Scott Galloway's Blog, page 21

The Last Last Mile

On Black Friday, we wrote about the dangers of the Buy Now Pay Later industry, which takes advantage of our psychological makeup to trick us into spending more than we can afford. From our lips to Uncle Sam’s ears: Yesterday, the Consumer Financial Protection Bureau announced it is collecting “information on the risks and benefits of these fast-growing loans” from five leading BNPL companies. It’s not (yet) the breakup of Big Tech, but it’s something.

OK, enough told-you-so. On to the post.

As I age (happening more and more recently) it feels as if the call from the Old World grows louder. We’re in the U.K. checking out boarding schools for my oldest (I’m a wreck over this) and telling my boys stories of their grandparents and the war. My mom and dad were born and raised in London and Glasgow, respectively. It’s the perfect vacation: We’ve watched 1917, Dunkirk, and the Blues (Chelsea Football Club) draw with the Toffees (Everton). Tomorrow we’ll see Tottenham face off against Liverpool. I love it here and want our soon-to-be teenage boys to be somewhere besides Florida for a few years. But that’s another post.

The U.K. is responsible for some of the world’s greatest innovations, including chocolate bars, the hovercraft, Adele, and … next-day delivery. Not Jeff Bezos, but a 19th-century Welsh flannel-maker. In 1861, Pryce Pryce-Jones (great name) began accepting mail-in orders for his flannels and promising next-day delivery nationwide. By 1880 he had more than 100,000 customers. One of them was the Queen, who later knighted him.

Sir Pryce-Jones leveraged the British railway network’s expansion and brokered a deal with the North Western Railway Company for three carriages on the Newtown-Euston line. These carts moved the flannels across the country daily. He then closed the gap between production and distribution. This meant building a warehouse next to the Newtown station. Then a factory next to the warehouse and a post office next to the factory. Pryce-Jones realized people liked his flannels but loved immediacy. Speed was the differentiator.

A century and a half later, Pryce’s impact has manifested in Jokr, Buyk, Gorillas, and Fridge No More. These firms were all birthed during the pandemic and may be points in a line of the prosperity often registered post-crisis. New York City has become a petri dish for dozens of budding delivery startups. They’re recrafting the supply chain with hundreds of millions in venture capital to achieve (roughly) the same thing:

Get you your shit fast, really fast.

The Need for Speed

These companies erect hyperlocal grocery stores — “dark stores” — that are only open to employees. Each hub serves an area no greater than a mile in radius. Once your order is processed, pickers collect and package your groceries in 3 minutes and a courier e-pedals them to your doorstep within the next 12.

The final step in delivery, handing a product to the consumer, is known as the last mile. Historically, the mile has been rhetorical. The nearest UPS hub or DHL warehouse might be 10 or 20 miles. These businesses, however, have dispersed their distribution networks to within an actual mile. The last last mile.

VCs recognize the opportunity. Gorillas has raised more than $300 million since its founding last year and is valued at over $1 billion. Jokr, which started delivering groceries eight months ago, has raised $350 million at a $1.2 billion valuation. They’re two of the fastest zero-to-unicorn firms in history.

It’s a global phenomenon. Spain’s Glovo raised $528 million in April ($2 billion valuation). Turkey’s Getir raised $550 million in June ($7.5 billion valuation). America’s Gopuff raised $1 billion in July ($15 billion valuation). Prague has Rohlik, London has Zapp, Moscow has Samokat … the list goes on. In the first quarter of this year alone, instant-delivery startups raised nearly $8 billion — more than in all of 2020.

Delivering at these speeds is similar to supersonic travel: expensive. It means operating hundreds of distribution hubs and hiring thousands of full-time couriers. (To get the reliability they require, these companies put their delivery staff on salary, in contrast to Uber’s gig-economy model.) That’s on top of enormous marketing budgets. Buyk will spend a fifth of its new capital on marketing this year. Jokr lost $13.6 million on just $1.7 million in revenue. You read that right — it had losses equal to eight times its revenue.

