logic that gets you to "spending money on leisure is bad". My reasoning is that I believe that to not be the position held by many people, on top of my belief that generally most people are not extremely smart.
Absent the "spending money on leisure is bad" claim, I don't see a claim to saying that, _objectively_, junk food, sports cars etc is an indicator of people applying bad judgement. And so saying "well BNPL is objectively just yet another stupid tax" is not a well founded argument in my opinion!
"I think Burrito Now Pay Later is bad" is a fine statement, and doesn't try to apply a layer of objectivity that, in my view, crumbles pretty quickly.
> let the market decide who should hold the risk
Subprime mortgage crisis. . . (This is leaving aside the idea that letting markets decide any given thing is even a good idea in general.)
> financial innovation has been and will continue to be a massive net positive for humanity
Anyone who gets starry-eyed about "innovation" instantly makes me suspicious. Innovation in itself is neither good nor bad. The idea that "financial innovation" will be a positive independent of specific proposals is highly suspect.
The rest of the article looks like a bunch of economics mumbo jumbo that can easily explain why something looks good on paper and just as easily lead us into all kinds of trouble.
Financing should be used for things that provide value over the time horizon it takes to earn the money to fully pay for them. If you finance things for less than that time horizon, you just end up getting more and more underwater. If you finance something that delivers value for ~6 hours then you probably shouldn't be buying that thing or your fiscal solvency is really headed for the cliff.
But BNPL by design encourages you to buy things you can't afford and complicates your finances with more timed bills to pay. It makes it more likely people don't budget well and form buffers.
A PNBL would be better, add 10% tithe to every purchase that goes to a checking account. Once that reaches $1k it overflows to an index fund.
He says it won't be like 2008 bundling this stuff up and that might be right or wrong. To be 2008 you need 2 ingredients: combined gambling and banking operations at the banks (a legalised FTX of sorts) and some liars in the system misrepresenting the risk. Maybe a 3rd ingredient is a crazy/frenzy driving up the gambling into the bubbled asset.
The same ideas can work for other things, though it's easiest to apply to predatory behaviour.
Not trying to be snarky, genuinely curious what the sales pitch is here.
Pay up front for benefits that are realized later, upon further action.
I have a membership with my local craft brewery that I love to frequent that similarly could be considered a PNBL like financial thing.
Arguably, it's also gift cards, though yeah, without any benefit, no one really buys gift cards for themselves.
Consider the United States subprime mortgage crisis of 2008. I'm actually willing to accept that broadening the borrower base had the potential to be a social good. In particular, throughout the 1990s and 2000s, home equity was a very real way for middle-class Americans to accumulate family wealth, and expanding access to that at least had potential for positive impact. But the actual way that the mortgage industry went about it was maximally wrong. Every layer was incentivized to finagle the numbers to work out, despite that the fundamentals never did. Every layer, from the loan officers to the underwriters, all the way on up, were incentivized to look the other way while they took their own cut. Loan officers fudged numbers, underwriters fudged numbers, and so on. At the core of this conflux was the mortgage-backed securities (MBS) machine. A lot of the financial engineering involved may have been valid on paper, with some set of constants. But it was clear, at least in hindsight, that the banks, ratings agencies, and brokers worked together to stack too many bad assumptions on top of each other, until the whole thing burst. We all know how that story ended.
Is BNPL, and the securitization thereof, the next big trap? It's too early to say with confidence, but certainly the signs are there. I only hope that, if it's going to blow up, it does so early, before regular people's pensions start buying into BNPL-derived securities.
* One person has $10k saved, invested into something safe and liquid. Then buys something for $10k, earns and invests that $10k back, and because of investing is a bit up (let's say now they own $10.3k)
* The other person borrows $10k, and repays $11k over time.
This buy-and-earn cycle will repeat, and each time the person that fronted $10k is $1.3k up (and due to interest, this is only growing with time). The difference quickly becomes staggering. Tragic, and a classic rich-get-richer situation. And the only difference is the starting $10k and some discipline.
