Buy Now, Pay Later: The Growing Risks

A Growing Concern Regarding the Economy and BNPL Services

The concerns expressed by Nigel Morris regarding the state of the economy deserve careful consideration. As the co-founder of Capital One and a pioneer in subprime lending, Morris possesses a unique understanding of American financial capacity.

Currently, as an early investor in companies like Klarna and Aplazo, he is observing trends that are causing him significant apprehension.

Increased Reliance on Buy Now, Pay Later for Essential Goods

Morris recently stated at Web Summit in Lisbon that the increasing use of buy now, pay later (BNPL) services for basic necessities, such as groceries, is a worrying sign.

This suggests a substantial number of individuals are facing financial difficulties.

Statistical Evidence of Rising BNPL Usage and Defaults

Data supports Morris’s observations. The number of BNPL users in the United States has surged to 91.5 million, as reported by Empower.

Recent Lending Tree survey data, released in late October, indicates that 25% of these users are utilizing these services to finance grocery purchases.

These purchases represent essential spending, differing from the discretionary items – like designer bags or new electronics – that BNPL was initially marketed towards.

Escalating Default Rates

Furthermore, borrowers are increasingly failing to repay these loans. Lending Tree’s data reveals an acceleration in default rates.

In 2025, 42% of BNPL users had at least one late payment, a rise from 39% in 2024 and 34% in 2023.

A Warning Sign for Fintech and the Broader Economy

This situation extends beyond consumer finance, acting as a potential indicator of broader economic issues within the venture-backed fintech sector and beyond.

It mirrors the conditions that preceded the 2008 mortgage crisis, with a crucial difference: its relative invisibility.

The Issue of "Phantom Debt"

A significant problem is that most BNPL loans are not reported to credit bureaus, creating what regulators term “phantom debt.”

This lack of reporting prevents lenders from gaining a complete picture of a borrower’s debt obligations across multiple BNPL platforms.

Lack of Transparency in the BNPL System

As Morris explained, providers who do not check or report data to credit bureaus remain unaware of a borrower’s total BNPL debt.

He highlighted a scenario where a borrower could obtain ten such loans within a single week without this being visible to other lenders, describing it as “absolutely true.”

Impending Financial Challenges

Currently available figures, though somewhat outdated, paint an unfavorable picture. Data released in January by the Consumer Financial Protection Bureau – following market monitoring requests issued to leading BNPL providers like Affirm, Afterpay, and Klarna – indicated that approximately 63% of borrowers had multiple concurrent loans outstanding, and a third utilized loans from several BNPL lenders.

The data also demonstrated a rise in BNPL usage in 2022, with one-fifth of consumers with established credit histories financing at least one purchase through a BNPL loan, compared to 17.6% in 2021. Around 20% of borrowers were frequent users, initiating over one BNPL loan monthly on average, an increase from 18% the previous year. The average number of new loans per borrower also grew from 8.5 to 9.5.

The characteristics of these borrowers are particularly noteworthy. As of 2022, nearly two-thirds possessed lower credit scores, with approvals granted to subprime or deep subprime applicants 78% of the time.

While BNPL doesn’t currently pose a systemic risk – the total market value remains in the hundreds of billions, not trillions – the limited transparency surrounding this debt, coupled with its prevalence among financially vulnerable borrowers, warrants increased scrutiny.

Considering the current economic climate, which is more challenging for many subprime borrowers than it was three years ago – especially within the auto lending sector – these figures are likely even higher now.

The lack of recent data stems from shifts in regulatory policy. The CFPB, under the Biden administration, initially sought to regulate BNPL transactions similarly to credit card purchases, extending Truth in Lending Act protections.

However, the Trump administration reversed this approach. In early May, the CFPB announced it would not prioritize enforcing that rule. Shortly after, acting director Russell T. Vought rescinded 67 interpretive rules, policy statements, and advisory opinions dating back to 2011, including the BNPL rule, citing minimal consumer benefit and substantial burdens on regulated entities. (This can be interpreted as successful lobbying efforts by BNPL companies.)

Subsequently, the CFPB released a new report presenting a contrasting perspective. Focusing solely on first-time borrowers, the agency reported a 98% repayment rate for those with subprime or no credit, and found no evidence that BNPL access contributes to debt distress.

This optimistic portrayal clashes with the 42% late payment rate, highlighting a critical data deficiency. We currently lack comprehensive insight into borrower behavior over time, particularly those managing multiple BNPL accounts. The positive report focused on initial users, while the concerning data encompasses the entire user base.

New York State addressed this gap in May by implementing licensing requirements for BNPL companies. However, a state-by-state regulatory approach creates inconsistencies that financially sophisticated companies can readily circumvent.

When asked about parallels to the 2008 financial crisis, Morris – a fintech investor with 18 years of experience – cautioned against oversimplification.

“This is a genuine concern,” he stated, carefully choosing his words. “Stepping back to examine the U.S. consumer, we see a number of lending businesses operating in this space – so far, delinquency and charge-offs haven’t risen. However, there are undoubtedly storm clouds gathering on the horizon.”

He noted the unemployment rate reaching 4.3%, its highest level in nearly four years. He also mentioned “instability surrounding immigration, tariffs, and the recent government shutdown.” Small and medium-sized businesses are “reluctant to invest,” and consumer spending has “decreased significantly in the last nine months due to these uncertainties.”

The conclusion of the student loan payment moratorium also contributes to the situation – Morris described it as “the largest asset class outside of mortgages.” A September analysis by the Congressional Research Service indicated that roughly 5.3 million borrowers are in default, and another 4.3 million are in late-stage delinquency.

