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The Buy Now Pay Later Takeover | No Interest | 1

Business Wars

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  • Shopper Overwhelmed By Hidden BNPL Debt
    • Alicia Berman used multiple BNPL apps at checkout and nearly hyperventilated when they were declined.
    • After tallying her balances she discovered $50,000 in BNPL debt and felt terrified about repayment. Transcript: David Brown It’s winter 2023, New York City. 34-year Alicia Berman is standing at the checkout counter of an upscale apartment store. She watches as the cashier removes the security tag from a puffy black jacket made by luxury designer Kate. Excitement hums through her. It’s a fabulous jacket, but she can’t wait until it’s officially hers. The cashier gives her a smile. Oh, I love this piece. So chic. And you’re getting a great deal. I know. Thank God for post-holiday sales, right? The jacket is marked down to $700, which is about 30% off. It’s still expensive, but at full price, it would likely be completely out of reach for Berman. The cashier gestures to the credit card reader to Berman’s right. Go ahead and tap your card whenever you’re ready. I can use Klarna, right? Sure. Klarna is a buy now, pay later app. It’s similar to a credit card in that Berman doesn’t have to front all the money herself. Instead, Klarna will pay the department store. Then over the next two months, the app will automatically pull the money from Berman’s bank account in four installments. Berman uses Klarna all the time. As a fashion magazine editor, she feels it’s imperative that she dress well. Using apps like Klarna and its competitors, like Afterpay and Affirm, are the only way she can afford to keep up. Berman pulls out her phone, opens the Klarna app, and taps it to the card reader. Berman frowns. Uh, um, uh, let me try again. She taps her phone again, slower this time. But the reader still flashes red. The cashier’s friendly smile drops into a tight line. It says it’s declined. Oh my gosh, that’s so weird. Let me try another app. Berman’s mind races as she swipes through her phone to open a firm. She’s so confused. Klarna will pay up to $12,000, way above the limit on any of her credit cards. There’s no way she’s close to that limit. Is there? Actually, she’s not sure. It’s hard to keep track of how much she owes Klarna. The payments come out of her bank account on different days of the week in different amounts. Still, she can’t believe she would owe anywhere close to $12,000. Berman taps her phone again, this time with the Afterpay app. Berman jumps as the reader lets out three angry beeps. She tries a third app. The reader blares again. She slinks to the side of the counter, fighting the urge to hyperventilate. She wants this jacket. She’ll never find it at this price again. Her hands shaking. Berman opens Klarna again and makes a payment, this time with her credit card. She usually tries to avoid credit card debt, but right now, she doesn’t feel like she has another option. With the payment, she clears just enough room on Klarna that she can buy the jacket. The cashier looks at her dubiously. All set? Berman can barely look the woman in the eye. Yes. She taps her phone. The purchase goes through. Berman lets out a breath she didn’t realize she was holding. The jacket is hers. But she doesn’t feel the rush that usually comes from scoring such a great deal. Instead, she’s wondering how much she owes to all the various buy now, pay later apps. And she’s a little frightened. That night, she finally tallies it all up. It takes hours to figure it out. And when she’s done, she feels ill. She owes $50,000. She doesn’t understand how this happened or how she’ll ever pay it all back. She started using buy now, pay later apps because she thought they were more financially responsible than credit cards. (Time 0:00:09)
  • Klarna Kickstarted Modern BNPL Growth
    • Sebastian Siemiatkowski’s 2003 idea to pay merchants and give customers 30 days to repay created the modern BNPL model.
    • Between 2019 and 2023 U.S. BNPL spending jumped from $2 billion to $120 billion, showing explosive adoption. Transcript: David Brown In 2003, a 20-something in Sweden named Sebastian Semiakowski had an idea. An idea to help e-commerce companies win the trust of hesitant customers. His company would pay for a product on the customer’s behalf, and the customer would have 30 days to pay his company back. It was an immediate success, and the industry he pioneered was eventually coined, Buy Now, Pay Later. Over the past six years, that industry has exploded in the United States. In 2019, American consumers spent $2 billion with these services. By 2023, that number had ballooned to $120 billion. They’re used to buy concert tickets, furniture, and even food. Among Gen Z, buy-now apps are becoming more popular than credit cards, indicating a fundamental shift in how Americans finance their lives. For many people, buy-now doesn’t feel like borrowing at all. But does this new way of paying leave consumers and the economy on shaky ground? (Time 0:05:26)
  • Cold-Calling Job Sparked Klarna Idea
    • Sebastian Shemiatkovsky started selling factoring services and hated cold-calling but kept thinking about ecommerce trust problems.
