The Buy Now Pay Later Takeover | No Interest | 1

[Music] It's winter 2023, New York City. 34-year-old Alicia Berman is standing at the checkout counter of an upscale department 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. 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 yourself. Instead, Klarna will pay the department store. Then over the next two months, the Apple automatically pulled 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. "Ah, I'm, 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 her 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 her 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. But now, she's buried in debt. She doesn't even pay 10 times. She's also a member of the company of the company, the owner of the company, the owner and the customer. The company is open-minded, and she's been working for 26-26% of the company. She's open-minded and says she's a good person. [Music] In 2003, a 20-something-year-old in Sweden named Sebastian Schemiakowski 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 by 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, clothing, furniture, and even food. Among Gen Z, buy now pay later apps are becoming more popular than credit cards, indicating a fundamental shift in how Americans finance their lives. For many people, buy now pay later. Doesn't feel like borrowing at all. But does this new way of paying lead consumers and the economy on shaky ground? This is Episode 1. No interest. It's 2003 in Stockholm, Sweden. Sebastian Schemiakowski 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 coal-called. Schemiakowski 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. Schemiakowski 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 Schemiakowski will go through it all again with the next number on the list, and the one after that. It's my 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 Pricewater House Coopers. But the economy was sluggish after the tech boat will crash, and no one was hiring. Instead, he found himself at the last place he imagined working, as a salesman for this factoring company. It's barely a step up from the telemarketing job he'd had in high school, and it's not helping him get closer to his real dream, starting his own company. He hasn't figured out the specifics yet, but he knows he wants the company to be successful. It would be great to help his parents out. They work so hard to provide a bright future for him after they immigrated from Poland. I want to pause here for a moment because I feel like I can sense what some of you might be thinking. It's not just the lousy job, it's the mismatch between what he thought he was getting with his degree and what he actually got. In business, this expectation gap shows up all the time. You sign a lease, hire staff, buy equipment, and then reality shows up with a different plan. Mistake isn't dreaming big. It's believing the dream entitles you to a smooth launch or anything else. Most companies start as Plan B businesses, a work around a side door, a way to stay in the game until the real opening appears. There's something to be learned from that. When you're stuck doing boring work, when you're still collecting useful knowledge, even if it feels like you're just spinning your wheels. Every successful business person will tell you that. But if you don't keep your head in the game, you may never have that moment. The moment when incredible fate and business aspiration collide. Shemia Kofsky's boss walks by and barks at him to give him a ride. back to work. He quickly straightens up and puts his headset back on. He dials the next number on the list, an online cat food company. To his surprise, the person who answers is not a middle-aged woman. Instead, it's a young man. Shemiod Kofsky goes into his typical spiel. At the end, the man on the other end actually sounds interested. It turns out he isn't someone stuck in accounting. He's one of the company's founders. He asks Shemiod Kofsky a slew of questions, and Shemiod Kofsky can hear him jotting down notes. He knows from his time as a telemarketer that, "The more of a connection you can make with a potential customer, the better your chance of making a sale." So Shemiod Kofsky asks the man, "How many cats he has?" The man chuckles and says he actually doesn't have any. He only started a cat food company because the Google AdWord for cat food was cheap. As a result, 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. Shemiod Kofsky 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 at 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 hears 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. Shemiod Kofsky 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 Shemiod Kofsky can't stop thinking about what the cat food company found or 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, Shemiod Kofsky 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 their account, so the risk of debt is lower and the limits are clear. But this control comes with the 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. Shemiod Kofsky realizes this isn't a new problem. Maylord or company space this challenge years ago, customers had to pay for a product they couldn't see in person. To reduce the risk, many mail order companies offered to "build me later" option. They essentially sold the product on credit and the customer paid after they received it. Shemiod Kofsky begins to wonder if this "pay later" service could work in the digital age. This is a great example of innovation that isn't really inventing. It's translating. Shemiod Kofsky took something people already understood from mail order and moved it to a new place. That's a useful play for anyone building a business. Don't ask customers to learn a new behavior if you can borrow one they already trust. The trick is finding the part customers already like and removing the part they hate. Here, what they hate is that risk, paying for something they can't touch. What they like is control, paying after is shows up. It's early 2005 and Shemiod Kofsky is standing on stage in an auditorium at the Stockholm School of Economics. Beside him or 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. Shemiod 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. 