Déjà Vu

In 1999, Webvan went public at an $8 billion valuation (a big number back then). The company promised grocery delivery to your doorstep in 30 minutes thanks to state-of-the-art fulfillment centers manned by robots. At its peak in 2000, Webvan was registering $180 million per year. Unfortunately, the cost of processing, fulfilling, and delivery was … half a billion dollars. Delivery in 30 minutes is compelling. But the concept was ahead of its time, and though capital was cheap, it was expensive vs. today. Webvan filed for bankruptcy within two years of listing.

While we’re strolling down memory lane, Kozmo.com raised $250 million in 1999, promising free one-hour delivery for small items like DVDs, magazines, snacks, and coffee. It made $3.5 million in revenue that year, but lost $26 million and went bust in 2001. Urban Fetch (a Kozmo rip-off) was another: It raised some cash in 1999, burned it all, and shut down in 2000. At the San Francisco office of my consulting firm, employees would order a pint of Ben & Jerry’s or a pack of gum from Kozmo rather than walk to the convenience store. Again, the value proposition was there, just not the capital to achieve requisite scale.

Arrival

Bezos felt speed could be the skeletal structure of a megalodon. In 1999 getting everything you wanted within a day of ordering was expensive. And with only a third of Americans using the internet, the customer base was sub-scale. Books were the placeholder. The real product, speed, would take decades and tens of billions of dollars to develop.

At the time, shipping costs at “catalog” companies such as Williams Sonoma were steep: 30% or more of the product price in some cases, just for “regular” delivery, which might take several days. Two-thirds of larger retailers made a profit on shipping, but retailers relied on third-party providers (UPS, FedEx, and the postal service), marking an era of great brands with little underlying product differentiation — FedEx didn’t offer The Marvelous Mrs. Maisel.

Amazon.com began the same way. In 2004 it charged $9.48 for two-day shipping on a book and $16.48 for overnight. Bezos envisioned another way — the way of Pryce-Jones. Both men understood speed was a differentiator worthy of investment. The next year, he turned unlimited two-day shipping into the core feature of the most accretive innovation in business history: Amazon Prime.

After achieving a monopoly on speed, Amazon began turning it into a profit center and became a platform for other retailers, charging them for its best-in-class fulfillment. Then, once Amazon got these third-party sellers on the platform, Bezos started extracting more from every sale. In 2014, Amazon took 19% of third-party seller revenue. Today it takes 34%. That number’s mostly a mix of the company’s referral fees (what you pay to be on the platform) and fulfillment fees (what you pay for your product to be delivered). An increasing share is now coming from advertising fees — and the rent for visibility on Amazon is rising. People posit the economic value of beachfront real estate in a/the metaverse. It already exists. It’s the results page in the online retailer’s metaverse that retailers are paying for, and it’s likely worth tens (if not hundreds) of billions.

Amazon’s toll road on third parties generated $90 billion in revenue last year — if it were a stand-alone business, it would rank 31st on the Fortune 500. This year, it’s projected to clock $120 billion, ahead of both FedEx and UPS.

Watch Your Back

Some instant-delivery companies say they’re competing with supermarkets. Jokr’s co-founder says he’s coming after Amazon. That might sound crazy, but when your valuation is 706 times your revenue … you need to articulate a big vision and assure investors you are hunting elephants.

The market’s growing, and so are our expectations. In 2015 most consumers defined fast shipping as three or four days. The next year, it was two days. If these companies normalize 15-minute delivery, we’ll likely develop a taste for last-last-mile flesh. And that could reshape the $1 trillion grocery market.

That might be enough to scare the delivery behemoths into action. In October, Uber a 15-minute grocery-delivery program in Paris. Last month, DoorDash acquired Finland’s ultrafast service Wolt for $8 billion. Instacart is reportedly launching its own trial program, as is …  Amazon.

This is part of a larger trend that’s bigger than just physical delivery. Everything is getting delivered. Streaming brought the box office into the home; roughly half of pre-pandemic moviegoers aren’t buying tickets. Telehealth brought doctors and therapists into the home; telehealth claims are up 37 times from before the pandemic. Yet more evidence of the Great Dispersion.