Land, like in China, should be available only under a 99-year lease (perhaps with a modest homestead exemption). The government should own radio airwaves, natural resources, and banking. This doesn't mean that it couldn't hire private contractors to do the work (e.g. bidding on oil extraction), but Chevron and Exxon shouldn't own the oil field.
And I think the government should provide very basic, minimal, Soviet-grade housing free to everyone.
If you'd like your kids to have their own bedrooms, you pay. If you're happy with a 2-bedroom for a family of four (kids room, adults room), or dorm-style housing for adults, you can live there for free.
Having a free option would, in fact, drive costs down for everyone.
More broadly, we should rationalize what's nationalized. For example, a lot of parts of education make sense with a lot more open competition.
Rents not covering most of amortization would make lot more reasonable system to live in.
Which doesn't mean you get rid of mortgages entirely, but maybe don't have the main policy intervention in the market be like that.
This is true unless wages are also always going up, which is not the case unless it’s all just inflation in which case nothing is really appreciating.
There is actually a fantastic sci-fi novel I highly recommend written by a professor of enlightenment philosophy that uses the as part of the premise. too like the lightning by Ada palmer. [1]
https://en.wikipedia.org/wiki/Ada_Palmer
Except it's even worse. A car crash is terrible, but at least nobody profits from it. With debt you create a market for manipulating as many people into debt as possible.
I'd have no problems with BNPL if wages kept up with necessities like housing, tuition, and healthcare, or if those services were provided to citizens for free in exchange for higher taxes. Or even if minimum wage would move, like, at all.
What I think this is a better sign of is this: a very lopsided finance industry against workers and borrowers due to the fact that paychecks only arrive on a two-week schedule but burrito debt is freely available at any time. And when they stack fees on top of a burst of interest, it is really, really looking like they are becoming an enemy.
I hope they fuck up the implementation and end up losing money to hackers.
How do you imagine this would work for a company using normal fiat payment rails?
Hackers use this to make many orders using fake personal information. In BNPL, all losses are covered by the BNPL provider - so merchants get their money, criminals get random stuff for resale, and BNPL have to foot the bill.
That is quite ungrateful to money lenders.
They could, like, not lend money to begin with.
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The part of the "free market" that these fat cats always gloss over is that a cornerstone of a free market is that the consumers of the market are able to make educated decisions about the products that are available to them. If the populace is incapable of doing so in the way the products are presented to them, is that really a free market?
> Is financing your lunch a sign of societal decay? Maybe, maybe not.
Financing your lunch means you can't pay for your lunch. And then somebody comes to search profit in that. Yep, it's societal decay.
Ah, but he draws the line at sports bets, he doesn't like that.
> Financing your lunch means you can't pay for your lunch. And then somebody comes to search profit in that. Yep, it's societal decay.
Counterargument: almost always when I buy something, lunch or otherwise, I put it on a credit card, which I pay off always before the due date but essentially never on the same day I had the lunch. Viewed through the lens of a society that only paid up front in cash, what I do would be viewed as risky and irresponsible; but it is not.
BNPL as it currently exists, in the form described in this article, is exploitative. But the American credit card system, which is the same sort of thing mildly rearranged, is far less exploitative.
BNPL is worse, they take 5% and all you get is a small loan for a few weeks. Their whole business model relies on it being "free" for middle-class people who will pay back their loans, because the fee is hidden in the purchase price. This is an area where government regulation is actually required, all transaction fees should be disclosed and charged as a surcharge on the base purchase price, whether it's a credit card or BNPL, to provide a fair and competitive market for consumers and merchants.
Btw. in Europe the card thing was solved differently. First, most people use debit cards, not credit cards. Second, card fees are capped at 0.2% which makes it actually a cost saving measure (cash processing is not free).
Are you sure about that?
I would be surprised if a society that only paid up front in cash had ever existed. For example, "if you do something for me now, I'll do something for you later" is a much more basic form of interaction than "if you do something for me now, I'll give you this money" is.