30 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. Shemiod Kofsky 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? Shemiod Kofsky explains that "customers will need to be at least 18 years old, have a valid bank account, and have a personal identity number, the sweetest equivalent of a social security number." Creditor will also charge late fees, giving them another income stream. The judge has grumbled 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. Shemiod Kofsky and his friends feel dejected. They really thought they were on to something and that they'd win over investors. But right before they walk out the door, a man rushes up to them. He tells Shemiod Kofsky 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 in fees. They won't deviate from that. Now let's think about this for just a moment. Shemiod Kofsky 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 Delcopy is, 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 Delcopy, 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 Shemiod Kofsky needs. He knows the judges are experienced and successful, but he agrees with the stranger that in this case, they're just wrong. The banks aren't going to offer what are essentially interest-free short-term loans. That would cut into their core business too much. There is a market here, he thinks, and he's going to prove it. As a next step, Shemiod Kofsky secures a meeting with an American entrepreneur living in Sweden. She sees the potential in creditory and agrees to invest $60,000. She also connects Shemiod Kofsky with a team of engineers who quickly get to work building the software for creditory. The engineers work fast, and in April 2005, creditory processes its first transaction. Almost immediately, the company is successful. Merchants love partnering with creditory because just as Shemiod Kofsky predicted, the service brings in more customers who are willing to take purchasing risks now that they have creditors' protection. Within a few months, creditory is making a profit, and the company expands into Norway, Finland, and Denmark. But Shemiod Kofsky has bigger ambitions. He wants to expand beyond the Nordic countries and become a true global player, which means building a bigger and better platform. To do this, creditory needs top engineers, and that's where things start to stall. Creditors seen as an old-fashioned and voicing company, not a tech company. It might be profitable, but it's not the kind of place elite engineers dream of working. If creditors going to level up, its reputation has to change. Shemiod Kofsky believes that securing an investment from a big tech financier might help, and he sets his sights. on Silicon Valley's Sequoia Capital. They were early investors in Atari, Apple, and Google, a friend with a connection of the firm puts in a good word for Shemia Koski. Now, he just needs to close the deal. It's 2010, Shemia Koski is sitting in his office at Cretator, 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. Shemia Koski spins in his chair and stares at his phone. He reaches for the handset, then stops. He hits the intercom button again. Tell him I'm not available. I thought you told me to interrupt you no matter what if someone from Sequoia called. Shemia Koski 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. Shemia Koski stares at the phone. He believes in Cretator and knows this investment could take them to the next level. But what if instead of making Cretator seem more appealing? He just blew his best chance of achieving his dreams. If you want to get a job, I'll have a job. What do you know about what the business is? Is it a business plan that you're working on? Yes, of course. And the company's company is the company's company. It's a company that's working on a business plan. How long until Chin's gig is up? Follow the spy who now, wherever you listen to podcasts. For three days, Sebastian Shemia Koski 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 agreed to meet in London. Olson isn't sure it's a fit. Sequoia specializes in startups, companies very early on in their development. Cretator is well beyond that phase. They've been around for five years. They're profitable and have already expanded into other countries. But Cretator's success is exactly what peaks Olson's interest. During their meeting, Shemia Koski makes his case. He argues that Cretator 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 Cretator, they don't have to enter their card number every time. They just enter their name and social security number. Shemia Koski also shows Olson data around abandoned shopping cards. How customers often load items, then click away at checkout. But when customers pay with Cretator, they're more likely to complete the checkout process. Then there's the installment feature. Instead of paying all at once, Cretator customers can pay for their item in four interest-free installments, which makes clicking buy feel even easier. Olson and the others at Sequoia Capital are convinced and decide to invest $9 million. Sequoia's stamp of approval helps rebrand Cretator as a tech company. But Shemia Koski knows their transformation isn't complete. Next, he changes Cretator's name to "Clarna," which means clear and Swedish. And certainly sounds more enticing than Cretator. And in 2012, he sets a meeting with Max Levchen, the co-founder of PayPal. Levchen left the online payment platform after eBay acquired in 2002. Ever