It's notoriously difficult to tell when the country is in a recession, even for economists. And the way some of you are handling this is to look for signs everywhere and anywhere. From the return of recession pop on the charts...

Y'all missed the biggest sign of the recession, and it's not just that big line going down, it's the fact that Lady Gaga is getting down in the studio like it's 2008.

I got a coupon on my bread rolls. Yeah, something bad is gonna happen.

To the armchair experts of the internet who have flooded the social media zone with tips and analysis.

When people are paying off Starbucks drinks in installments, you don't need a Bloomberg terminal to figure out something is off.

That last part about paying for things and installments? That caught my eye as well. So that's what we're gonna talk about today, the rise of buy now, pay later services or BNPLs. The idea is this, instead of using traditional credit or debit to pay for your new sweater or TV or even your DoorDash order, you can break it up. And sometimes those payments happen every few weeks, sometimes once a month, and it's clear we're not sure how to feel about.

You're paying monthly for some mid Chinese food? That's just financially irresponsible, man. You don't gotta do this.

'So today I'm going all the way to the top, to the CEO of Klarna, that's the company most widely associated with buy now, pay later in the U.S. Is this a dangerous fad or, as he argues, a smarter, healthier form of credit? I'm Audie Cornish and this is The Assignment. BuyNow PayLater services are not banks. They're financial tech companies, and their model is built on the point of sale. That sweet spot between you and the retailer. Their main innovation, well, unlike credit cards, they offer an interest-free way to pay in installments on a single purchase without the stress of a credit check. BNPLs are especially big with young people. More than half have used a BNP service and like, yeah, I mean, I can understand that it's an attractive option if you can't get approved for a credit card, or if you're worried about incurring debt, or you just don't have access to a lot of cash. So here's an example. 25-Year-old Corey Jones.

Corey, how do you always look so bougie? How do you always look nice when you're on a budget?

He made this TikTok a few years ago when he was a grad student in North Carolina.

Let me tell you my secret: credit card debt, Afterpay, Klarna. Is it the most financially responsible? No, but that's okay because the debt will disappear someday.

Now this video has been shared almost 24,000 times, racked up more than 140,000 likes. So we called him up, and Corey has a theory about his generation.

I feel like we know what we want and we're going to get it regardless if we're able to get it now.

And that's one of the big criticisms of BNPL. It leads to more spending, more impulse spending among a subset of users who may already be financially overextended.

It just makes it feel more digestible, even though, like, I know $400 is coming out of my account regardless. Like, it just makes you feel digestible and it makes you like I'm not overly spending even though I kind of am.

'Sebastian Siemiatkowski was 23 when he founded Klarna, so it's not like he doesn't know what it's like to be cash-strapped at that age. Klarna isn't just a BNPL provider, but a full-service bank in his native Sweden. Actually, he calls it a neobank.

I would call it just like a next generation with the technology more at heart, I guess, and using more modern technologies and caring more about the user interfaces and the experiences that they provide and maybe the incumbents have.

Here in the US, Klarna is best known for buy now, pay later. In fact, it's doing so well it's been on the verge of making its stock market debut in an IPO that is now on hold in light of the uncertainty in the markets. The company reported losses of nearly 100 million in the first three months of this year. That's way more than Q1 of last year. At least some of that is because BNPL users aren't paying back their loans.

I think it's very clear that what happened during COVID was there was a lot of money from the government. A lot of people managed to pay down their credit card debt. And you have to remember, like a few years ago, credit card debt in the U.S. was at record low, right? And then as like we reversed back from that, some people forgot the benefit of being low in debt. And we've seen like an overindexing again. But you have to remember I've been doing this for 20 years. I took Klarna through the 2007 financial crisis.

Americans are still spending, whether they have the money or not. And BNPL, well, that's a part of it. Siemiatkowski says Klarna plans to grow the company by providing a different personal finance model, saying that it would help people like Corey get what they want in a way that, at least Siemiatkowski argues, would be healthier.

