Bnpl Is Expanding Fast, And That Should Worry Everyone

When Nigel Morris tells you he’s worried astir nan economy, you listen. As manufacture observers know, Morris co-founded Capital One and pioneered lending to subprime borrowers, building an empire connected knowing precisely really overmuch financial accent nan mean American tin handle. Now, arsenic an early investor successful Klarna and different buy-now-pay-later companies for illustration Aplazo successful Mexico, he’s watching thing that makes him profoundly uncomfortable.

“To spot that group are utilizing [BNPL services] to bargain thing arsenic basal and basal arsenic groceries,” Morris told maine connected shape astatine Web Summit successful Lisbon this week, “I deliberation is simply a beautiful clear denotation that a batch of group are struggling.”

The statistic backmost up his unease. Buy-now-pay-later services person exploded to 91.5 cardinal users successful nan United States, according to nan financial services patient Empower, pinch 25% utilizing nan services to finance their groceries arsenic of earlier this year, according to survey data released successful precocious October by lending marketplace Lending Tree.

These aren’t nan discretionary purchases — nan designer bags and latest Apple headphones that BNPL was marketed for originally. Borrowers aren’t paying it back, either. According to Lending Tree, default rates are accelerating: 42% of BNPL users made astatine slightest 1 precocious costs successful 2025, up from 39% successful 2024 and 34% successful 2023.

Storm clouds connected nan horizon

This isn’t conscionable a user finance story; it’s a canary successful nan ember excavation for nan full venture-backed fintech ecosystem and beyond. It points to what could create into a superior problem — 1 that echoes nan informing signs that preceded nan 2008 financial meltdown isolated from for 1 thing: it’s mostly invisible.

Most BNPL loans aren’t reported to in installments bureaus, creating what regulators telephone “phantom debt.” That intends different lenders can’t spot erstwhile personification has taken retired 5 different BNPL loans crossed aggregate platforms. The in installments strategy is flying blind.

“In a world where, if I’m a buy-now-pay-later provider, and I’m not checking bureau data, I’m not feeding bureau data, I americium oblivious to nan truth that Nigel whitethorn person taken retired 10 of these things successful nan past week,” Morris explained. “[That’s] perfectly true.”

The numbers that are disposable are some disfigured and dated. Consumer Financial Protection Bureau information published successful January of this twelvemonth — aft nan agency issued marketplace monitoring orders to awesome BNPL providers including Affirm, Afterpay, and Klarna — showed that astir 63% of borrowers originated aggregate simultaneous loans astatine immoderate constituent during nan year, and 33% took retired loans from aggregate BNPL lenders.

The information besides revealed that successful 2022, one-fifth of consumers pinch a in installments grounds financed astatine slightest 1 acquisition pinch a BNPL loan, up from 17.6% successful 2021; astir 20% of borrowers were dense users originating much than 1 BNPL indebtedness connected mean each month, an summation from 18% successful 2021; and nan mean number of caller loans originated per borrower accrued from 8.5 to 9.5.

The borrower floor plan is concerning: arsenic of 2022, astir two-thirds had little in installments scores, pinch subprime aliases heavy subprime applicants being approved 78% of nan time.

To beryllium clear, BNPL isn’t yet a systemic threat connected nan standard of nan 2008 owe crisis. The full marketplace is measured successful hundreds of billions, not trillions. But nan deficiency of visibility into this indebtedness — mixed pinch its attraction among already-stressed borrowers — is worthy watching acold much carefully.

The Trump management reversed course. In early May, nan CFPB said it would not prioritize enforcement of that rule. Days later, CFPB acting head Russell T. Vought rescinded 67 interpretive rules, argumentation statements, and advisory opinions making love backmost to 2011, including nan BNPL rule. The agency said nan regulations provided “little use to consumers” and placed a “substantial burden” connected regulated entities. (Translation: BNPL companies lobbied successfully.)

In fact, soon after, nan CFPB released a caller study pinch a surprisingly different message. Focusing only connected first-time borrowers, nan agency said customers pinch subprime aliases nary in installments repaid their BNPL loans 98% of nan time, and that location was nary grounds that BNPL entree causes indebtedness stress.

The discrepancy betwixt this rosy image and nan 42% precocious costs complaint reveals nan information spread astatine nan bosom of nan problem: We presently don’t person bully visibility into what happens to borrowers complete time, particularly those juggling aggregate BNPL accounts. The optimistic study looked astatine first-time users; nan concerning information comes from nan full personification base.

“So I deliberation it is simply a existent issue,” he said of nan economy, choosing his words deliberately. “If you return a half measurement backmost and we look astatine nan U.S. user astatine nan moment, and we person a number of businesses that are successful and astir lending to this user — truthful far, truthful good. Delinquency is not rising yet. Charge-offs are not rising yet. But there’s intelligibly large wind clouds connected nan horizon.”

He pointed to unemployment hitting 4.3%, its highest level successful almost 4 years. He cited nan “tumult astir migration and astir tariffs and astir nan caller authorities shutdown.” Small and mean businesses “are very loath to invest. People person pulled backmost dramatically successful nan past 9 months fixed each that noise.”

Also successful nan operation is nan extremity of nan student indebtedness costs moratorium — “the largest plus people extracurricular of mortgage,” Morris noted. Roughly 5.3 cardinal borrowers are successful default and different 4.3 cardinal are successful late-stage delinquency, according to a September Congressional Research Service analysis.

What’s important to understand is that because BNPL loans are typically smaller than in installments paper balances aliases car loans, borrowers thin to prioritize keeping them current, which intends other, larger debts commencement to default first. Someone mightiness person a cleanable grounds connected their 4 BNPL accounts while their in installments card, car loan, and student indebtedness each spell delinquent.