Financing your meals isn't an exotic concept; it has normally been known as "running a tab". But running a tab involves periodic settlement of whatever the tab has run to. It isn't broken down into individual transactions each on their own detailed payment plan. This is something that doesn't make sense for small purchases.
Than what? Have we actually checked what the level of fraud is by credit-card companies, or how they price various cards for various customers?
Eating is voluntary, if only for short while.
I've seen cases where it allows those with money to extract money from those with a lot of money too.
Take this situation:
Business A and business B are both doing well and competing with each other in a duopoly.
a) No credit: Each business needs to be in the black, and competition is sustainable.
b) Credit: Whichever business borrows more money to spend on buying customers is more competitive in the short term (which can lead to monopoly long-term). Both businesses run in the red are and brittle. In any downturn, tightening of credit, etc. both are liable to go under.
This competition to raise increasing amount of money to be competitive (to increasing devaluation and/or debt makes for a pretty broken economy), and makes traditional businesses (which invest in R&D from profits) increasingly unsustainable.
This even goes to government level. Historically, if e.g. two European powers were in a war, whomever could borrow more to buy weapons / hire mercenaries would have an advantage. Access to credit made for more costly, more deadly wars, and broken national economies. If neither side had access to credit, both sides would be strictly better off.
However, it’s become more and more clear that not all credit is created equal and what you spend the resulting capital on matters a lot. If one buys a house to live in or equipment to make money with - that’s generally good use of credit, assuming costs do not outweigh the benefits. I can’t think of a situation where buying lunch that one has to finance is a good thing (as different from credit card points harvesting/optimization). The implications of anything similar to payday loans going mainstream feels like a large societal risk.
Key differences:
- Houses are gaining value over time while consumer goods such as food, phones, TV, cars are loosing value over time.
- A loan for a house can be paid back very slowly so that you effectively only pay your initial share of the price (and share the profits with the loan giver via interest). A loan for consumer goods must usually be paid back almost immediately.
A car loan can be a great investment if it gets you to a job you otherwise wouldn't have, even if it is going down in value.
Debt for an expensive degree that gets you a good job is the same, and entirely devoid of resale value. Debt for an expensive degree with no job prospects, not so.
We are right back to feudalism.
Simply bring up inflation is wrong and not necessary (outside of disaster, etc) and the US government should control its own monetary policy and not the fed. You’ll get downvoted and/or fed arguments from economists (modern day priests) about how wrong you are. And yet the wealth gap keeps growing while we’re the most technologically advanced and efficient we’ve ever been.
If it results in higher prices, the people who actually use “buy now pay later” aren’t going to be the only ones paying more, since they pay the same price as everyone else. The costs are spread across all customers.
Depending on demographics, this could work as either a progressive or regressive “tax.”
Finally, if I had substantial investments, I would be earning returns for the ~month before having to liquidate assets to pay the credit card.
The bank financing my car loan is still paying me to have it because inflation is still so high and I got lucky with origination date.
In general I am skeptical of the overall societal benefit of new financial instruments for the above reasons. E.g. I can't imagine BNPL loans existing in a strong economy of mostly secure and economically savvy middle-class earners.
https://www.complexsystemspodcast.com/episodes/credit-card-r...
In the “buy now, pay later” scheme, the person getting the loan doesn’t pay the interest, or at least no more than any other customer. They’re getting subsidized by other customers.
A tax is a deadweight loss in one sector that (hopefully) funds something else in a (hopefully) net-worthwhile way.
Calling a facilitating cost like marketing or finance or customer support a "tax" is like calling the need to pay to clean the bathrooms at your business a "tax", if you squint and look at it from far away it's kind of similar but it’s also totally uninformative.
In some abstract way, the social obligation for small businesses owners to send their kids to pricey afterschool classes is a "tax" paid by their customers, but that's probably not a useful way of analyzing a complex system
The less disposable income you have, the more careful you need to be about not exceeding it, because if you do it can be very difficult (not merely inconvenient) to dig yourself out of that hole.