When we started our business, we learned two things. Like one, when people shop online, credit is not predominantly because you want to borrow, but it's predominantly because you want see and touch the product before you pay for it. And if you have a debit card, a little bit of problem is you're shipping this money and then hopefully you get something that looks like that picture you saw online, right? So credit is actually has a different kind of function and it's not about lending, it's predominately about like that buy now, pay later, which basically is that. But secondly, we also realized that there was a better option to credit than credit cards. What if you don't charge interest? Installments are very clear. They're like, okay, I'm paying one fourth of this every second week until I paid it down. So it's like a fixed term, it's very clear so we wanted to create a better credit product. One that was had fixed installment, that was interest free, that was easier to use.

'And we should say consumers have embraced this, right? Certainly in the U.S., BNPL, Buy Now, Pay Later programs have exploded. I think it was partner-centric, they had this survey that's found that like more than half of Americans are currently using some form of Buy Now because there are many other apps and programs that do this. Your Affirms, your PayPal. And as it's expanded, for a variety of reasons, people worry that it's just another form of credit debt that people are taking on. And I want to ask you about that, because I have to admit, I am one of those people that when I learned you could basically Klarna your DoorDash burrito, I was like, that seems unwise. Like, why even offer that option?

'Yes, and that is unwise. I would not recommend anyone to put a burrito on Buy Now Pay Later for clarity. But it is also partially because Klarna in the US has become very associated with Buy Now Pay Later. So when US consumers think about us, they think about Buy Now Play Later. But if you look at Klarna, in Europe, we are an equivalent of PayPal. So we offer both debit based payments, where you pay the full amount upfront. And we offer credit-based payments where you pay in installments or even finance like bigger ticket items for longer periods of time. And obviously we have realized that in the U.S. There's an opportunity to offer a better debit solution as well where people can pay the full amount. And that's what we have done with DoorDash and others. We're starting to come into places where...

'But wait a second, you just said that's not a good idea, so I feel like I have to stop you. I mean, I can understand business-wise why you'd embrace it. But a lot of us see this as a sign of economic strain, of people who fundamentally have reached the point where they can't actually pay for essentials, like groceries, like their takeout. And this doesn't look like a good option.

Yep. But that is again, what I was saying is that we don't only offer credit. We offer debit, like 30% of Klarna's total volume is people pay the full price. Just like the...

But you mentioned this thing about the U.S. That people are using it a little bit differently.

Well, people associate us with it, but Klarna wants, we want to grow our options. So to me, what's critical is every time you make a purchase, I want people to have the optionality to push debit or credit on every purchase. And that's what Klarna does in Europe. We always offer both debit and credit. And now we're doing more oftenly in the U.S. As well. So the point when we go to DoorDash, people go like, oh, they're coming there with their credit option is like, no, I don't expect there to be much credit on DoorDash. I expect people to use our debit option to pay the full amount on DoorDash.

But why? Like if you have an economy where prices are getting higher, right, where there's tariff uncertainty and when your savings may be dwindling, and you have existing credit on other cards, right? Why wouldn't you click on that option that lets you split up the payments? Like I feel like in the U.S. We are seeing people embrace that more.

Yes, that's true, but it's an extremely small proportion. So like, we obviously, because we do this in Europe as well, we do see that like on the equivalent of DoorDash in Europe, it will happen occasionally that people put it on credit. But most often people put these on debit with Klarna, just like they use PayPal wallet to pay online, right? They pay the full price. But the point is, also what one forgets in that comparison is I can go to DoorDash today and I can use my credit card. And if I do that, I actually accumulate all of my spending on credit and I get a bill at the end of the month to pay that down and then I'm likely to revolve. So what we want to do is we want provide a better option than credit cards, meaning that every time you make a purchase, you should have the option to choose between debit and credit like you used to, allowing you to rack up a smaller outstanding debt. In general, people owe Klarna about $100 to $150 on average, compared to the $5,000 on the credit card.

In total loans or any single little loan?

No, per consumer, outstanding. On any given moment, an outstanding credit card customer will owe about $5,000 in average in the US. A Klarna customer will owe 100 to 150. So the point is that what we believe, if you take 20 years down the road, let's just imagine Klarna is on every place where you buy something, just for the sake of it. I would argue that we want people to use debit more often and then occasionally use buy now pay later. Rather than everyone using a credit card where they put all of their spending on credits, right, which is what you do with a credit, you put all your spending on it.