Over the past two decades, the dispersion of retail from shelves to porch fronts has created and reallocated trillions in value. A similar tectonic shift is likely to occur in grocery and restaurants at the hands of ghost kitchens, ride-hailing companies, and well-capitalized last-last-mile firms. The question is, will new giants be birthed or will the existing behemoths grow new heads?

Slow … Down

Something is lost in the rush towards the instant distribution of everything. There’s something unmistakably human about a doctor placing a hand on your shoulder when they break good or bad news, or a therapist looking you directly in the eye when you start telling them what’s on your mind, or being part of a collective when you see a bunch of old people sending young people to die (see above: 1917 and Dunkirk). We’re losing these moments by the day, minute by minute.

Yet something is gained, as well. Innovation in the last mile has likely created more shareholder value in the past two decades (e.g., Apple Stores, Amazon Prime, streaming) than any innovation in any era. Why? Because they help us make the most of our time. The same is possible in our personal lives. We, too, would benefit from an investment in going the last mile. Do we get to the love and admiration we feel? Do we tell our spouse we appreciate the life we’ve built together? Do we show our kids, every day, that they are wonderful? Do we practice citizenship, every day, in ways that supersede partisanship or empty recognition from media algorithms? Most of us feel all these things, but do we say at the same rate what we think and feel?

Take it from two of the clearest blue flame thinkers in business history, Mr. Bezos and Sir Pryce-Jones: The only real asset is time. And at the end of this sentence you’ll be closer to having … less. The unlock in many of our own lives is the last last mile.

Life is so rich,

P.S. This February in Miami, the heat is on. Kara Swisher and I debut Pivot MIA, a new type of conference that will challenge convention. Join us in America’s most vibrant and future-forward city February 14-16 as we assemble the hottest names in fintech, media, entertainment, education, climate, and more. You don’t want to miss this.

P.P.S. My goal with No Mercy / No Malice is to make you more successful, both professionally and personally. That’s also the goal of my upcoming Business Strategy Sprint with Section4, kicking off January 10. Join us.

 

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Love Persevering

The aim of our content is twofold: We want you to 1) learn something; and/or 2) feel something. Nothing I have presented, blogged, said, or authored has ever inspired the response and emotion of the following post. It’s fitting that the subject matter is … our dog.

[The following was originally published on March 5, 2021.]

“What is grief if not love persevering?”

— WandaVision

We put down our dog Zoe, on Tuesday. We’re grieving. Three months ago our vet told us Zoe had growths on her liver, so to take her home and enjoy our remaining time with her. Tuesday morning I woke to distressed calls — “Dad … DAD!” — coming from downstairs. Zoe had collapsed a few feet from her bed. She’d lost control of her bowels, and her breathing was labored.

We shuffled her onto a beach towel and carried her to the back of our car. At the vet, we learned that her organs were failing and that she was bleeding internally. The clinic had an outdoor annex, where we laid Zoe down on a wicker table and gathered around to say goodbye. Like in every urbanized landmass in Florida, there was a gas station and a strip mall abutting the clinic. A car alarm was ringing. We had a remote control to notify the clinic when we were ready for them to administer pentobarbital, a seizure medication that would stop Zoe’s heart.

Zoe’s death has rocked our household. The other dog won’t come out of his crate, the nanny won’t stop crying, my oldest doesn’t want to come out of his room, and (most disturbingly) his 10-year-old brother is doing what we ask him to. We’ve been a bit self-conscious about our grief —  we recognize that 500,000-plus U.S. households haven’t lost a pet, but a dad, aunt, or other loved one in the past 12 months. But our grief persists.

At first I was fine playing the role of the stoic dad: “She lived a great life,” “This is what’s best for her,” etc. Then yesterday, on a livestream with Verizon and 60 of its communications agency partners, I started sobbing while describing the harm Facebook is doing to society. Despite all the machismo and strength I aspire to project, there I was, 56 years old and a chocolate mess on a Zoom call with dozens of people who want confirmation that they should serve ads on Yahoo.

It’s not the worst thing for someone in my line of work to have Verizon’s agency partners believe I am emotionally invested in holding social media platforms accountable. However, I’ve been crying every six hours since. I cried watching WandaVision last night, when eating oatmeal this morning, and again doing pullups.