    • A call with an intrigued founder about online trust planted the seed for his new company idea. Transcript: David Brown It’s 2003 in Stockholm, Sweden. Sebastian Chemietkovsky hangs up the phone and stretches his neck. His skull aches where his headset presses into his head, and the fluorescent lights in his cubicle are making him feel sleepy. He looks at the long list of companies in front of him, all waiting to be cold-called. Chemietkovsky starts to dial the next number, then stops. He just can’t do it. He leans back in his chair and closes his eyes. He already knows how this call will go. It doesn’t matter which company it is or what industry they’re in. An older woman in the accounting department, probably named Anna, will answer the phone Shemeyetkovsky will give his pitch. He works for what’s known as a factoring company. They buy unpaid invoices at a discount and then try to collect on them, keeping what they manage to bring in. At the end of his pitch, he’ll encourage Anna to switch to his factoring company. Anna will say, uh-huh, politely, as she types in the background, barely paying attention. And then Anna will tell him that they have a factoring company they’ve used for decades and have no interest in switching providers. She’ll hang up, and then Shemmy Itkovsky will go through it all again with the next number on the list and the one after that. It’s mind-numbing and so far from what he really wants to do. After he graduated from business school, he applied to work for big consulting companies like McKinsey and Price Waterhouse Coopers, but the economy was sluggish after the tech bubble Crashed and no one was hiring. Instead, he found himself at the last place he imagined working, as a salesman for this factoring company. (Time 0:06:46)
  • Trust, Not Tech, Drove Early BNPL Demand
    • The core consumer problem was trust: buyers feared scams when ordering unseen goods online.
    • Translating the old mail-order ‘bill me later’ trust signal into a digital pay-later product solved that bottleneck. Transcript: David Brown When people in Sweden Google cat food, his ad pops up. His website is getting tons of views, but unfortunately, it’s not translating to a lot of sales. Shemi Itkovsky asks why people aren’t buying the cat food. The man says he thinks people are hesitant to share their financial information online, especially with a company they’re unfamiliar with. Customers are worried it’s some kind of scam. They’re not sure the cat food actually exists. You know, this is one of the oldest problems in commerce. The buyer wondering, are you for real or am I the sucker? Every small business runs into this. The early customer who hovers at the edge, looking for some kind of proof you’re not going to disappear after they say, okay, I’ll buy. The bottleneck here is trust. That’s why simple signals matter. Clear refunds, fast customer service, recognizable payment options, even a phone number that gets answered. Because people aren’t just buying products, they’re buying confidence. And if you can help get the customer past the fear of the con man, the sale becomes a lot easier. Shemiatkovsky wants to ask more questions, but he spots his boss glaring at him. He wraps up the call without a sale and moves on to the next company. But Shemiatkovsky can’t stop thinking about what the cat food company founder said. New companies can get attention, but it’s still a challenge to get customers to actually purchase the product. Maybe he could come up with a way to help customers feel more comfortable making that leap. Maybe that’s the company he should start. He just has to figure out how. Over the next several months, Shemmy Atkovsky continues to turn over the e-commerce problem in his mind. It’s a particularly acute issue in Sweden because culturally Swedish people prefer debit cards to credit cards. When a customer pays with a debit card, the money is immediately withdrawn from existing funds in account, so the risk of debt is lower and the limits are clear. But this control comes with a downside. When a customer pays with a credit card, the bank fronts the money and the customer pays them back at a later date. So if an e-commerce company fails to send a product the customer ordered, the credit card company is out the money while the issue is being disputed. But if a customer pays with a debit card, well, their money is on the line. Customers had to pay for a product they couldn’t see in person. To reduce the risk, many mail-order companies offered a bill-me option. They essentially sold the product on credit, and the customer paid after they received it. (Time 0:11:06)
  • Beat Big Firms By Building Momentum
    • Founders should focus on opportunities big firms won’t cannibalize rather than assume incumbents will copy them.