Morris emphasized that the current situation doesn’t yet constitute a crisis. “Delinquency and charge-offs haven’t risen yet,” he acknowledged. However, the combination of factors – hidden debt, increasing unemployment, the end of student loan forbearance, and regulatory changes – creates an environment where problems could escalate rapidly.

The primary concern isn’t BNPL debt in isolation, but rather its potential ripple effects. The Federal Reserve Bank of Richmond has cautioned that BNPL’s systemic risk stems from its “spillover effects onto other consumer credit products.”

Because BNPL loans are typically smaller than credit card balances or auto loans, borrowers often prioritize maintaining current payments on them, leading to defaults on other, larger debts. A borrower might have a flawless record with their four BNPL accounts while simultaneously defaulting on their credit card, car loan, and student loan.

The “Mom Test” Applied to Consumer Lending

Neil Morris possesses extensive experience on both sides of the lending landscape. He previously spearheaded innovations in subprime lending at Capital One. Subsequently, he invested in emerging fintech companies aiming to challenge established financial institutions, including Klarna, which recently became a public company with a market capitalization of $13.5 billion, despite limited profitability due to absorbing borrower default risks.

Drawing on his accumulated knowledge, I posed a question to him during a public discussion: “What differentiates providing assistance to underserved populations from enabling detrimental financial habits? Have current lending practices crossed that line?”

Morris responded thoughtfully, acknowledging the complexity of the issue to the assembled investors. He emphasized the crucial importance of a strong “moral compass” within the consumer lending sector.

He recounted the “mom test” utilized during his time at Capital One. This involved evaluating a product based on whether one could confidently recommend it to their mother. If a clear endorsement wasn’t possible, the product shouldn’t be offered to consumers.

Given his investment portfolio, Morris likely views Buy Now, Pay Later (BNPL) companies favorably. However, a critical assessment of these services is warranted, particularly considering the current regulatory environment. A significant concern is that most BNPL providers do not report to credit bureaus.

This lack of reporting creates opacity and prevents borrowers from building credit through responsible repayment. This is, in fact, a deliberate aspect of the business model. As Morris explained, some BNPL companies actively discourage credit score improvement for their customers, as it could lead them to seek lower-cost credit options elsewhere.

The potential scope of this issue is expanding rapidly, with BNPL increasingly integrated into the broader financial ecosystem. The distinctions between this largely unregulated lending form and traditional banking are becoming increasingly blurred.

Klarna has operated with a banking license in Europe since 2017. Affirm currently serves nearly 2.8 million debit cardholders, facilitating financing for in-store purchases and extending installment debt into traditional retail environments. Both companies are now integrated with Apple Pay and Google Pay, streamlining the BNPL experience.

Established financial institutions are also entering the BNPL market. PayPal reported $33 billion in BNPL transactions for 2024, representing a 20% annual growth rate. Major banks now offer post-purchase installment options. Through partnerships with payment processors like Adyen, JPMorgan Payments, and Stripe, Klarna’s services are now accessible to a vast network of merchants.

Morris observes a broader trend occurring across the industry. He noted that when questioning software companies integrating payments, lending, and insurance, the anticipated future revenue source often surprises even seasoned investors. “They say, ‘I believe I will generate more revenue from embedded finance than from my primary software offerings.’”

Morris further elaborated: “Initially, these financial services are supplementary. However, as marketplace dynamics compress returns in the core business, financing operations frequently demonstrate greater resilience and market influence.”

Another Potential Economic Bubble?

A significant risk is emerging with the expansion of business-to-business BNPL (Buy Now, Pay Later). The trade credit market, encompassing supplier lending to businesses, currently totals $4.9 trillion in outstanding payments for U.S. companies, as reported by The Economist.

This figure is four times the size of the entire U.S. credit card market. BNPL companies, after establishing a strong presence in consumer lending, are now actively targeting this sector.

Access to BNPL options leads to an average spending increase of 40% for small businesses, according to providers such as Hokodo. While seemingly beneficial for commerce, this translates to increased debt accumulation.

The speed at which this debt is being packaged and resold is concerning, reminiscent of the conditions preceding the 2008 financial crisis. Last year, Elliott Advisors acquired Klarna’s British loan portfolio valued at $39 billion.

Furthermore, in 2023, KKR agreed to purchase up to $44 billion in BNPL debt from PayPal. As of June of this year, Affirm had issued approximately $12 billion in asset-backed securities.

This mirrors the subprime mortgage crisis: risky debt is divided into segments, sold to investors, and obscured by complex financial arrangements. A crucial difference this time is that much of this debt isn't reported to credit agencies.

Following discussions with Morris and subsequent research, it’s apparent that two potential bubbles are developing. However, only one is receiving substantial attention, particularly within Silicon Valley.

The artificial intelligence (AI) bubble has recently dominated news cycles, with growing scrutiny of the $100 billion data centers, inflated valuations, and substantial venture capital investments.

The BNPL situation, while less visible, warrants equal concern. It operates with limited regulation and disproportionately impacts vulnerable populations – approximately 40% of Americans.

This includes individuals financing everyday expenses in installments and recent graduates managing student loans alongside multiple BNPL accounts.

Economic prosperity in certain areas can overshadow this significant issue. However, unsustainable consumer debt will inevitably cause widespread hardship, impacting venture capitalists and their portfolio companies.

Morris, observing the BNPL landscape as an investor, recognizes these warning signs. He isn’t forecasting an immediate collapse, but rather advocating for increased monitoring. The critical question is whether regulatory bodies will intervene before the situation escalates.