What finance does best is “creating financial crisis” actually and that's exactly with that kind of tools that it happens. It looks like 2008 is now far enough (17 years, wow tome flies!) in the past that finance people now feel comfortable acting as if it didn't happen…
But this has been the norm for a while, no? I can't remember the last time I didn't utilize credit at a restaurant or retail store. If you use credit cards, it doesn't make sense to reflexively admonish people for using BNPL for everyday purchases.
To be sure, BNPL is in many ways a predatory innovation. But it isn't totally novel. It seems like a natural consequence of what came before.
If there was a thing that worked like a credit card, but without the credit part, I'd probably be using that instead.
I'm not saying you're wrong, but I want to highlight that this is US specific. I'm in Europe, in my 30s and I never owned a credit card. The same goes for all my friends. Even ones who had to get a credit card for a trip to US, or got one from their bank without asking, don't use them.
Among those who like credit cards (of which I am one), the “credit” part is basically irrelevant. Paying for my stuff a few weeks later is nice, but it’s not why I use credit cards. If there was a card that offered an extra 0.5% cash back but purchases had to be paid immediately, I’d jump on it.
The arguments sound like the rationals commonly ascribed to subprime mortgage burritos twenty years ago. So if the ultimate results for wealth and the unwealthy wind up being similar, I won’t be terribly surprised.
</I am not an economist>
This is so disconnected from reality that it's not just worrisome but despicable. Why did Alice missed a 25$? Maybe, just maybe, because she struggles to make ends meet, so if she had problems paying 25$, now she will have MORE problem paying 32$. Yes, she could have not chosen to use Klarna and she could have not chosen to buy something at all, but hey, who is gonna pay that IPO now?
Also… in this situation does klarna get any of that 1340 or does Alice just delete the app?
Alice has $100 in burrito debt at 0%, but misses one payment, which automatically reverts to a 30% interest rate, back-tracked to the start of the "loan".
She also receives a $7 late payment fee, which is equivalent to about 90% interest for the time covered.
Her bank will often re-order operations on a given day in order to maximize the fees charge (yes, this happens, yes, this is legal), so even if she had her paycheck arriving on the same, the operations will often be sequenced with largest debits first, followed by credits, so that the overdraft hits as early as possible, and the most possible number of failed payment fees can be extracted, followed by the credit, which is now greatly reduced
(I actually had this happen to me as a student once, five late payment fees because of re-ordering, which caused me to both never let this happen again, and change banks immediately for one which wasn't as predatory).
Burrito loans are like payday loans, but even more predatory... They are neither ethical, nor moral (usury is even covered in the old testament, for christian folk).
But it doesn't need exaggeration! A missed payment accelerating the loan to 46% APY effective is already usury and bad enough!
What percent of people who miss a payment get sent into a debt spiral from a $7 fee?
Cheap food is not going away; my lunch every day costs ~55 cents to make. In this context of luxury goods, the article makes more sense and isn't some dystopian nightmare like people are implying, it's just another luxury good you may buy.
This is broadly not good for people. Financing things like your food or your rent (seriously - that’s a thing here) doesn’t help if they’re recurring. It’s not like people are gonna need to just finance one month’s rent payment and then they’re solvent and paying off the next 4 months normally plus installments. Really, what could structurally change in someone’s personal finances over a 6-8 week term? If you couldn’t afford a burrito or rent this week, what possible belief is there that next month you can afford that plus debt service.
The loans are just gonna stack and stack. Which will drive people into more debt, and more need for continued financing. This isn’t a multi billion dollar business because people just need a temporary boost once every year or two because their paycheck timing is off. It’s a flywheel money extraction machine.
Securitizing these debts doesn’t make them a good idea for the consumers. It makes it good for the industry so it can scale it up larger. Which means more people in more debt more of the time with “investors” extracting wealth from it.