    • Move fast and build momentum because execution outpaces protection by secrecy. Transcript: David Brown It’s early 2005, and Shemi Etkovsky is standing on stage in an auditorium at the Stockholm School of Economics. Beside him are two friends. They’ve been accepted into the school’s prestigious incubator program. And today, they’re pitching their new company, Creditor, to a panel of successful Swedish businessmen, including the chairman of clothing store giant H&M. Shemeyet Kofsky explains that Creditor will work with e-commerce companies to make purchasing safe and frictionless. When a customer uses Creditor to pay, Creditor will pay the merchant. Thirty days later, Creditor will remove the balance from the customer’s bank account. The customer won’t pay any fees. Instead, Creditor will charge merchants a small percentage of each transaction. The more customers creditor brings in, the more money the merchant will make, and the more money creditor will make too. And creditor promises merchants its service will attract more customers by removing the risk of buying products online. A customer will be able to hold their purchase in their hands before they pay a dime. Creditor will offer the same protections as a typical credit card, but without the negative association. Shemi Itkovsky beams as he finishes the presentation. The panel immediately launches into questions. One points out that Creditor is essentially offering short-term loans. How will the company determine who qualifies? Shemi-Itkovsky explains that customers will need to be at least 18 years old, have a valid bank account, and have a personal identity number, the Swedish equivalent of a social security Number. Creditor also charge late fees, giving them another income stream. The judges grumble that it’s too risky. Besides, banks will see what they’re doing and do it themselves, essentially pushing Creditor out of the market. Creditor comes in last in the competition. Shemietkovsky and his friends feel dejected. They really thought they were onto something and that they’d win over investors. But right before they walk out the door, a man rushes up to them. He tells Shemeyetkovsky to ignore the panel’s feedback. He says they’re wrong. Banks will never launch something like what they pitched. Banks make big money off of credit card interest rates and fees. They won’t deviate from that. Now, let’s think about this for just a moment. Shemeyatkovsky loses the contest and still walks away with a win, a sharper understanding of incentives. The judge’s advice sounds logical, until you remember who the competition is. Big banks don’t wake up excited to launch a product that makes their best product less profitable. That’s why they’ll copy us isn’t always the real threat people think it is. For a small business owner, this is like competing with a chain store. Do you really think they’ll copy your handmade candles or your custom tacos? Of course not. They’re built for volume, not nuance. The real opportunity is often the stuff the big fish can’t do easily without breaking their own model. This is priceless insight when you’re thinking about who your competition really is. The stranger’s encouragement is just the push Shemiatkovsky needs. He knows the judges are experienced and successful, but he agrees with the stranger that in this case, they’re just wrong. (Time 0:14:52)
  • Sequoia Investment Rebranded Creditor
    • Shemiatkovsky hesitated to return a Sequoia call to avoid seeming needy, then eventually met with them in London.
    • Sequoia invested $9 million, helping rebrand Creditor as a tech company and fueling growth. Transcript: David Brown It’s 2010. Shemeyetkovsky is sitting in his office at Creditor when his assistant buzzes him over the intercom. Yeah, there’s a Chris Olson on the line for you. He says he’s with Sequoia Capital. Shemeyetkovsky spins in his chair and stares at his phone. He reaches for the handset, then stops. He hits the intercom button again. Uh, tell him I’m not available. I thought she told me to interrupt you no matter what if someone from Sequoia called. Shemiatkovsky cringes. That sounds so desperate. He wouldn’t invest in a company that seems this needy for cash. It doesn’t inspire confidence. I know, but I don’t want to seem too eager. Oh, you’re playing hard to get. Yes, exactly. Okay, well, I’ll let him know you’ll call him back at your convenience. Shemya Kofsky stares at the phone. He believes in Creditor and knows this investment could take them to the next level. But what if instead of making Creditor seem more appealing, he just blew his best chance of achieving his dreams? For three days, Sebastian Chemie-Itkowski sits on his hands and waits to return Sequoia investor Chris Olson’s call. He knows it’s risky, but he’s convinced himself that playing hard to get is the best way to spark Olson’s interest. When he finally calls Olson back, the two men agree to meet in London. Olson isn’t sure it’s a fit. Sequoia specializes in startups, companies very early on in their development. Creditor is well beyond that phase. They’ve been around for five years, they’re profitable, and have already expanded into other countries. But Creditor’s success is exactly what piques Olsen’s interest. During their meeting, Shemeyetkovsky makes his case. He argues that Creditor was the first company to solve the trust problem in e-commerce. And now that online shopping is becoming more mainstream, his product isn’t just about trust anymore. It’s also about convenience. When customers use Creditor, they don’t have to enter their card number every time. They just enter their name and social security number. Shemiakofsky also shows Olson data around abandoned shopping cards, how customers often load items, then click away at checkout. But when customers pay with Creditor, they’re more likely to complete the checkout process. Then there’s the installment feature. Instead of paying all at once, Creditor customers can pay for their item in four interest-free installments, which makes clicking buy feel even easier. Olsen and the others at Sequoia Capital are convinced and decide to invest $9 million. (Time 0:20:30)
  • Perception Shift Unlocks Talent And Scale
    • Rebranding to Klarna and courting fintech talent shifted perception from invoicing firm to tech company.
