An interesting thing to understand about Klarna and other buy-now-pay-later products is that a major part of their profit is the very high merchant fees they charge; retailers have to pay ~2-4x what they do for credit cards if they want to offer Klarna. 57% of Klarna's profit comes from these merchant fees compared to just 24% from loan interest [1].
It turns out it's worth it to merchants because when you're not paying now, you end up buying more than you would otherwise. Order sizes are ~15% higher [2]. Probably similar to how it hurts more to pay with cash than debit because it's so tangible.
I view it kinda similar to gambling apps with their endlessly optimized special offers designed to exploit the human monkey brain.
It's interesting psychology. You can do buy now, pay later + get it later without Klarna.
Just go to checkout, divide the sum by how many instalments you want to pay. Then open your banking app, setup a monthly transfer for that instalment to savings account, setup reminder in 3-6 months, then in 3-6 months just buy it.
Just few more steps, but for a human it's more attractive to get item now and feel the pain later, rather than the other way around.
That's how they make money.
> It turns out it's worth it to merchants because when you're not paying now, you end up buying more than you would otherwise.
This applies to credit cards too. And Klarna offers 6 week interest free loans (with partial payments along the way), not really that different from the 30 day loans from credit cards. So why is Klarna worth the extra merchant fees to the merchant?
Because the terms are way friendlier. Merchants get the money right away, and there is no risk of chargebacks. The article doesn't mention this specifically though the overall confusion is the same: Klarna is a slightly different form of credit card.
And yet, Klarna cannot figure out a way to make a decent profit, even with less than 40% of the employees (from the VC funded glory years) and dozens of acquisitions of actually profitable companies.
> convince everyone that this is beeblebrox and therefore the previous rules don’t apply.
This reminds me of how services like Realpage have been described as "algorithmic price-fixing." There's something traditionally illegal (but profitable), and people try to get away with it by slapping on "but with a computer" as some kind of twist that's supposed to make it OK.
Sometimes there's a POSIWID [0] aspect to it, where the excuse is "no human explicitly designed the system to do X from the ground up"... which is a distraction from "we kept shopping around and tweaking until it started to do X and then we decided to make that a core part of our business."
That might be a defense against mens rea, but once someone points out that you created a crime-machine by accident, you still gotta fix it or turn it off.
I cannot for the life of me find the article that explains this succinctly and with a hint of salience, but I recall reading sometime this year about how Klarna (a Swedish company) created the concept, in part, because the Swedish (culturally) tend to pay back their loans. It was a hit in its motherland, with little fraud and generally-responsible users. Then they went worldwide, in particular in America where we are a pack of jokers and heathens who are happy to finance a Crave Case and a vape with no intention of paying it back ever.
It apparently never occurred to them that we are like this.
Cute story, but do you think a massive company that specializes in loans and credit would move to the largest credit market in the world with a 100 years of very detailed financial data and models about loans, delinquencies, defaults, bankruptcies, etc but “it never occurred to them” to check that?
My picture, may be wrong, is that not paying your loans is easier to get away with in the US. That you can just not pay and people will sigh and actually give up. While in Sweden people will hound you until they get their money.
Consider this:
> Klarna requires you to have a card filed with them and they will charge your card an exorbitant interest rate if you miss a payment. But on the other hand…if you cancel your card, or if you put in a temporary card from one of those temporary card services that auto-expires, what is Klarna going to do? They can’t, like, claw back the taco.
I think this is a case in point, this expectation that if you don't pay that's the end of it. Even in the US it's possible to recover the money with a lawsuit, and I wouldn't be surprised if Klarna starts making use of that possibility.
If I'm right, this would also explain not using traditional credit scores, as they are more a measure of whether you usually pay your debts on time, but what matters is whether you have the assets/income so that you can be made to pay your debts.
The fact that the author has never actually bought a taco with Klarna pretty clearly detracts from the article, even, in that they really don't seem to have any idea how the other half interacts with financial services.
The article doesn’t mention it directly but as they alluded to, all these buy now pay later companies are bleeding money, which is kind of impressive in itself.
Delinquency rates are very high, and there isn’t much recourse for them when someone decides not to pay.
These installments likely don't cost Klarna any extra. You can play games with the credit card authorization system to simulate installments without incurring extra fees. Then Klarna has their own middleman fee like any other payment gateway, and it's very high despite the lack of extra cost.
Klarna and other companies like it will reject the temp credit card situation. But nothing they can do if you cancel your debit card and close your bank account. Given the trouble that takes, they probably figure the risk is low
The description of the whole "copy something, but ignore the regulation" scheme is missing the most important part: Make sure that the extra risk you are undertaking be eaten by someone else, while you get most of the upside of the bet.