Failed Birth Control

Two decades ago I moved to New York, where I applied tremendous skill and resources to building a life of arrested adolescence. The SoHo loft, a wintertime apartment in South Beach, a summer home in Watermill (complete with sand volleyball court, even though I … do not play volleyball), and a metallic-blue Maserati. Jesus, what a douche.

I embarked on a series of obsessive relationships — with people, business ventures, and material goods (the more scarce, the better). Inevitably, the rapture would fade, and my heart would sink. A weak heart breaks more easily. I wasn’t grieving over the lost person or the failed deal so much as I was grieving the lost possibility to escape to a better life — a life of meaning vs. the Imax version of The Narcissist’s Playbook.

Then I met someone nicer, more impressive, and much more attractive than me — who was also kind. However, she wanted children. I told her I wasn’t interested in getting married again. She called my bluff with a José Aldo roundhouse: “We don’t need to get married to have a kid.”

Looking for an alternative means of birth control, I drove to Pennsylvania to pick up an 11-week-old vizsla. The breeders were some of the most down-to-earth, normal dog breeders I’d ever encountered … and they were exceptionally strange. But that’s another post. We named our puppy Zoe, and talk of a baby subsided. However, like most extemporaneous methods of male birth control, my tactic wasn’t effective, and 38 weeks later my oldest son came rotating out of my girlfriend.

Zoe soon became my oldest son’s dog. He had a connection with her only matched by the contempt he has for his younger brother. Zoe forged the bond by sitting in front of his crib each morning; they stared at each other through the wood slats while my son spoke a language deployed across species. They’d be transfixed like this for 20 or 30 minutes (no joke). It was as if they were planning a jailbreak.

And why I think I’ve been crying.

I will miss Zoe, as she was a meaningful part of our family’s life. But the truth is, once we had boys, most of that emotion transferred to the kids. Plus, I’m not one of those guys who finds peace away from the family in the company of dogs. So yes, I am grieving Zoe, but as with happiness, real grief is internal.

Zoe’s death has rocked me because it’s a marker. A reminder that time is the most relentless force in the universe: No matter what we do, its thievery marches on. For the rest of my life, I’ll have sons. But I no longer have the baby who sat on a blanket with us in the backyard, the toddler who made an alliance with his dog to disappear his vegetables, or the 8-year-old who rang out a particular laugh only the dog could inspire. Zoe’s death is a loss on several levels.

Love Persevering

Dogs aren’t allowed on the couch in our household. Ever. The thing is, both dogs and humans are mammals, and we’re happiest when surrounded by (read: when touching) others. So Zoe and I had an agreement: After everyone was asleep, she could come on the couch, rest her head on me, and dream. It was a pact of secrecy, and not once in her 14 years did she betray this trust — vizslas are rugged hunting dogs, and also discrete. She would lie on me, dream, and, according to her paws, run for miles. Many of these posts have been written with Zoe’s head resting on my stomach as she dreamt of running through a Hungarian forest.

All Zoe wanted was affection — which is to say, love. As she was lying on a wicker table, next to a gas station, death came for Zoe. When her heart stopped, our other dog was licking Zoe’s ears, and our entire family had our hands on her. Our wonderful dog left this Earth with everything she had ever wanted. And we are grieving because our love perseveres.

Life is so rich,

P.S. A recent addition to our family, Leia:

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Super-App

Finally.

Two years ago I wrote a letter to the chairman of Twitter calling for Jack Dorsey to be replaced as CEO. Or, more to the point, for the board to appoint a full-time CEO. An executive who spends 90% of his time running another company and plans to spend half the year on a different continent looked like a recipe for poor shareholder returns. Spoiler alert: It was.

This past February, as there were now directors on the board acting as fiduciaries, I predicted Dorsey would be replaced by the end of the year.

Between the day @jack reclaimed the CEO position and the day he resigned (six years), Twitter’s stock increased 33%. The S&P 500, Facebook, and Google rose by 121%, 283%, and 447%, respectively.