    • Founders warned that sharing ideas risks being copied, but execution and timing matter more than secrecy. Transcript: David Brown But Shemi Itkovsky knows their transformation isn’t complete. Next, he changes Creditor’s name to Klarna, which means clear in Swedish, and certainly sounds more enticing than Creditor. And in 2012, he sets a meeting with Max Lepchin, the co-founder of PayPal. Lepchin left the online payment platform after eBay acquired it in 2002. Ever since, he’s been starting and investing in new companies. Shemmy Etkovsky’s been honing his long-term vision for Klarna. He wants to issue the credit the customer will use and also process the payment for the merchant. And he thinks Levchin could be a valuable advisor. Shemietkovsky says he shared his idea with Levchin over breakfast in early 2012, laying out his business model and the company’s long-term vision. He hoped to recruit Levchin to the board or join as an advisor given his expertise in fintech. But according to Shemietkovsky, he received an email from a friend several months later and learned that Levchin is pitching a company that sounds remarkably similar to Klarna. And he discovered that Levchin publicly presented the idea just one month after their breakfast meeting. Shemiatkovsky says he confronted Levchin, but Levchin insisted he had the idea before he met Shemiatkovsky and that the timing was just a coincidence. Shemmy Atkovsky’s not convinced, but there’s not much he can do. He took a risk in sharing his vision for Klarna, and now it looks like he’s been burned. That right there is a founder’s nightmare. You open your playbook to someone powerful, and suddenly your idea has legs, as in someone else is walking away with it. Here’s the practical takeaway. The real protection isn’t paranoia, it’s momentum. See, if you can execute faster than anyone else, being copied doesn’t have to be fatal. But notice the emotional cost here. Betrayal doesn’t just sting personally. It changes how you share, how you partner, who you trust. In small business, it can be a contractor who ghosts you after learning how you do what you do, or maybe someone on the inside with a thumb drive who thinks they can do anything you can do Just better. Anyone remember Google engineer Anthony Lewandowski in our Waymo series? Well, the solution to this may sound boring, but it’s effective. Document what matters. Control access where you can. And keep building relationships that your rivals can’t clone. Levchin may have cachet and access to deep pockets, but Klarna was first to market. Shemiatkovsky just needs to capitalize on that. (Time 0:23:39)
  • Founder’s Fear Of Idea Theft
    • Shemiatkovsky accused Max Levchin of pitching a similar idea after sharing his vision over breakfast.
    • Levchin denied copying, leaving Shemiatkovsky frustrated but compelled to accelerate execution. Transcript: David Brown And he discovered that Levchin publicly presented the idea just one month after their breakfast meeting. Shemiatkovsky says he confronted Levchin, but Levchin insisted he had the idea before he met Shemiatkovsky and that the timing was just a coincidence. Shemmy Atkovsky’s not convinced, but there’s not much he can do. (Time 0:24:51)
  • Missed Platform Play Narrowed Klarna’s Path
    • Klarna missed an early chance to become a broad payment processor while rivals like Adyen expanded payment options.