It's not even tech related at that point: It's also how synthetic CDOs were supposed to work for those issuing them in the financial crisis. If your innovation is only to eat the risk that before was illegal, then you are taking a gamble with is unlikely to pay off. It's also why private equity is using loans from third parties as part of their purchases: if the company they bought goes under because the fees were too high, or the intervention was too aggressive, the loan goes into default, and they didn't make the loan, so it's someone else's problem. Most crypto schemes end up like that too: The issuer offloads much of the risk. What is the real wonder of tokenized shares in a startup, if not for the venture capitalist to be able to offload risks into unsophisticated investors well before an IPO? Any place that is creating bonus risk is sticking most of it to someone else, capturing just the upside.
If Klarna wants to have a chance, it has to charge a whole lot more fees to the merchant, and then find a way to offload as much of the credit risk as possible, probably doing some kind of complicated scheme to make others underestimate the risk. Otherwise they are just WeWork, grabbing pennies in front of a steam roller until a bad recession destroys them.
"Much of that regulation may do more harm than good, but our legislative system moves slowly and favors doing nothing over doing something"
Which is much more trivially true than your incorrect reading of it.
I think you should read the rest of the article, because it is mostly positive on regulation. The whole article is about why Klarna being a credit company while trying to dodge credit regulation is a _bad_ thing
The point of crypto is not "breaking the rules." Bitcoin might be inefficient but its mostly used as a reserve currency these days. Crypto in general, however, is the first currency that is backed neither by its cult value (gold) nor the military and economic strength of the country that prints it (USD), but entirely by technological foundations itself. It is revolutionary, if also very power inefficient. It is effectively reducing the role of the state to an intermediary regulatory body as technology continues to advance to the point where such civil laws are not required. Of course the corporation, as an entity, will come to dominate the world, but that is the natural progression of history and can also be overcome through social and political movements. But not before the state itself, as a political entity, is effectively dissolved.
Every person I’ve ever met who espouses “crypto” sounds like they’re in a cult trying to recruit new members. I can’t recall meeting a person who uses crypto who when asked about it (if they didn’t bring it up first) treated it like “oh, yea, crypto, it’s whatever, you just use it or don’t”.
How is it not backed by its cult value? It's the same as gold, only valuable if enough people agree that it's valuable. The technical foundations make it cool to think about, but not valuable without a large community of like-minded people.
To OP: This is not a crypto issue, and many of us not obsessed with the subject like me will get annoyed to see it being brought up.
You speak true of the subject matter, however. Except for Klarna, I had good credit (the last time I applied, score FICO was 720 with strong payment history (no negatives, a decade of history of good credit, near and/or zero balances, and a quarter million of personal income) and they wouldn't lend me a dime (I asked for like $100 or something...literally could not be bothered to find my wallet, get my card out, and find the 3 digit number on the back...I also figured it'd be neat to have a new line of credit). I suspect they have some other odd model for tracking you, and if they can't, they reject, so it is likely not as bad as you think.
You likely ran into anti-fraud provisions with that scenario, specifically identity theft prevention. Having worked at a similar business for years, a trend for high fraud occurrence is squeaky clean credit file-high income applying for low value credit.
These have a well above average occurrence of identity theft cases, presumably because the guaranteed affordability test pass combined with low value makes it easy to get the loan and subsequently unlikely anyone will bother to chase it when they identify it as fraudulent.
It's easier, and cheaper, as a provider to just reject all originating accounts in this scenario. Similar to applying for a mortgage: if your credit parameters vastly mismatch your affordability you will get a LOT more questions asked.
[+] [-] dathery|5 months ago|reply
It turns out it's worth it to merchants because when you're not paying now, you end up buying more than you would otherwise. Order sizes are ~15% higher [2]. Probably similar to how it hurts more to pay with cash than debit because it's so tangible.
I view it kinda similar to gambling apps with their endlessly optimized special offers designed to exploit the human monkey brain.
[1] https://www.fool.com/investing/how-to-invest/stocks/how-does... [2] https://www.uschamber.com/co/good-company/the-leap/klarna-se...
[+] [-] varispeed|5 months ago|reply
[+] [-] rhetocj23|5 months ago|reply
[+] [-] DonsDiscountGas|5 months ago|reply
This applies to credit cards too. And Klarna offers 6 week interest free loans (with partial payments along the way), not really that different from the 30 day loans from credit cards. So why is Klarna worth the extra merchant fees to the merchant?
Because the terms are way friendlier. Merchants get the money right away, and there is no risk of chargebacks. The article doesn't mention this specifically though the overall confusion is the same: Klarna is a slightly different form of credit card.
[+] [-] scuff3d|5 months ago|reply
[+] [-] burnt-resistor|5 months ago|reply
[+] [-] rockyj|5 months ago|reply
[+] [-] Terr_|5 months ago|reply
This reminds me of how services like Realpage have been described as "algorithmic price-fixing." There's something traditionally illegal (but profitable), and people try to get away with it by slapping on "but with a computer" as some kind of twist that's supposed to make it OK.