Consumer lending takes ‘the mom test’

Morris has lived some sides of this equation. He revolutionized subprime lending astatine Capital One. Then he backed fintech startups trying to disrupt nan aged guard, including Klarna, which went nationalist earlier this twelvemonth and presently boasts a $13.5 cardinal marketplace cap, moreover though it’s hardly profitable (including because it absorbs each nan default consequence of borrowers).

Given those years of insights, I asked him connected stage: “Where is nan statement betwixt catering to and helping an underbanked organization and enabling group to excavation a spread for themselves? Have these companies crossed it?”

Morris seemed genuinely to wrestle pinch nan question, telling nan investor attendees who’d gathered to study from nan speech that it’s a “very, very difficult mobility to answer. I deliberation that nan domiciled of nan civilized compass successful user lending is very, very important.”

He described “the mom test” from his Capital One days: “If this thought was presented to your mother and she called you up and said, ‘Son, should I return this product?’ And if you can’t unequivocally opportunity yes, it’s a bully product, you should not beryllium offering it to nan American people.”

But again, nan problem is that BNPL companies aren’t transparent astir their returns, and astir firms don’t study to in installments bureaus, which — successful summation to making visibility into nan them challenging — intends borrowers can’t usage successful repayment to entree lower-cost credit.

That’s portion of nan business model, by nan way. “Some of these buy-now-pay-later companies don’t want that to happen” — meaning for their customers to build up their in installments scores — “because they don’t want nan user to graduate,” Morris said.

While Morris and I were discussing these ethical questions, nan invisible problem he’s worried astir is getting exponentially bigger, pinch BNPL bleeding into each area of nan financial system, and nan borders betwixt this unregulated lending and accepted banking disappearing entirely.

Klarna has been operating arsenic a licensed slope successful Europe since 2017. Affirm now has astir 2 cardinal debit cardholders who tin finance purchases successful beingness stores, bringing invisible installment indebtedness into brick-and-mortar retail. Both companies are integrated into Apple Pay and Google Pay, making BNPL arsenic frictionless arsenic tapping your phone.

Not to beryllium near behind, accepted finance is racing toward BNPL now, too. PayPal said it processed $33 billion successful BNPL spending successful 2024, increasing astatine 20% annually. Major banks now fto customers divided purchases aft nan fact. Through deals pinch costs processors for illustration Adyen, JPMorgan Payments, and Stripe, Klarna’s services now scope millions of merchants automatically. What started arsenic a niche checkout action is becoming embedded financial infrastructure.

Morris sees this displacement happening everywhere. “When I talk to immoderate of these package companies that are now embedding payments, lending and insurance,” he told me, “and you say, ‘Okay, 5 years from now, wherever are you going to make your money?’” nan reply surprises moreover seasoned investors for illustration him. “They say, ‘You cognize what, I deliberation I’m going to make much money successful embedded finance than I americium successful my halfway software.”

Continued Morris: “It starts disconnected arsenic a bully small add-on, but erstwhile nan powers of nan marketplace thrust down nan returns successful nan halfway business, it’s often these financing businesses that person nan top longevity and marketplace power.”

Put different way, full industries are softly transforming from immoderate they sold primitively into financial services companies, pinch each nan associated risks but often without nan associated oversight.

A 2nd bubble?

But nan existent threat lies successful what’s coming next, which is business-to-business BNPL. The waste and acquisition in installments market, wherever suppliers lend to companies buying their products, represents $4.9 trillion successful payables among American firms alone, per information cited by The Economist. That’s 4 times larger than nan full U.S. in installments paper market. And BNPL companies, having conquered user lending, are now moving aggressively into this space.

When mini businesses summation entree to BNPL, their spending increases by an mean of 40%, according to B2B BNPL providers for illustration Hokodo. It sounds awesome for commerce until you recognize what it means, which is much debt, accumulating faster, pinch moreover little visibility than much accepted user lending.

Indeed, nan indebtedness itself is being packaged and sold astatine a gait that should siren anyone who remembers 2008. Elliott Advisors past twelvemonth purchased Klarna’s $39 cardinal British indebtedness portfolio. In 2023, KKR agreed to bargain up to $44 cardinal successful BNPL debt from PayPal. As of June of this year, Affirm had issued astir $12 billion successful asset-backed securities.

This is nan subprime owe playbook playing retired successful existent time: portion up risky user debt, waste it to investors who judge they understand nan consequence profile, and create layers of financial engineering that obscure wherever nan existent vulnerability lies. Except this time, a batch of that underlying indebtedness isn’t being reported to in installments bureaus.

My ain takeaway from my sit-down pinch Morris — and my investigation starring into it — is that we’re watching 2 imaginable bubbles correct now, but only 1 is getting nan attraction it deserves, astatine slightest successful Silicon Valley, certainly.

The AI bubble has been dominating headlines successful caller weeks, arsenic a increasing number aliases group mobility nan $100 cardinal information centers, sky-high valuations, and jaw-dropping task rounds we’re seeing.

The BNPL business is different but nary little worthy watching. It’s invisible, lightly regulated, and affecting nan astir susceptible Americans — which is astir 40% of them. It’s group financing their meals successful 4 installments and caller graduates juggling student indebtedness payments pinch 3 different BNPL accounts.

The champagne is flowing truthful freely successful definite sectors of nan system that it makes this very large problem easy to overlook, but erstwhile user indebtedness becomes unsustainable, there’s going to beryllium a batch of symptom crossed nan board, and VCs and their venture-backed businesses will beryllium among those to consciousness it.

As Morris watches his BNPL investments from nan different broadside of nan table, he seems to understand these warning signs amended than most. He’s not predicting a clang — he’s urging vigilance. The mobility is whether regulators will do thing astir it earlier it’s excessively late.