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In a move that set social media ablaze with memes and satirical commentary, leading food delivery business DoorDash announced a partnership with buy-now-pay-later (BNPL) provider Klarna. The deal allows DoorDash customers to split their food delivery payments into four interest-free instalments or defer payments to align with their paychecks. While some joked about "burrito bonds" and impending "taco debt crises,"  many saw this as a major recessionary indicator if people are having to resort to buying food on credit. However, this collaboration actually highlights a significant shift in consumer credit preferences and behaviours away from interest-derived credit cards to fee-focussed BNPL. ABSI this week explores this credit revolution.

Source: Instagram

The DoorDash-Klarna partnership isn't just about financing fast food; it's a reflection of evolving attitudes towards credit, particularly among younger consumers. Traditional credit cards, with their high interest rates and potential debt traps, are increasingly falling out of favour with millennials and Gen Z. According to RFI Global, 26% of 18-24 year olds and 42% of 25-34 year olds own a credit card, in comparison to 66% for those aged 55+. Instead, these generations are gravitating towards more novel financing solutions such as BNPL services that offer more transparency and control on fees with a technology-first approach.

This shift is transforming BNPL from a niche product for big-ticket items into an everyday spending tool enabled through digital wallets. By partnering with DoorDash, Klarna is positioning itself as a viable alternative to credit cards for routine purchases. This move aligns with the broader trend of BNPL providers expanding into "everyday spending categories," as noted by Klarna's Chief Commercial Officer.

Source: RFI Global

For Klarna and other BNPL providers, pivoting into smaller purchases can offer lucrative avenues for further growth, but it's not without risks:

1. Credit Checks: As BNPL becomes more mainstream, providers must improve their credit assessment processes to minimise bad debts. The Australian government, for instance, is implementing stricter regulations requiring BNPL providers to follow responsible lending practices by mid-2025.
   
   
2. Debt Accumulation: The ease of obtaining BNPL credit could lead to overextension, especially when used for everyday expenses like food delivery.
   
   
3. Credit Score Impact: While most BNPL providers don't perform hard credit checks for initial setups, missed payments can negatively affect credit scores.
   
   
4. Regulatory Scrutiny: As BNPL grows, it's likely to face increased regulatory oversight, potentially impacting its current business model.

The DoorDash-Klarna partnership signifies more than just a new way to pay for takeout. It represents a broader shift in how consumers, especially younger generations, view and use credit. As BNPL continues to evolve and expand into everyday spending categories, it's poised to challenge the dominance of traditional credit cards.

However, this transition isn't without challenges. BNPL providers must balance growth with responsible lending practices to avoid the pitfalls that have plagued traditional credit products. As regulations tighten and the market matures, we can expect to see further innovations in this space.

Source: Instagram

While the memes about "burrito bonds" may be amusing, they underscore a fundamental misunderstanding of BNPL's role in modern finance. Far from being a sign of impending economic doom, the integration of BNPL into everyday transactions reflects changing consumer preferences and the financial industry's adaptation to those needs.

Consumers using BNPL for their takeout isn’t a recession indicator, just like using a credit card isn’t either. It is a signal of the changing face of consumer credit to align with a younger generation that is seeking a technology-first platform that provides transparency on costs and tools for budgeting. As we move forward, it will be crucial for consumers, regulators, and financial institutions to work together in shaping a credit landscape that offers both flexibility and responsibility. The future of credit may not be in plastic cards but in the digital wallets of consumers who prefer to "buy now, pay later." In the meantime, enjoy the finance memes.

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