Yeah. But what if you're just doing it all at the same time, right? And you do see a lot of those people who are in the category of delinquent or who are paying you late, they're what's called, they're stacking those loans, right. So they've made a small purchase, a Klarna purchase, they've maybe made a medium sized Affirm purchase, they have a visa somewhere with even more purchasing. Like it feels like you can separate them out and say one's better than the other when actually the Venn diagram is a circle. There's people who are just accumulating debt.

Yes. You're entirely right. That problem has always existed with credit cards. There's people that have five credit cards and rack up, you know, etc. So it's not necessarily a new problem for the credit industry. But you're totally right. And I think that to really understand, like, are we driving a more healthy credit behavior compared to traditional solutions, the only thing you can look at in the end is the losses. And if you look at our losses at Klarna, our losses are about 20% to 30% below credit card industry standards. So we do see that consumers that use this product overall, looking in total, is actually racking up less debt than if they use only credit cards. So to me, that's like, from my perspective, enough of evidence that this is a better solution in general, that doesn't mean that you won't be able to find single consumers and point to the fact that to a point, they have used and build up debt on multiple services. And I think that one problem here has been that traditionally the way that banks try to avoid credit card over indebtedness was through credit bureaus and the credit bureaus, the information in credit bureaus may be very outdated or very old.

Right. So to be clear, every time I'm using my credit card, either well, paying my bills on time, or not so well, not paying my bills, the banks could report that to credit bureaus, and that could hurt me down the line. It was a way of sort of that report card, which we all deal with, is a way keeping us in line.

'Exactly. And today, for example, Klarna applies some newer, more modern technologies than credit bureaus to make that decision of whether we can extend credit to you or not. So one example of that is today people connect their bank accounts, allowing us to get access to their real-time financial data, like what you're actually spending today and how much you're spending and what your income is, rather than relying on year-old information. This is where the innovation is happening, that we're trying to be even smarter on how you take those decisions to prevent people from getting into those situations. But generally speaking as well, I would say that like, because we don't charge interest, the interest here is paid by the merchant, right? They pay for the fee of these loans. So generally also these loans, because they are smaller, shorter term, fixed term and interest free, everything else equal is a healthier type of loan than the credit card debt that you could rack up. McKinsey estimated that in the U.S., there's about 20% of consumers who don't care about loyalty points and don't about all the fancy, pants-y stuff that credit cards have been providing to kind of bring you into their system. But they have felt they have lost track of revolving. They have gotten themselves into credit card debts and then taken themselves out of it. And they only wanna use debit. They don't wanna use these credit cards. They wanna use debit. But occasionally, they need a little bit of credit, or they want to use occasional debit credit. And that's really the category of consumers that Klarna is coming into. These are what we call the self-aware avoiders. We always recommend, like, use debit predominantly, and that's why we also want to offer debit as a payment method. But then occasionally, you can get access to a fixed installment.

'Sebastian Siemiatkowski is the CEO and founder of Klarna. Our conversation continues after the break. Let me come back to something that you said about how credit card companies kind of, they report information because over time, that's how everyone can kind of keep track of who's paying their bills on time. You know, one of the ways, as I understand it, that Klarna has tried to get people to pay is like you have high fees for being late. And there are people who feel like, oh, I thought I was getting this interest-free loan, but in the end, between the fees, or maybe I struggle to return the item, that there's actually hidden costs to doing this. And because it's frictionless, you don't totally engage on that in the moment of your purchase.