Sometimes there's a POSIWID [0] aspect to it, where the excuse is "no human explicitly designed the system to do X from the ground up"... which is a distraction from "we kept shopping around and tweaking until it started to do X and then we decided to make that a core part of our business."
That might be a defense against mens rea, but once someone points out that you created a crime-machine by accident, you still gotta fix it or turn it off.
[0] https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_wha...
[+] [-] kevinsync|5 months ago|reply
It apparently never occurred to them that we are like this.
[+] [-] eddythompson80|5 months ago|reply
[+] [-] im3w1l|5 months ago|reply
Consider this:
> Klarna requires you to have a card filed with them and they will charge your card an exorbitant interest rate if you miss a payment. But on the other hand…if you cancel your card, or if you put in a temporary card from one of those temporary card services that auto-expires, what is Klarna going to do? They can’t, like, claw back the taco.
I think this is a case in point, this expectation that if you don't pay that's the end of it. Even in the US it's possible to recover the money with a lawsuit, and I wouldn't be surprised if Klarna starts making use of that possibility.
If I'm right, this would also explain not using traditional credit scores, as they are more a measure of whether you usually pay your debts on time, but what matters is whether you have the assets/income so that you can be made to pay your debts.
[+] [-] unknown|5 months ago|reply
[deleted]
[+] [-] ipsum2|5 months ago|reply
[+] [-] naniwaduni|5 months ago|reply
[+] [-] theahura|5 months ago|reply
[+] [-] catlover76|5 months ago|reply
[deleted]
[+] [-] dangus|5 months ago|reply
Delinquency rates are very high, and there isn’t much recourse for them when someone decides not to pay.
[+] [-] jjangkke|5 months ago|reply
[+] [-] resonious|5 months ago|reply
[+] [-] etchalon|5 months ago|reply
[+] [-] firesteelrain|5 months ago|reply
[+] [-] teaearlgraycold|5 months ago|reply
[+] [-] hibikir|5 months ago|reply
It's not even tech related at that point: It's also how synthetic CDOs were supposed to work for those issuing them in the financial crisis. If your innovation is only to eat the risk that before was illegal, then you are taking a gamble with is unlikely to pay off. It's also why private equity is using loans from third parties as part of their purchases: if the company they bought goes under because the fees were too high, or the intervention was too aggressive, the loan goes into default, and they didn't make the loan, so it's someone else's problem. Most crypto schemes end up like that too: The issuer offloads much of the risk. What is the real wonder of tokenized shares in a startup, if not for the venture capitalist to be able to offload risks into unsophisticated investors well before an IPO? Any place that is creating bonus risk is sticking most of it to someone else, capturing just the upside.
If Klarna wants to have a chance, it has to charge a whole lot more fees to the merchant, and then find a way to offload as much of the credit risk as possible, probably doing some kind of complicated scheme to make others underestimate the risk. Otherwise they are just WeWork, grabbing pennies in front of a steam roller until a bad recession destroys them.
[+] [-] sanktanglia|5 months ago|reply
[+] [-] theahura|5 months ago|reply
"Much of that regulation may do more harm than good, but our legislative system moves slowly and favors doing nothing over doing something"
Which is much more trivially true than your incorrect reading of it.
I think you should read the rest of the article, because it is mostly positive on regulation. The whole article is about why Klarna being a credit company while trying to dodge credit regulation is a _bad_ thing
[+] [-] DiscourseFan|5 months ago|reply
[+] [-] hellisothers|5 months ago|reply
[+] [-] theahura|5 months ago|reply
(https://open.substack.com/pub/theahura/p/tech-things-the-poi...)
[+] [-] burkaman|5 months ago|reply
[+] [-] rekttrader|5 months ago|reply
[+] [-] eek2121|5 months ago|reply
You speak true of the subject matter, however. Except for Klarna, I had good credit (the last time I applied, score FICO was 720 with strong payment history (no negatives, a decade of history of good credit, near and/or zero balances, and a quarter million of personal income) and they wouldn't lend me a dime (I asked for like $100 or something...literally could not be bothered to find my wallet, get my card out, and find the 3 digit number on the back...I also figured it'd be neat to have a new line of credit). I suspect they have some other odd model for tracking you, and if they can't, they reject, so it is likely not as bad as you think.
It's probably much worse. ;)
[+] [-] andwur|5 months ago|reply
These have a well above average occurrence of identity theft cases, presumably because the guaranteed affordability test pass combined with low value makes it easy to get the loan and subsequently unlikely anyone will bother to chase it when they identify it as fraudulent.
It's easier, and cheaper, as a provider to just reject all originating accounts in this scenario. Similar to applying for a mortgage: if your credit parameters vastly mismatch your affordability you will get a LOT more questions asked.
[+] [-] unknown|5 months ago|reply
[deleted]