My next prediction? Twitter will be acquired by the end of 2022, most likely by Salesforce or a fintech company like PayPal or Stripe with inflated currency. Jack could also reunite his sister-wives — in a man-bites-dog scenario, the company formerly known as Square could acquire Twitter. Why? For the same reason it’s now called Block. Super-apps.

A super-app offers a suite of internet services on one platform. Block already boasts an armament of super-app services: peer-to-peer payments (CashApp), crypto and stock trading (also CashApp), lending (Afterpay), music streaming (Tidal), it’s dabbled in food delivery (Caviar, sold to DoorDash in 2019), and its core merchant-payment platform (Square). Building social into the platform is the logical next step to becoming America’s first super-app.

I wrote about super-apps last week in New York magazine, and excerpts from that article appear below. It was timely: Super-app stories have been in the news ever since.

Square changed its name to — this was announced 48 hours after Dorsey exited Twitter. “Square” will be reserved for the merchant-payment business; the three-dimensional moniker encapsulates all its various products. Twitter would give Block even more dimension.ByteDance (TikTok’s parent company) invested in iMile, a last-mile courier service that connects mostly Chinese e-commerce companies to consumers in the Middle East. Dance videos are just the bait — commerce is the hook, and ByteDance is building services for more than limber-limbed teens.Grab, the “everyday everything app” from Singapore, made its public debut yesterday after a $40 billion SPAC deal. It’s the biggest SPAC to date, though the stock fell more than 20% by the closing bell.Indian super-app Paytm IPO’d with a $20 billion valuation — the largest public listing in the nation’s history. However, however … it, too, shed more than a fifth of its value on the first day of trading. Then slid further before maybe finding solid ground at $14 billion.

In sum, it’s getting crowded in the super-app lobby. The competition in India now includes: Amazon Pay, Google Pay, WeChat, and PhonePe (owned by Flipkart/Walmart). Southeast Asia also hosts many players: Gojek, Line, Sea Limited, Tokopedia, Zalo, and more.

And for good reason. The super-app market is the digital Iron Throne. Super-apps live on mobile, and mobile is the internet in emerging markets. India, for example, has three times as many cellular subscribers as the U.S., and Indians spend 17% more time per day on their phones.

Long term, however, it’s the world’s largest economy that is the biggest prize. A platform that services every aspect of the consumer experience in any market will be one of the most valuable companies in that market. The firm that establishes super-app leadership in America will be the most valuable company in history. Some thoughts below, with excerpts from our piece originally published in New York magazine on November 24, 2021.

The metaverse is best described as a consensual hallucination between Mark Zuckerberg and the media — a fantasy that we’ll trade pleasurable activities in the physical world, like cooking and dating, for nausea-inducing hours in a virtual realm full of legless avatars. To most ordinary people, the Facebook CEO’s aspiration to be the god of a universe we can enter only by affixing a prophylactic to our heads seems megalomaniacal. They’re correct. However, every time you hear Zuckerberg say metaverse, swap in super-app and the plan sounds less stupid.

A super-app is a single mobile app that offers basic services including chat and payments, along with a suite of “mini-apps” from third parties, ranging from stores and restaurants to government agencies. Westerners aren’t familiar with them, but across much of Asia, super-apps are the internet. The largest is China’s WeChat, possibly the most used piece of software on the planet. On WeChat, you can find a date, hail a cab, pay utilities, even get divorced. An app reaches super status when it knits together a critical mass of services, makes them so easy to toggle across that, even if they aren’t as good as sole-purpose apps, the app becomes your OS for your digital life. The more services, the less reason to ever leave.

A super-app can start small: WeChat began in chat; Indonesia’s Gojek started in ride hailing; and in India, Paytm was originally for buying prepaid mobile minutes. All eventually expanded from their niche and snowballed to dominance. The economics of super-apps are powerful — and possibly inexorable. I’m convinced that constructing a U.S. super-app is the strategic-imperative of the next decade and could result in the first $5 trillion company.