since, he's been starting and investing in new companies. Shemia Koski has been honing his long-term vision for Clarna. He wants to issue the credit the customer will use and also process the payment for the merchant. And he thinks Levchen could be a valuable advisor. Shemia Koski says he shared his idea with Levchen over breakfast in early 2012, laying out his business model in the company's long-term vision. He hoped to recruit Levchen to the border, join as an advisor given his expertise in Fintech. But according to Shemia Koski, he received an email from a friend several months later and learned that Levchen is pitching a company that sounds remarkably similar to Clarna. And he discovered that Levchen publicly presented the idea just one month after their breakfast meeting. Shemia Koski says he confronted Levchen, but Levchen insisted he had the idea before he met Shemia Koski and that the timing was just a coincidence. Shemia Koski's not convinced, but there's not much he can do. He took a risk in sharing his vision for Clarna, and now 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 Levin Dowski 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 cash, and access to deep pockets, but Clarno was first to market. Shemiod Kowski just needs to capitalize on that. As Levchin secures series A funding for his rival company, Affirm, Shemiod Kowski decides, "It's time to expand Clarno's offering." 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 Clarno board and gets its approval to start developing a new product. In the two years since Sequoia Capital invested, Clarno has changed. It's grown to over 1,000 employees. They've opened an office in London, and they've started offering by now pay later in other European countries, not just their Nordic neighbors. There are benefits to growing, but there are drawbacks too. Shemiod Kowski 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, it's more complicated. There are more steps to make changes, more internal politics to navigate. Instead of being nimble, Clarno feels slow and sluggish. And while Clarno struggles to expand its product, its competition is growing rapidly. There are now three main competitors, Affirm and two new startups, Adian in the Netherlands and Stripe in San Francisco. In 2013 alone, Adian adds 50 payment methods across Southeast Asia. Clarno adds none. Shemiod Kowski can see the window narrowing. If Clarno can't move faster, the future he imagined may belong to someone else. It's January 2015 in Stockholm, Sweden. Sebastian Shemiod Kowski is in his office, reviewing his schedule for the day. Come in. The door opens and one of his top executives walks in, holding his phone. Did you see the latest press release from Adian? No, who did they manage to sign this time? I'll take a look. He hands over his phone and Shemiod Kowski reads the update. New customers that signed with Adian in 2014 include Facebook, Spotify. Oh, wow. Shemiod Kowski looks up. He feels like he's been punched in the gut. Sputters. Spotify signed with Addigan? - Clarna has been courting Spotify for months. Landing them would signal that Clarna is more than just a by now pay later company. Processing subscription fees for a major international company like Spotify would legitimize their broader payment system. Clarna thought they had home field advantage. Spotify is headquartered in Sweden. The companies are practically neighbors. But instead, Spotify chose their Dutch rival. - Damn it. - Yeah. Shemmy Akofsky turns and stares out the window. Even though it's after nine in the morning, the sky is dim. Sunrise was only half an hour ago. A million thoughts race through his mind. He turns back towards the executive. - Okay, hi. I think we have two options here. We can try to dress ourselves up as a competitor to Addigan and aim for acquisition. - Gotta be honest, I don't love that idea. - Or we double down on our core business. Buy now pay later and we go for the United States. - The executive exhales. - We've avoided the US for a reason. Customers there largely rely on credit cards. - I know, I know, but if we want true global scale, then we have to go where consumers have the most purchasing power in the world. - Well, what if it fails? - Then we fail, but look, it's go bigger, go home. - The executive takes another breath and then nods. - Okay, let's go to America. - Shemmy Akofsky, Grins, he delayed expanding into the US for years, always feeling like it was out of reach. Convents that American consumers were so reliant on credit cards, they wouldn't see the appeal of Clarina. But a lot has changed since he started this company in 2005, including consumer spending habits. And if Clarina wants to upend the financial industry, then it needs to conquer America. (upbeat music) (laughing) (upbeat music) (upbeat music) - As Clarina prepares to enter the United States in the mid-2010s, they encounter a shift in consumer behavior. Historically, US customers have largely relied on credit cards, but that dominance is starting to crack. A growing segment of Americans is becoming increasingly skeptical of credit cards. Many of them came of age during the 2008 financial crisis and saw their parents rack up debt that couldn't pay off. To them, credit card companies don't look like convenience. They look predatory, offering high credit limits, prompting people to spend beyond their needs, and trapping them with years of interest payments that never seem to end. For these consumers, using a credit card just isn't worth the risk. They prefer to use debit cards, only spending money they know they have. A report by McKinsey calls them self-aware avoiders. These aren't people who avoid credit cards because they have poor credit and can't get them. They're largely high-income earners who are happy to spend, but choose not to use credit cards out of principle. The shift creates the