Plus then there’s the whole systemic risk of people not paying back. They bake into the rates some percentage of defaults, and the larger the pool size the safer that gets. This systemically is a bet that no more than X% of loans will default at once. Basically shorting loan defaults.
Which is cute and all until any economic situation hits where a bunch more people suddenly can’t pay at the same time. In which case the whole thing unwinds brutally. And given that the play is to literally sell financial products that increase pressure on people’s ability to pay… this is probably super unwise. Combine that with any of the major structural economic issues we have ongoing and you’re poking a sleeping pressure cooker.
The only real questions are how much can be extracted before it explodes, and who is the ultimate bag holder at the end?
“If you thought 2008 was fun, well hold my beer…” - finance, probably
I think the immorality of it for consumers is obvious on the surface, but the backend financial stupidity of it is slightly less obvious. At least to me, I felt that it was risky but couldn’t clearly articulate why until reading this.
The only difference may be how many people buy into these. I don’t imagine BNPL securities to have the reach of 2008 for a few reasons, but perhaps I’m being naive.
I'll believe that BNPL is good when all the companies become non-profits that use excess funds to cancel debts rather than lining the pockets of rich investors.
I'm not sure it's great.
It's definitely useful for people to be able to unbundle risks. Or rather, it's useful to someone who knows what they are doing. Something like what's described in the article, for instance, where there's a mutual benefit to executing the financial transaction.
But what I really worry about is that where there's a game to be played, there are chips to be lost. Financializing everything creates a million little games, and the games favor people who know the rules.
If you're living in the old world, and someone offers you a university place, you just take it if you can afford it. What happens? Kids who can afford it will take it. If they do well, they make the surplus. If they can't afford it, that's tough, but they also aren't out of pocket. If you take a degree and things don't go as planned, you lost the capital, but you aren't in massive debt as well.
In the new world, what happens? Well, you can now take a loan. That's you taking a bet on your future income being sufficient to pay off the interest on your loan, and hopefully also the principal. You are basically mortgaging your education. More people can go in this model, but the extra people are also more likely to be the marginal people. They get a roll of the dice that they didn't have, but even though as a group they are going to roughly break even, some will end up in trouble that they could not ever have ended in without the loans. People who win in this game are still paying out part of their winnings: you're a doctor, but you still gotta pay your loans. People who lose are in deep trouble.
Both the winner and the loser are paying the financial market.
Now throw in a non-bankruptcy law for these loans and watch the whole market eat itself as lenders figure out that they can really be quite casual about who to lend the money to.
The same thing happens with actual mortgages. If you lived in a world where nobody lent money for a house, a house would cost a lot less. Instead, you get to compete with other borrowers to bid up prices. You're taking a bigger risk for the same house that someone a hundred years ago might have considered to be for the poorer people in the city. (Look at restrictions on building for an underlying reason why the market flies.)
The same happens with cars. The same is happening with BNPL.
Who wins with these games? Financial intermediaries. The vast economy of marketing the loans, turning them into derivatives, trading those derivatives, administrating them, all sorts of ancillary functions.
Also, deeper pockets. Much like insurance, if you can bag together a bunch of risks, some of them will offset each other. The individual who is taking a degree cannot normally derisk it by some portfolio effect, and he certainly can't just offload it with a phone call.
It's like everybody has to ante up to sit at the poker table of life. You can't just let the button come to you, you have to play all the time. You can't just be a doctor or a lawyer, everyone needs to be a trader.
The numbers coming out of these companies are simply implausible, especially their claimed delinquincy rates; unsecured debt agains subprime borrowers that up until recently wasn't reported to any credit agency, basically a perfect storm of debt that won't be paid off, but it was doing far, far better delinquincy numbers than credit card debt? Implausible. But the market, in its current mood, believes it enough for them to get away with it.
What I do notice and do agree on is the fact that our society has become too financialized, there are too many people working in the financial sector that spend their days studying and trading financial products that oftentimes stem from debt.
But I also can't imagine our society without debt, how will we give the chance for people to attempt to create enterprises and businesses without it? Where would you draw the middle ground here?