    • Missing that window pushed Klarna to double down on BNPL as its core differentiator. Transcript: David Brown He pushes his company to become a broader online payment system, one able to handle credit card payments, subscription payments, and more. In 2012, he presents his vision to the Klarna board and gets its approval to start developing a new product. In the two years since Sequoia Capital invested, Klarna has changed. It’s grown to over 1,000 employees. They’ve opened an office in London, and they’ve started offering buy now, pay later in other European countries, not just their Nordic neighbors. There are benefits to growing, but there are drawbacks, too. Shemiatkovsky no longer feels like he has a strong grasp on his own company. When there were only 100 employees, he knew everyone. He knew who to talk to about what. He understood the process for developing new features. But now, well, it’s more complicated. There are more steps to make changes, more internal politics to navigate. Instead of being nimble, Klarna feels slow and sluggish. And while Klarna struggles to expand its product, its competition is growing rapidly. There are now three main competitors, a firm and two new startups, Adyen in the Netherlands and Stripe in San Francisco. In 2013 alone, Adyen adds 50 payment methods across Southeast Asia. Klarna adds none. Shemietkovsky can see the window narrowing. (Time 0:26:45)
  • Make Consumers Your Path To Merchants
    • To win merchants, Klarna decided to win consumers first by making its app the habitual shopping gateway.
    • They added an in-app browser and virtual cards so users could shop anywhere and still use Klarna installments. Transcript: David Brown Okay, so how do we convince merchants that we’re worth the risk? The executive takes off his glasses and cleans them with his tie. Well, respectfully, I think we’ve lost the merchants. I think we need to go straight to the consumers. Shem Yitkovsky stops chewing and puts his muffin down. Okay, how do we do that? Consumers find us through our partnership with merchants. We have our app. Klarna’s app shows users their transaction history, with images of everything a customer had purchased using Klarna. Shemmy Itkowski nods. He’s starting to see what his executive has in mind. If we make our app more popular than AfterPays, then we can show merchants that consumers prefer Klarna. The executive nods as Shemietkovsky goes on. And if consumers open Klarna when they go to make a purchase, then the stores will follow. Exactly. All right? Now we just need to figure out how to make Clorna the app people open first. The other executives around the table break into a chatter as they start to brainstorm. This is a quiet but radical shift in how they’re thinking about customers. Up to now, Klarna thought the merchant was the buyer. When the store and the shoppers follow, or what comes out of this back and forth, is a realization that the real leverage has moved downstream. If consumers love you, merchants don’t really get a vote. They will follow demand. We see this everywhere. Food delivery apps, streaming services, even credit cards. Acceptance follows usage, not the other way around. It’s also a reminder that sometimes the real product isn’t what you sell to partners. It’s the habit you build with everyday people. To increase the popularity of Klarna’s app, the team makes a decisive change. They add a built-in browser. Now, instead of waiting for merchants to partner with Klarna, consumers can shop anywhere directly inside the app. When a user is ready to check out, Klarna generates a virtual credit card, letting them pay in installments, even if the store has never worked with Klarna before. Klarna is hoping this freedom to shop anywhere will entice consumers. Klarna soon surpasses Afterpay in terms of app downloads, a point their sales reps are quick to point out when they’re pitching potential merchant partners. (Time 0:36:30)
  • Rapid Growth Exploited A Regulatory Gap
    • Klarna leveraged influencers and a regulatory gap for four-installment loans to rapidly onboard Gen Z in the U.S.
    • Rapid growth invited scrutiny about whether BNPL reproduces credit-card-like harms without the same protections. Transcript: David Brown When the COVID-19 pandemic forces people into lockdown and brick-and stores close, online shopping explodes, and Klarna is poised to take advantage. The company partners with influencers who spread the word about Klarna on TikTok and Instagram, allowing it to reach young shoppers, their target consumer. And while credit card companies face strict rules about how they can market to people under 21, Klarna doesn’t face these same restrictions. U.S. Credit laws carve out exceptions for loans made in four installments or less. And since Klarna’s standard offering is to split into four payments, it falls into this regulatory gap. By the end of 2020, Klarna has more than doubled its number of users over the previous year. It becomes the biggest buy now pay later company in the United States and the world. But success brings scrutiny. As Klarna and buy now pay later move into the mainstream, regulators, consumer advocates, and economists begin to ask harder questions. Klarna may have billed itself as an alternative to credit cards, but now it’s big enough that people are starting to wonder whether it’s luring consumers to make the same mistakes. (Time 0:39:20)