opening Clarina needs to make its move to the United States. They invest millions opening offices in New York in Los Angeles, and for the first time in their history, they willingly take on losses. Betting the scale will come later. Clarina starts pitching major US-based merchants on partnering with them. By now pay later isn't completely new in the United States. PayPal co-founder Max Levchin's company Affirm has been around since 2012, but Affirm mostly partners with companies selling big ticket items like jewelry, mattresses, and furniture. Clarina takes a different approach, targeting merchants that sell mid-tier everyday items like clothing and event tickets. In 2019, Clarina pitches the youth-oriented clothing company Urban Outfitters. The company is eager to land this account. It's a well-known brand that could introduce Clarina to a broad swath of younger US consumers, especially the self-aware avoiders. It's trying to reach. Sebastian Shemiodkovsky and his team walked the company through their long track record in Europe. The features they offer merchants and the customer data they can provide, but Urban Outfitters goes with their arrival after pay instead. After pay is a newer company, founded in Australia in 2014. And once again, Clarina sees a familiar pattern. The company pitches a merchant, but the merchant chooses one of its competitors. For Shemiodkovsky, it's a jolt of deja vu. He's seen this before, like when Adian began rolling out payment methods across multiple countries, while Clarina struggled to scale. That was the moment when Clarina missed its opportunity to become a multi-purpose payment processing company. And once a rival company has momentum, it's hard to stop them. Clarina needs to figure out how to break this cycle and fast. Shemiodkovsky walks into a conference room and takes a seat. Executives gather around the table, sipping coffee and nibbling on muffins. Shemiodkovsky gets straight to the point. Okay, what's going on? We're the more established company. We've been operating for almost a decade longer than after pay. We have more features and our product is better. Why are companies picking after pay over us? An executive shifts in his seat. Well, maybe it's our pitch. A sales executive sitting across the table glairs at him. Our pitch is great. That's not the problem. An executive with thick glasses sitting at the far end of the table mutters something. Shemiodkovsky looks at him sharply. What was that? I don't think we're doing anything wrong. What do you mean? I think it's like that saying, you can do everything right and still lose. I don't think there's anything wrong with our pitch. There's nothing wrong with our product either. We're just losing. Yes, but the question is why? Maybe in those first pitches, we just didn't nail it. Maybe we didn't have the right team of people on that call with Urban Outfitters. They picked after pay and now after pay is the safe conventional choice. Even though they're even more of a startup than we are. It doesn't matter. It's too easy for an executive to sell their boss on after pay. I mean, Urban Outfitters uses it so we should use it too. There are winner and everyone wants to go with a winner. Shemiod Kofsky gets up and grabs a muffin from the sideboard. He walks around the table as he eats. There's an electricity pulsing through him. He loves a worthy adversary and after pay is proving to be one. OK, 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. Shemiod Kofsky stops chewing and puts his muffin down. OK, how do we do that? Consumers find us through our partnership with merchants. We have our app. Klorna's app shows users their transaction history with the images of everything a customer had purchased using Klorna. Shemiod Kofsky nods. He's starting to see what his executive has in mind. If we make our app more popular than after pay, then we can show merchants that consumers prefer Klorna. The executive nods as Shemiod Kofsky goes on. And if consumers open Klorna 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 Klorna 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, Klorna 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 Klorna's app, the team makes a decisive change. They add a built-in browser. Now, instead of the app, 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. The plan works, and Klarna makes deals with Sephora, Macy's Etsy and GameStop, among others. When the COVID-19 pandemic forces people into lockdown and brick and mortar 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. US 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 built 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. The question looming over Klarna isn't whether the model works. It's whether this new way of paying leaves consumers and the economy in a dangerous place. From wondering, this is episode one of the buy now pay later takeover for business wars. A quick note about recreations you've been hearing, in most cases we can't know exactly what was said. Those scenes are dramatizations, but they're based on research. If you'd like to read more, we recommend they got to live the life of luxury then came the fine print by Amy X-Wang, published in the New York Times magazine, also making sense of Klarna by Steve O'Heeer published in TechCrunch and the interview with Sebastian Shemmy at Kovsky, conducted by Ben Gilbert and David Rosenthal on the acquired podcast. I'm your host David Brown, Austin Rackless wrote this story, sound designed by Josh Borales. Kyle Randall is our lead sound designer, voice acting by Chloe Elmore, fact checking by Alyssa Jung Perry. Our producers Tristan Donovan of Yellow Ant are managing producer of Desi Blayla. Our senior producers are Jenny Bloom and Emily Frost. Karen Lo is our producer emeritus. Our executive producers are Jenny Lauer Beckman and Marshall Louis for Wondering. [Music]