Already, there are a host of companies looking to replicate the Asian model — but to do so, they’ll have to get past Apple and Google, the nearly hegemonic mobile-OS providers, which are investing billions to prevent a super-app from inserting itself between consumers and the OS. The radical transformation of Apple under Tim Cook has been a decade-long project to extend the company’s ecosystem to nullify the potential for a super-app to sit on top of iOS. It explains why Apple now offers both credit and debit payment systems, why you can use your Apple ID to sign in to a huge range of third-party services, and why Cook is giving Reese Witherspoon and Jennifer Aniston hundreds of millions of dollars to produce an inferior version of Murphy Brown.

​​Who are the strongest challengers to Apple and Google? Most apparent, the other Big Tech behemoths, Amazon and Facebook/Meta, who aim to leapfrog by building alternative interaction paradigms, a pretentious way to say “voice” (Amazon) and “VR” (Meta). And while they are both trying to skate to where the puck is headed, Meta is on thin ice with a portal that makes you nauseous. Voice is underhyped, and VR overhyped.

The likely epicenter for aspiring super-apps is fintech. Payments in particular: PayPal, which owns Venmo, and Block né Square. And new fintech unicorns are being birthed weekly, including crypto-based businesses that are also in a position to leapfrog with long legs of capital, vaulting over the entire existing financial system. Fintech companies that reach scale have valuable infrastructure, acquisition currency in the form of overheated stock, and trust. Traditional Big Tech leaders, social media companies especially, have burned through acres of PR heat shields over the past years, relentlessly assaulted by bad press as they ask people to come for teen depression and stay for insurrection. Fintech has been (relatively) unscathed. Plus, these companies begin their assault from higher ground: payments.

Payment processing is the foundation of a super-app. It’s the glue that integrates core features with those provided by third parties on the platform, and it gives users the convenience of not needing to enter credit-card information across apps and sites. A shift in the arbitrage of attention, from ads to the more potent payments business, promises to fuel a historic merger-and-acquisition binge that will reshape the array of industries that tech derisively labels “content.” The likely biggest acquirers will be in finance — not just start-ups but Wall Street’s Old Guard, whose imminent panic will manifest in M&A banker fees.

Financial-services firms are already expanding into new markets. Not long ago, American Express acquired the reservation service Resy. There was a brand logic to that deal, as AmEx has long offered concierge services. In addition, JPMorgan recently purchased the Infatuation, the restaurant-review site and owner of Zagat, which is considerably more curious. In March, Square paid nearly $300 million for the music streamer Tidal, prompting a wave of WTF? coverage. You’ll know the super-app conquest has hit another level when Jack Dorsey combines Square with the other company he used to stop by on Wednesday and Friday afternoons, Twitter, and offers useful services.

I’ve lived through half a dozen of these techno-social transitions, from the PC era to “dot-coms” (ask your parents), through mobile and social, and now this. Every shift has created more wealth than the one before — but also levied more harm. One thing they all had in common is that we never really saw them coming. In hindsight, these things look obvious, but none of these transitions have manifested as we expected. For the most part, they’re worse. The difference now is that we can see super-apps coming. In Asia, they’re already here. As consumers, investors, and political leaders, we have a chance to do better. To set the stage for competition and empowerment, not co-option and enragement. Whether our future is mediated by Siri, Alexa or by Meta, it doesn’t need to be a world of addiction and exploitation. The virtual world isn’t “it is what it is,” but what we make of it.

Life is so rich,

P.S. Making predictions can be dangerous. It might put you in the Twitter crosshairs of Elon Musk. Yet I persist. Join my free Predictions livestream on December 7. You probably won’t regret it.

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Red Friday

Smoking wasn’t popular among women until Edward Bernays, the father of public relations, rebranded it. In 1929 he capitalized on the feminist movement and repositioned cigarettes with a “torches of freedom” campaign. Bernays hired women to march down Fifth Avenue smoking as a public display of emancipation and rebellion. Within six years, women were purchasing 1 in 5 cigarettes, up from 1 in 20 in 1923.

The strategy is simple: If people associate something negative with your product (e.g., cancer), change the conversation — “You’ve come a long way, baby.”

Facebook’s rebranding to Meta is your mom at Thanksgiving when your brother begins bragging about all the “honk” he was making selling meth in rehab … just ignore all actions and words leading to that point, and change the subject as if the entire natural state has been suspended. and are also good at this. New names attempt to divert our attention from teen depression, lung cancer, and murder, respectively.

