I’m the kind of person that looks at the payment card you use at the grocery store. If you are in front of me in line, I might even peek over your shoulder. This nosy behavior started about four decades ago. The observation assumes that you are doing the “best practice” for shopping if you use your debit card for groceries. The purchase is consumable, and the debit card clears to your daily demand deposit account (DDA) quickly. If you are using a credit card, I assume that you are doing it for the reward points. If you’re smart about it, you probably use the American Express Blue Card, one of my favorites, for the whopping 6% cashback.
But I digress.
If you are paying cash at the grocery, your household must carry a wad of money, and if it is a check, I assume that you have no open-to-buy on your credit card or not enough cash in your DDA account.
The same logic works at the gas pump, sans the check.
Use your debit card if you want the most economical option. For example, if you like reward points, use a card like the ExxonMobil Citi Card. Forget about cash, unless you want to go into the store.
But now, a new option: Buy Now, Pay Later at the pump. For this option, now offered by Klarna, I’d say you better rethink your financial strategies before activating the BNPL.
Newsweek reports a new option by fintech Klarna. In an article titled “You Can Buy Gas Now and Pay Later in Installments with Klarna,” the story begins:
Americans struggling with skyrocketing gasoline prices now have the option to postpone their payments at the pump. Klarna, a “buy now, pay later” service, has partnered with Texaco and Chevron gas stations to allow consumers to buy gas in installments.
The Klarna app alerted its users this week: “Beep beep! You can now gas up or grab snacks at Chevron and Texaco and split the cost over six weeks with Klarna.”
Of course, gas prices are up big time (along with your grocery bills). But BNPL? Pay-in-Four for a consumable product like gasoline? I can see the top credit policy managers I reported to at Citi or Chase years ago twitching at this one. Enabling this consumer option on a non-revolving product is not a sign of prudential lending. On the contrary, at the very best, it allows a marginally qualified customer to get into a financial nightmare.
Now, I am the first to say that there is something to BNPL. This Mercator (Now Javelin) classic, called BNPL Borrowing: Confessions of a Credit Card Manager, explains the promises and risks of BNPL, as I field-tested an array of BNPL loans. But sorry, Klarna, this time, the idea is a dud.
The bigger question is: Why would a lender specifically underwrite a consumable purchase to a marginally qualified customer base to pay the gas with four payments every other week? What happens when the car needs a fill-up next week or the following week? Do we start tacking on more BNPL loans? Ouch.
Lenders have the responsibility to keep borrowers out of trouble. That’s why underwriters use the FICO Score, one of the reasons the CFPB exists, and why the Office of the Comptroller of the Currency demands safe and sound lending.
Call me old school, but this offering comes at the wrong place and time. CFPB is hyper-focused on the subject, inflation is up, and gas prices are surging. It is not a good time to start carrying over debt for gasoline.
From an underwriting perspective, you can read about Klarna’s 500% surge in credit losses during 2021 here. Something like BNPL-at-the-Pump will keep that trend tolling well into 2023.
But, keep with your plastic, debit, or credit. This is one application for BNPL that just does not make sense. Even if gasoline hits $10 per gallon.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group