I'm more skeptical. I think housing would be radically different in such a world. More people would be renters, more housing would be hereditary, and more would be corporate owned. Houses that were owned would be much smaller and more affordable.
Keep in mind there is a vast amount of areas where new housing can be built controlling the prices.
"Investor Economics: Assume a $100 BNPL loan. $25 is paid upfront by the Consumer, so an Investor pays $73 for a $75 loan, discounted for risk, fees, and return expectations. The Investor receives $75 from customer repayments over 6 weeks minus servicing fees of $0.25. A $1.75 profit on $73 investment over 6 weeks is a 2.4% return, or 22.8% annualized (52 weeks/6 weeks = 8.67 periods each year; annualized return = (1+0.024)8.67 - 1)."
> an Investor pays $73 for a $75 loan, discounted for risk, fees, and return expectations
The investor doesn't expect to get 100% of that $75 back on average.
The $25 is the first payment, which is made immediately.
Juxtaposing yourself with Warren Buffet and then hand-waving away his wisdom is probably the reddest of flags when discussing finance (not that Buffet is always right). "Innovation" in payday loans is akin to inventing new ways to feed living, breathing things into a meat grinder. In this case it's the poorest among us. The author goes on to say:
> Is financing your lunch a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Market Completion.
This is undiagnosed sociopathy.
There is a point when making a thing that you must ask "what affect will this have on the world?" or you risk destroying far more than you create. Finance types have learned absolutely nothing since Buffet laid down his "newspaper test":
"I want them to not only do what’s legal obviously, but I want them to judge every action by how it would appear on the front page of their local paper written by a smart but semi-unfriendly reporter who really understood it to be read by their family, their neighbors, their friends."
Yeah this is a fucking crazy statement, as if the “but” justifies the former statement because it touches a Proper Noun.
“Is getting beaten to death in broad daylight a sign of societal decay? Maybe, maybe not. But it’s definitely an evolution in Practical Fitness.”
Incidentally, regarding Buffet's sensibilities, I once felt it worthwhile to write to Berkshire Hathaway's little office, about a new shady thing one of their holdings was rumored to be doing towards employees, and whether that fit BRK's standard of good management. My note almost certainly got tossed into the crazy-people round-file, but it'd be nice if Warren Buffet called up a CEO or Chair, and said, "Hi, Bob. This is Warren. What kind of shop are you running over there?"
This is a non-sequitur argument. Your credit card issuer knows who you are, your credit profile, and they know you spent $30 at Chipotle. There's nothing preventing Visa and Mastercard from taking the debts on these individual $30 purchases at Chipotle + McDonald's + Domino's etc, bucketing by FICO score of the borrower, and working with banks to securitize that "Fast Food Takeout" debt, just the same as Klarna or Affirm are doing. It's not a fundamentally different product.
What the author is really claiming is, Visa and Mastercard don't have entrepreneurial cultures so they're not really interested in or willing to internally commit to this kind of new product (i.e. debt securitization), so it took some new Fintech companies to come to market and push the gauntlet, who are trying to get a foothold in the market by marketing to underserved segments (customers who were denied credit cards) and by juicing their initial offering to consumers with unsustainable benefits (not reporting initial defaults to credit bureaus). For which, you know, fine. But at some point the credit card companies will wake up and take second-mover's advantage, which is really anyway their incumbent advantage, where they're taking less of a fee than Klarna/Affirm are.
edit: by the way, HNers who push for UBI, this is exactly how the private market would effectively create it. Consider someone with a junk credit score who never intends to make any payments whatsoever. This would allow the credit card company to issue a card (say, with a $300 limit), take the charges to that card and securitize them into a bond with a C rating, and see if there are any high-risk buyers. Why would anyone purchase a bond like that? Because bundled into the security will also be other people with junk credit ratings who do intend to make repayments so that they can start to build their credit score. But for people who never intend to make any repayments, that's effectively $300 free every month, financed by hedge funds looking for return on high-risk bonds.