'That's very fair. And if you look at all banks historically, there's been overdraft fees, late fees, and so forth, right? So it's not uncommon. But the interesting thing that people don't know is when we launched our product in the UK, we actually decided to go entirely without late fees. We didn't have any late fees or no interest whatsoever. We only relied on the merchant fee that the merchant pays for offering Klarna. And unfortunately, after testing that for a few years, we also realized that if there were no consequences to not pay on time, actually people racked up even more debt. So it wasn't, it's a little bit like a city with no parking tickets, right? Like eventually, unfortunately, it will lead to not great parking. So what we've tried to do is to set some late fees that there is good that there's some consequence for the consumer of not paying on time tends to lead to people being a little more careful about how they use the product. But obviously what you want to be mindful of, and we've seen tons of examples of payday lenders and you know, all types of not so healthy credit providers throughout the history of these services. If a company becomes reliant on these fees or builds too much of like their income from them that can, you know can make a company over index on those things. And then that can create a very unhealthy product and so forth. So it is a balance act where we generally-

'I feel like I should translate that for a non-business audience. So basically, if you start over relying on penalties after a while, your customer penalizes you, basically.

Exactly. Thank you. That's a very... I'm gonna borrow that description if you're okay with that because it was a much better way to put it.

'Yeah that's okay. But I guess the reason why I'm focusing on that is because there are lots of ways you're describing Klarna that makes it sound As you said, can it be healthier than a credit card? But then there are lot of ways that as someone who grew up in college when everyone was like giving away credit cards and we all got into credit card debt it does sound very similar, you know, because at the end of the day it is about frictionless purchasing, right? It's about taking away those moments where you might say do I need to buy this or not? Because it takes away the can I buy this, or not? And in that way it feels I don't know. This is my inner bank teller coming through -- I was a bank tell her in high school so I became very intimate with like kind of the people who would come to the the window who had very little left and the friction of asking and that moment and even sometimes the shame involved in that, was the discipline. Buy now, pay later just takes all that away. You don't have to feel embarrassed. You don't have to feels shame. You don't have to engage in any kind of discipline to get you on in that moment.

Yeah, some people argue that. I would though say that like, when you swipe your credit card, there's not a lot of shame in it either. And I'll say actually the opposite, they try to make it look fancy and cool to swipe that platinum card or whatever it is. So like, I don't think that that exists. Maybe you would argue that when you sign up for that card, there's a little bit of like shame associated with it, or like some kind of friction.

Or reality, right, because your credit report is going to impact that. If you've been delinquent in all kinds of payments, and you go to get another credit card and they say no, that's a point that says to you, hey, I'm not good at this part. Maybe I shouldn't have credit, and this, for instance, doesn't have a hard credit So you're able to get involved in the credit economy very easily.

That's true, but I would actually argue that if you look at it, I think, again, that there's actually a big difference. Like when you apply for your credit card, they will check your income and they will give you a very high limit. Like they may give you like, you know, two thousand dollars or three thousand dollars. Like that's not actually how we do it. So what we do instead is we look only at the single purchase you're doing. So let's say you're buying for 80 dollars or 100 dollars and we take a decision for that hundred dollars only. And then if you show that you pay back that $100, we may extend another $100. And we take a decision, transaction by transaction, which the credit card companies don't. And this is actually one reason why the losses are lower, because we're looking at it like over time on how people use these products and whether they're using them in a responsible way to make sure that like people don't overextend themselves on the credit side, right? While the problem for the credit companies is more often that they want you to overextends because they want you to build that revolving credit that they have $5,000 that's running at 20% interest. So the incentives are just slightly different.

'And to your point earlier about the credit cards, you know, the credit card companies actually have to report a fair amount of information, right, to the credit bureaus. I know that Klarna has done some reporting in certain markets. Reporting is not universal in this industry. And there are a lot of financial experts that are like, we actually don't have our arms around how much debt is out there with BNPL, because you guys aren't having to report it. So, like... that's nerve-racking as someone who lived through the sort of too big to fail, you know, period of the housing loan crisis, that there could be a kind of burgeoning debt that people don't fully understand.

'Yeah, so it's not entirely true in the sense that, like, Klarna, as an example, is a bank in Europe, and we're fully regulated, so we need to report all our balances, including our American ones. But I do agree with you, and I think that there is, like, to me, it's funny, like you know, people sometimes say, you know that I'm pro-regulation, sometimes anti-regulations, but like, I'm in general, like I am a big fan of, you now, capitalism. But I'm also not an anarchist. I don't believe that a system without rules makes sense. And I think financial industry and banking require some rules. And in buy now pay later, when there was a government that was more pro-regulation, we agreed. And now there seems to be a government that's more anti-regulatory for banks-

You mean here in the U.S.