A low-calorie version of this is unfolding in the payments space. The stale product formerly known as a loan has been rebranded as “Buy Now Pay Later,” or BNPL. The premise is simple: Buy a product for a fraction of its cost at checkout and pay the rest of it off over a few weeks or months. The good news: Debt is not as bad as cancer. Though it can trigger depression and even revolution. But that’s another post.

BNPL is one of the hottest trends in finance: 1 in 5 Americans used one of these services in the past year, with U.S. spending on BNPL increasing 230% since 2020. By 2025 global BNPL spending is projected to double to $680 billion. In August, Square acquired BNPL pioneer Afterpay for $29 billion in the largest-ever acquisition of an Australian firm. (We had the Founder/CEO of Afterpay on the Prof G Pod, and he’s an impressive young man.) Swedish BNPL giant Klarna is getting ready for a $50-billion-plus IPO, with a current valuation on par with ING or Lloyds Banking Group.

The target market is young people. Klarna’s frontman is rapper A$AP Rocky (who was paid in equity, not debt) — many BNPL brands rely on social media influencer campaigns. In the U.S., three-quarters of users are Gen Zers or millennials; it’s projected that nearly half of Gen Z will be using BNPL services by 2022. Their attraction to BNPL coincides with an aversion to banks and the credit they offer. This is a generation that came of age just before or in the wake of the Great Recession, a global economic crisis precipitated by … way too much credit. Young people love BNPL because, according to the former director of Afterpay, the vast majority of them “don’t want to be on credit.”

He’s not wrong. As Klarna reported in an investor factsheet, 1 in 3 millennials’ biggest fear is credit card debt. That’s more than name death or war. Deployment to Afghanistan is bad, but an unpaid balance on your Discover Card is (apparently) worse.

There’s one problem: Buy Now Pay Later is (wait for it) credit.

Hiding in Plain Sight

By most measures, BNPL services aren’t even good credit offerings. With a traditional credit card, you pay nothing up front, then you’ve got, on average, five weeks to pay without incurring any fees or interest. Closer to two months if you manage your billing cycles carefully. Carrying a balance will cost you, though, 1%-2% in interest per month. Miss a payment, and you get a late fee, about $30 — on which you’ll also pay interest.

In the short term at least, BNPL terms are worse. Take Afterpay. When you buy your new jeans, you have to come up with 25% of the money at purchase, then the lender gives you six weeks to pay off the remainder, in three installments. Miss an installment, and Afterpay hits you with a late fee. Continue in arrears, and the late fees increase, up to a cap of 25% of the purchase price. Also, you need a debit or credit card to make payments to Afterpay. Other providers have different fee and interest structures, but the basic model is the same. It’s credit.

BNPL companies market these limitations as features, not bugs. Because credit cards let you roll over your balance for a low monthly interest charge, you can rack up an insurmountable debt, which is harder to do with BNPL. Afterpay further limits customers’ risk by cutting them off once they start missing payments. It’s credit with training wheels, really. But it’s still credit.

BNPL marketing is Don Draper in Allbirds and a Patagonia vest, messaging for a modern age that generates irrational margins for the brand. Afterpay promotes that it charges “no interest!” However, miss one installment and you’re likely paying more, whether it’s called interest or a late fee. Afterpay competitor Affirm advertises the opposite: “Simple interest and no fees.” It then reiterates the message: “We don’t charge fees of any kind — not even late fees.” Bottom line, they’re all charging you the same thing: money.

Money Machine

So what’s the harm? Why not have a credit card with training wheels to ease young people into their journey toward a lifetime of debt? Especially as some of the costs are borne by the retailer in exchange for the consumer buying more sooner. Might Buy Now Pay Later even be training consumers to develop better purchase habits?

Here’s a good reason to be skeptical. (Let’s be honest, I’m skeptical about pretty much everything.) Pretending to be debit when you’re credit is an awesome business. BNPL firms take a larger cut of merchant sales than any other credit card company. Even AmEx — which charges merchants high interchange fees because its wealthy clientele are likely to spend more — gets a smaller share than Klarna, Affirm, and the like. Why would retailers do this?  Because this technology/branding/sleight of hand convinces people to spend more than they would otherwise … full stop.

