IMO this *greatly* underestimates the efficiency of the credit market right now.
Credit card providers are absolutely in the business of understanding who the customer is and whether they can pay back. Loan sharks are the 'adverse selection' equivalent - operating locally and on much higher interest.
This entire scheme screams of underestimating the complexity of identifying *who* is a borrower, whether they're credit worthy, and avoiding the risk of signing these folks up who can't pay back - because extending credit to a lot of unvetted people is quite literally an inherently risk activity. Not sure the model's economic benefit will show itself to be worth that long term cost that comes along with it. The enhanced fees here involved in delivery and 'platform' expense also generate negative incentivization for even minimally savvy people. If you can drive Chipotle (vs. using DoorDash) you're saving money on the transaction.
The anticipated collection costs alone to try and recoup a $20 burrito make me think this is doomed from the start.
The core economics are interesting - I'm glad you shared. I'm not a 'late stage capitalism' doomer either. However, this feels like 'hey what if we tried this - it works on a spreadsheet' without the real world experience to back it up will - per usual - cause the tech/finance enabled backers of this scheme to face reality from people who are very very good at extracting maximum value from a machine that they know doesn't like them very much.
I agree that credit card companies definitely put in a lot of effort to understand credit profiles of their card holders–it's their core competence; my point is that the structure of BNPL allows for more data, greater legibility and more specificity so the risk can be priced better.
In the future, it might be possible to have Level 2 and Level 3 data for B2C credit card transactions, but until then BNPL has this data advantage over credit cards.
Yep. But I think you're missing is the 'underlying' data will be ripe for abuse.
People who are desperate will find or fraud their way into bank accounts that can be used to build Klarna accounts. This type of fraud will begin to happen on an industrial scale, with potential public benefits being used here.
Finding the money after the fact will be very, very hard.
Look - I hope it works. Just don't be surprised when you hear stories of 'burrito bank mills' being used to defraud these guys out of hundreds of thousands of dollars before the financial uplift it purports to generate "Magically" doesn't appear.
When you take capital allocation seriously, when you stop filtering economics through the squeals of democratic sentimentality, you inevitably arrive where risk is not moralized but monetized. BNPL securitization is what happens when capital escapes moral democracy and starts governing directly: contract over consent, ledger over legislature.
Thanks for the writeup! I don't quite follow the comparison to the interest on credit cards in the "For Borrowers" section. Consider this timeline for credit card payments:
Billing Cycle: Jan 15 - Feb 14
Payment due: March 5
Doordash order 1: Jan 16
Doordash order 2: Feb 13
So the user doesn't have to pay for the Doordash order 1 for 7 weeks and Doordash order 2 for 3 weeks by default. They are already getting an interest free loan and the fraud protections of using a credit card if they pay on time.
A 6 week BNPL plan would require the first 25% payment at order time and then three more payments within 6 weeks. So you are likely getting a similar interest-free loan when you factor in the payment schedule.
BNPL is more directly helpful for low-income borrowers who carry credit card balances month to month, the "revolvers".
"If they pay on time" are the keywords: "transactors" don't benefit as much revolvers. Credit card float only lasts if you pay the full statement balance by the due date.
Secondly, credit card holders with high utilization rates during the cycle ding your FICO scores even if fully paid off on time, so here even if you're a transactor, you can benefit from using BNPL-enabled credit expansion.
the table y scale graduation is wrong 0.06 0.08 0.01 0.12
IMO this *greatly* underestimates the efficiency of the credit market right now.
Credit card providers are absolutely in the business of understanding who the customer is and whether they can pay back. Loan sharks are the 'adverse selection' equivalent - operating locally and on much higher interest.
This entire scheme screams of underestimating the complexity of identifying *who* is a borrower, whether they're credit worthy, and avoiding the risk of signing these folks up who can't pay back - because extending credit to a lot of unvetted people is quite literally an inherently risk activity. Not sure the model's economic benefit will show itself to be worth that long term cost that comes along with it. The enhanced fees here involved in delivery and 'platform' expense also generate negative incentivization for even minimally savvy people. If you can drive Chipotle (vs. using DoorDash) you're saving money on the transaction.
The anticipated collection costs alone to try and recoup a $20 burrito make me think this is doomed from the start.
The core economics are interesting - I'm glad you shared. I'm not a 'late stage capitalism' doomer either. However, this feels like 'hey what if we tried this - it works on a spreadsheet' without the real world experience to back it up will - per usual - cause the tech/finance enabled backers of this scheme to face reality from people who are very very good at extracting maximum value from a machine that they know doesn't like them very much.
Busting out the popcorn to watch how it goes.
I agree that credit card companies definitely put in a lot of effort to understand credit profiles of their card holders–it's their core competence; my point is that the structure of BNPL allows for more data, greater legibility and more specificity so the risk can be priced better.
In the future, it might be possible to have Level 2 and Level 3 data for B2C credit card transactions, but until then BNPL has this data advantage over credit cards.
Yep. But I think you're missing is the 'underlying' data will be ripe for abuse.
People who are desperate will find or fraud their way into bank accounts that can be used to build Klarna accounts. This type of fraud will begin to happen on an industrial scale, with potential public benefits being used here.
Finding the money after the fact will be very, very hard.
Look - I hope it works. Just don't be surprised when you hear stories of 'burrito bank mills' being used to defraud these guys out of hundreds of thousands of dollars before the financial uplift it purports to generate "Magically" doesn't appear.
Look who thinks he's Moldbug.
When you take capital allocation seriously, when you stop filtering economics through the squeals of democratic sentimentality, you inevitably arrive where risk is not moralized but monetized. BNPL securitization is what happens when capital escapes moral democracy and starts governing directly: contract over consent, ledger over legislature.
Thanks for the writeup! I don't quite follow the comparison to the interest on credit cards in the "For Borrowers" section. Consider this timeline for credit card payments:
Billing Cycle: Jan 15 - Feb 14
Payment due: March 5
Doordash order 1: Jan 16
Doordash order 2: Feb 13
So the user doesn't have to pay for the Doordash order 1 for 7 weeks and Doordash order 2 for 3 weeks by default. They are already getting an interest free loan and the fraud protections of using a credit card if they pay on time.
A 6 week BNPL plan would require the first 25% payment at order time and then three more payments within 6 weeks. So you are likely getting a similar interest-free loan when you factor in the payment schedule.
How is BNPL better for the borrower?
BNPL is more directly helpful for low-income borrowers who carry credit card balances month to month, the "revolvers".
"If they pay on time" are the keywords: "transactors" don't benefit as much revolvers. Credit card float only lasts if you pay the full statement balance by the due date.
Secondly, credit card holders with high utilization rates during the cycle ding your FICO scores even if fully paid off on time, so here even if you're a transactor, you can benefit from using BNPL-enabled credit expansion.