Yes, as an example, right?

And not just that I think the Consumer Financial Protection Bureau has been dismantled right now some of them are rules around BNPL, I don't know who's going to enforce them.

'Yeah, but I mean in Europe where we have also been very involved in the regulatory environment, like I always said that like, I think some rules make sense because you do need to realize that not all consumers are always going to be fully educated and fully aware and some are going to be in to a point vulnerable situations. And I think if it's an entirely rule less system, it's going to malfunction and it's gonna lead to bad practices and bad businesses. If you, however, regulate poorly, you might get the opposite, which is excess profits that we see in banking, where banks are making too much money because the barriers of entries are high and it's like over-regulated as well is not necessarily the solution. So the delicate challenge for government is to find the balance between the two.

'When you think back to that 23-year-old, could he or would he have used Klarna? Because when I think back when I was 23, I can actually remember going to an ATM and there being so little there that, like I had whatever threshold there was, like I couldn't take money out. And boy, did that impact my choices and how I did spending. Right now, that wouldn't happen to me.

'No, that's totally right. But I also remember when I used to go on the train and I didn't have any money on my debit card and I would be able to swipe it because the card readers at that point time weren't connected. And I would end up with an overdraft fee that was twice the price of the ticket. And at that time, to have given me interest-free credit would have saved my life. Now, that's one thing. I also remember the first time I got a credit card and I overspent that month dramatically because I felt like I had both my money on my account plus the credit line. And then I ended up falling into the trap of the credit cards when I did that. And it took me some time to get myself out of that. So again, like those are my experiences. And I think that that's why I'm always saying that like we're fighting fire with fire here. Let's be honest about that. Like we're finding credit with credit. And so it's easy to criticize us for saying, yeah, but it's still credit. And you will be right. Like it's right, but it's turned out that fighting fire with fire is actually quite effective. Like, you know, you burn off a little bit piece so you don't burn the rest.

What are you looking at now and what are you going to be looking at in the next couple of months that will give you an idea of our fiscal, our financial health?

'I think that the, you know, it's one thing if you look at like micro macro, if you think about macro in the US, the thing that I am mostly looking at-

'Which is the big-picture economy for people- they hear the word macro, big picture, yeah.

Yes, exactly. I think that there I am mostly focusing on what happening with the jobs because in the end, it's the jobs that impact whether you can pay off or not, right. And if you look at the jobs, I'm concerned that AI may start having an impact on the employment rates in the US.

And we should say, you say this as a person who actually tried to do some restructuring where you used more AI rather than workers.

True, and we have also, despite mixed writings about this, but the truth is, we were 5,500 people about two years ago and we're 3,000 now, so we are, and we are a significantly bigger business, so we have been able to utilize AI to become fewer, to do the same amount of, or even more work, right? And I think that that is becoming a reality and it's different this time around because maybe, as I remember as a kid when, things got worse in the economy, it would usually hit blue collar workers. You would hear like, now they have, you know, they have let go of like a lot of blue collar workers, right? Like that was always the thing. People lost their jobs in the factories.

Or, for the record, the bank. No one's coming to a bank teller anymore, so glad I found another line of work. I'm glad I found another line of work.

But I think this time around, the risk is that, and I hear that now as I hear a lot of like, you know, manufacturing companies announced, they're like, they're not touching their blue collar workers, like all the factory workers are staying, but they are reducing the size of their headquarters, their offices, the knowledge workers. And so the white collar jobs are at risk this time around and that obviously people in general tend to make more money, be maybe more middle income and high income than lower income in generally speaking. And that is something that I'm keeping an eye on. Like, is that going to happen? And we know that already the changes by the administration has been to let go of people in federal jobs, right? There has been some, but so far that has not seemed to have impact to the unemployment rate or the job employment rate in the U.S. But if the combination of that and AI could lead to more jobs, so that's something I keep an eye on and I'm a little bit worried about to see how that develops in the coming months.