The business model is predicated on this fact: BNPL customers spend more money. Klarna boosts the average consumer basket size by 45%. Affirm increases it by 85%. Afterpay reports a 17% larger shopping cart, as well as a 12% uplift in overall sales. This is the psychological masterpiece at the heart of BNPL’s success: While fear of debt draws consumers toward Buy Now Pay Later, the model inspires them to spend more.

BNPL marketing teams are careful not to emphasize this with consumers. But on the merchant side, it’s the main event. More and more retailers are installing BNPL offerings at checkout, because they know consumers will load up their shopping carts. As a result, Afterpay’s merchant network has grown 500%+ since 2018.

Vulnerable

Buy Now Pay Later firms are quick to tell you that this is where they make most of their money — off merchants, not millennials. That’s true. But the business model only works by capitalizing on the instinct for immediate gratification. And younger neurons are more vulnerable to this marketing than older ones. The prefrontal cortex — the part of the brain linked to dopamine control and release — only finishes maturing at around 25 years old. As a result, younger people are far more likely to engage in risky behavior in search of instant gratification and quick dopa-hits. This is what makes trades on Robinhood, likes on Instagram, and purchases on BNPL so much more rewarding to young adults: They’re engineered to satisfy their neurocognitive architecture.

The problem is the companies are putting these people in debt. (Something I do every day: “NYU Professor of Marketing”. But I digress.) Australia’s financial regulator found 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 had to cut down spending on essentials to make them. In 2019, Australian BNPL providers raked in $43 million in revenue from late fees, up 38% from the previous year. At a major U.K. bank, 10% of customers making BNPL payments overdrew their checking accounts in the same month. The authors of one study dubbed BNPL users “Generation Debt Trap.”

Some young people are beginning to catch on. TikTokers are dancing to the caption “crippling debt” after showing themselves purchasing new clothes with Klarna. Will a late BNPL payment hurt your credit score? Some of the companies say it won’t, others say it might. But a recent study found that a third of U.S. BNPL users have fallen behind on one or more payments, and 72% of them said their credit score dropped.

In countries with functioning governments, regulators have recently started to take action. After the U.K. announced a crackdown on BNPL, Klarna decided to reword its marketing to make it “absolutely clear” that it’s offering credit and not debit. Sweden recently prohibited credit payment options from being presented before debit options, sending BNPL options to the bottom of the check-out screen. In July, TikTok banned financial services brand advertising from its platform, including BNPL products.

U.S. regulation is trickier, as consumer credit laws vary by state and BNPL companies structure their offerings to elude many of them. Keep in mind, the last president  is one of history’s most prolific debt-defaulters. And our current president was nicknamed “the senator from MBNA” for his good work ensuring that credit card debt (and student loan debt) couldn’t be escaped via bankruptcy. Young people aren’t wrong to be concerned about credit. They’re just being lied to about it.

Your Social Movement Is My Benjamins

Social change has become a marketing veneer to create shareholder value, vs. actual … social change. We have entered into a consensual hallucination with the marketplace that our most pressing challenges can be solved by a college dropout who will make us rich in the process. No. Climate change, teen depression, income inequality, and profligate debt have made a lot of people exceptionally wealthy. And the cost to unwind the damage will be expensive … for all of us.

The electric vehicle market, for example, has been flooded with capital on the premise that the TAM is not electric cars, but climate change. (I see no other explanation for a $100+ billion valuation for a company that does $0 in revenue.) Robinhood built a $24 billion cache turning the stock market into a slot machine with shiny buttons and fake confetti, while claiming it was “democratizing finance.” And Facebook’s mission is to “bring the world closer together.” One insurrection and extreme dieting site at a time.

Today is Black Friday. I expect our Gen Z representative to blow next month’s paycheck on a box of $6 sweaters made in a Chinese labor camp, then lecture us on how our eight-year-old (paid off) Toyota is ruining the planet. Get. Off. My. Lawn.

Life is so rich,

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