Then act surprised when the elections turn out the way they turned.
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The article reads straight, but this line and the highly generic and corporate name of the blog ("Enterprise Value") make me question that.
I’m sorry but I think the either the author or I have entirely lost the plot. Finance is a game we play to make humans better off, not to “express their views” - if you think that being able to bet on everything makes society better off, that’s an argument you can make, but it is not self evidently good to me and it is not an argument the article seems to make.
Agreed that this author and the industry as a whole go too far in the direction of finance for finance's sake.
Being able to bet on something isn’t inherently good, but the article seems to treat that as axiomatically true without offering an explanation about the problem financialization is solving in the BNPL burrito delivery space, like you have for airlines and farmers.
If you are seriously thinking about financing a burrito u should rethink some aspects of ur life
Yes it absolutely is, and everyone involved is a piece of shit.
It seems like quite a racket, but doesn’t look like “preying on the poorest.”
This is a great example of how sociopathy is useful for building businesses. The tech version of this is:
"Will it destroy society and the job market? Maybe, maybe not. But it's definitely going to get us AGI."
People just openly admit that their business will hurt a lot of people but that it's great for some abstract goal that has vague-at-best upside.
I'm not an economist by any means, but most 'financial innovation' I've seen has resulted in new regulations to rein it in and/or block it, which is not a good look for the entire sector. Strong start.
> "To free up capital, the provider bundles many $100 loans and sells them to investors for 95 cents on the dollar through securitization. This allows the provider to recycle funds into new loans, continuing to earn fees."
> "In exchange for fees, banks structure these loans and quickly move them off their balance sheets and to investors."
Even if we ignore the morality of providing predatory loans to people who can't afford to pay for groceries up front, you would think that someone making a good-faith argument would realize, upon writing stuff like the above, that no, this is not a good financial product actually.
If the author actually read some of the stuff they've linked, they'd come across stuff like this:
> "A larger proportion of interest-bearing loans will put the BNPL platforms under tighter regulatory scrutiny, since there are rules and regulations to cap interest rates and to ensure sufficient disclosures to consumers, said Stephen Biggar, director of financial services research at Argus Research."
> "Warehouse facilities tend to have the highest cost compared to other funding sources, while selling the receivables as asset-backed securities is generally cheaper but more volatile and risky, depending on investors' sentiment, Lucas said."
I'm sure the author would say that the fact that there's an appetite for this justifies the offering existing, and I'm looking forward to their next article about all the positive value that loan sharks provide, or why all the failures derived from high-risk assets falling through are perfectly fine.
> "Non-Systemic Risk (possibly famous last words but we’ll see)"
> "Do I want to see a Sports Betting BBS Index? No. Will it happen? Definitely. Sports betting does a lot of damage to the finances of American households but when the loans backing them are securitized, they will make for a great fixed income product because because gambling is a somewhat recession-resilient industry, much like other ‘sin sectors’ like alcohol and tobacco (BBS indexes for alcohol and tobacco will also happen, and around here is where I may get tired of winning)."
I hope that this entire article is a joke that flew over my head.
> "Late Fees: Miss a payment, and you’ll likely face a modest fee, often capped to keep things reasonable. Picture Alice, who forgets a $25 installment on her $100 DoorDash transaction. She’s hit with a $7 late fee, tacked onto her next payment. Annoying, but it probably won’t push her down a debt spiral."
Yes, I'm sure that tacking on a 30% late fee to a person who can't pay $25 is reasonable.
> "In Design, the principle of Universal Design focuses on creating inclusive systems and tools that improve usability for all. Autocorrect, text-to-speech readers, dark mode, and subtitles all came from Universal Design. Similarly, lending that makes credit more affordable and accessible for lower-income individuals will reduce credit costs for all borrowers."
This is such a bad-faith argument, I'm frankly surprised to see it written.
The _least_ I can say about the article is that I am unconvinced, and that I'd be happy if I never got the chance to meet the author.
I don't know what to think anymore