Is there anything you want to ask me as a nosy reporter who's been banging on about your company for the last half hour?

No, no, no. I think we're good. I've already asked you if you have a credit card. I feel like I've asked you some personal questions on this call.

'No, no, I'm glad you did because I can I tell you something? When I first heard of BNPL It made me think of something from when I was a kid which was layaway and layaway was what- did you do layaway? How poor were you? I feel like this is something we can bond over if you ever did it or was that an American thing?

It was an American thing, but I'm familiar with the concept, yeah.

'Well, it let you do this thing you talked about. You got to touch the product, right? Your mom wanted to buy you this shirt or jacket. And what they did was yank it from the shelves so no one else would buy it, but you at least got to know. And then it went behind the shelves and, uh, behind a counter and you would come and pay in installments, but it wasn't frictionless, right. Like even standing in the layaway line was like someone from school saw you. It was like, everyone knew you couldn't afford your clothes again. It like- I feel like this destigmatizing credit is a good thing, but it has created a very serious cultural consumption obsession.

Yep, I think you're right. And I think there's like, unfortunately, you know, you wish there were a silver bullet solution to things, right? And the truth is probably that like, maybe it got better, but it also got worse, right. Like, that's the that's the conclusion. I think also though, that you have one thing that I always think about as well is that like there would be one or two weeks before my salary would I didn't have any money on my account, right, and the question is like, how did I act in those situations? And there was a lot of situations where a little bit of credit there, if interest free would actually have been beneficial. So like, for example, when we went to the grocery store, maybe we bought like a single package of something instead of being able to buy the big pack, which would have actually saved us, especially if it was interest free. And people with credit cards had that option and we didn't. And it actually made us take a lot of bad financial decisions. And I think that like, there's an interesting study in the U.S. That shows that credit cards in the US is the most effective income redistribution mechanism that has ever been created because credit card companies charge 2%, 3% for using credit cards. You're not allowed in the US to charge as a store extra for people swiping their credit cards, so you raise your prices. But that means that your debit users are paying higher prices in the stores to fund your credit users who are generally people of high income. And actually, some people calculated that it redistributes about $350 from lower income households to higher income households, the whole credit card system. So again, I think it is a system that requires a little bit of like competition and alternative thinking.

No, for sure. And I'm glad you brought that up because there are so many ways that when you're, when you are working class or poor, that you spend more in weird ways. Right? Like life costs you and your family more, I don't know if you grew up this way, where you're like watching your parents trying to make that math work. And you just live with it forever. Like I always have this sense of like, do I have enough? Am I managing this stuff?

'That's it. My parents overspend it on the mail order catalogs, and they were paying like 30% interest of that and stuff like that, right? So again, like I think it's sometimes also when you have more money easier to forget about that there were situations where actually the lack of money made you take worse decisions. And so it is a delicate balance to try to balance those two things and think about like, how do we provide these services in a way that makes sense. And I think that comes back a little bit to how long-term you are. I mean, when I started this company, I was accused of like, I just wanted to exit and sell it quickly and move on with my life and make a lot of money. I think 20 years into it, people start to recognize that maybe he's a little more long- term than that. And I genuinely, I want to disrupt financial services. I want build better banking services for consumers that are healthier and better. And I'll be here hopefully another 20 years trying to, you know, prove that this model actually leads to healthier outcomes. Not everyone needs to buy into it, but not everyone needs to use the product either. So that's like a little bit up to people in the end.

'Sebastian Siemiatkowski, he's the CEO and co-founder of Klarna.

This episode of The Assignment, a production of CNN Audio, was produced by Madeleine Thompson and Jesse Remedios. Our senior producer is Matt Martinez, our technical director is Dan Dzula, and the executive producer of CNN audio is Steve Licktieg. We had support from Dan Bloom, Haley Thomas, Alex Manessari, Robert Mathers, Jon Dianora, Laney Steinhardt, Jamus Anndrist, Nicole Pessaru, and Lisa Namerow. As always, thank you for listening, please do subscribe and share or even leave a review, because it makes a difference.