BNPL’s Rapid Rise: A Hidden Threat to Consumer Finances and the Economy

When financial titans like Nigel Morris express economic unease, it’s prudent to listen. Morris, co-founder of Capital One and a pioneer in subprime lending, built his empire on understanding the financial resilience of the average American. Now, as an early investor in Buy Now, Pay Later (BNPL) giants like Klarna and emerging players like Mexico’s Aplazo, he observes a disturbing trend.

Morris revealed at Web Summit in Lisbon, “To see that people are using [BNPL services] to buy something as basic and fundamental as groceries… I think is a pretty clear indication that a lot of people are struggling.”

The Alarming Surge of “Phantom Debt”

The statistics validate Morris’s concerns. BNPL services have exploded to 91.5 million users in the U.S., according to Empower. A significant 25% of these users relied on BNPL for groceries earlier this year, a troubling insight from a late October Lending Tree survey.

These aren’t the luxury items – the designer bags or latest gadgets – BNPL was initially pitched for. More critically, borrowers are increasingly defaulting. Lending Tree reports accelerating default rates, with 42% of BNPL users making at least one late payment in 2025, up from 39% in 2024 and 34% in 2023.

This situation isn’t merely a consumer finance anecdote; it’s a critical warning sign for the broader venture-backed fintech ecosystem. It echoes the precursors to the 2008 mortgage crisis, but with a dangerous twist: its largely invisible nature.

Because most BNPL loans remain unreported to credit bureaus, they foster what regulators term “phantom debt.” This obscurity means traditional lenders are blind to a borrower’s multiple BNPL commitments across various platforms. The credit system, in essence, 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 am oblivious to the fact that [someone] may have taken out 10 of these things in the last week,” Morris emphasized, highlighting the current reality.

Disturbing Trends in Borrower Behavior and Profile

The available data, though somewhat dated, paints a grim picture. Consumer Financial Protection Bureau (CFPB) data from January, following market monitoring orders to major BNPL providers such as Affirm, Afterpay, and Klarna, showed that roughly 63% of borrowers initiated multiple simultaneous loans at some point during the year, and 33% borrowed from multiple BNPL lenders.

In 2022, one-fifth of consumers with a credit record financed at least one purchase with BNPL, a rise from 17.6% in 2021. Around 20% were “heavy users,” originating more than one BNPL loan monthly on average, up from 18% in 2021. The average new loans per borrower also increased from 8.5 to 9.5.

The borrower profile is equally concerning: nearly two-thirds of BNPL users in 2022 had lower credit scores, with subprime or deep subprime applicants approved 78% of the time.

Regulatory Reversal and Data Discrepancies

While BNPL isn’t yet a systemic threat on the scale of trillions, its opaque nature and concentration among financially stressed borrowers demand closer scrutiny. Given that many subprime populations face worse economic conditions now than three years ago, particularly in auto lending, these concerning figures are likely much higher today.

The scarcity of recent BNPL data stems from significant regulatory shifts. The Biden administration’s CFPB initially sought to treat BNPL transactions like credit card purchases, bringing them under Truth in Lending Act protections. However, the Trump administration reversed this course. In early May, the CFPB stated it would not prioritize enforcement of this rule, with the acting director rescinding 67 interpretive rules, policy statements, and advisory opinions, including the BNPL directive. The agency cited “little benefit to consumers” and “substantial burden” on regulated entities – a move widely seen as a win for BNPL lobbying efforts.

Ironically, soon after, the CFPB released a new report with a surprisingly positive outlook. Focusing exclusively on first-time borrowers, it claimed subprime or no-credit customers repaid BNPL loans 98% of the time, finding no evidence that BNPL access caused debt stress. This optimistic report clashes sharply with the 42% late payment rate seen across the entire user base, highlighting a critical data gap: we lack comprehensive insight into long-term borrower behavior, especially for those juggling multiple BNPL accounts.

New York State’s recent imposition of licensing requirements on BNPL companies attempts to bridge this void, but a state-by-state regulatory patchwork is easily navigated by sophisticated financial players.

Storm Clouds on the Horizon: Beyond BNPL

Asked about parallels to the 2008 crisis, Morris, a seasoned fintech investor, carefully avoided hyperbole. “So I think it is a real issue,” he stated. “If you take a half step back and we look at the U.S. consumer at the moment, and we have a number of businesses that are in and around lending to this consumer — so far, so good. Delinquency is not rising yet. Charge-offs are not rising yet. But there’s clearly storm clouds on the horizon.”

He pointed to several economic headwinds: unemployment hitting 4.3%, its highest in nearly four years; political “tumult around immigration and around tariffs and around the recent government shutdown”; and small and medium businesses hesitant to invest. Furthermore, the end of the student loan payment moratorium – a colossal asset class second only to mortgages – adds pressure, with 5.3 million borrowers in default and another 4.3 million in late-stage delinquency as of September.

The primary concern isn’t BNPL debt in isolation, but its potential to trigger cascading effects. The Federal Reserve Bank of Richmond has warned that BNPL’s systemic risk could arise from its “spillover effects onto other consumer credit products.” Since BNPL loans are typically smaller, borrowers often prioritize their repayment, leading to defaults on larger debts like credit cards, car loans, and student loans.

The “Mom Test” and BNPL’s Ethical Tightrope

Morris, having innovated subprime lending at Capital One and later backed disruptive fintech startups like Klarna, understands both sides of the coin. When probed on the ethical line between assisting the underbanked and enabling financial peril, he acknowledged it as “a very, very difficult question to answer.” He emphasized “the role of the moral compass in consumer lending” and recalled Capital One’s “mom test”: “If this idea was presented to your mother and she called you up and said, ‘Son, should I take this product?’ And if you can’t unequivocally say, ‘Yes, it’s a good product,’ you should not be offering it to the American people.”

Perhaps BNPL, in its current unregulated form, would fail the “mom test” for many. The lack of credit bureau reporting not only obscures debt but also prevents borrowers from building credit to access lower-cost financing. Morris himself notes, “Some of these buy-now-pay-later companies don’t want that to happen… because they don’t want the consumer to graduate.”

BNPL’s Pervasive Expansion and Embedded Finance

The problem is poised to escalate as BNPL permeates every corner of the financial system, blurring the lines between unregulated lending and traditional banking. Klarna has operated as a licensed bank in Europe since 2017. Affirm’s nearly 2 million debit cardholders can finance in-store purchases, bringing invisible installment debt into physical retail. Both are integrated into Apple Pay and Google Pay, making BNPL as seamless as a phone tap.

Established financial players are also joining the race. PayPal processed $33 billion in BNPL spending in 2024, growing 20% annually. Major banks now allow post-purchase installment splitting. Through partnerships with payment processors like Adyen, JPMorgan Payments, and Stripe, Klarna’s services reach millions of merchants automatically. What began as a niche checkout option is rapidly becoming embedded financial infrastructure.

Morris observes this pervasive shift. “When I talk to some of these software companies that are now embedding payments, lending and insurance,” he shared, “and you say, ‘Okay, five years from now, where are you going to make your money?’ [the answer] surprises even veteran investors like him.” They often respond, “I think I’m going to make more money in embedded finance than I am in my core software.” He added, “It starts off as a nice little add-on, but when the powers of the marketplace drive down the returns in the core business, it’s often these financing businesses that have the greatest longevity and market power.”

A Second Bubble? The Business-to-Business Frontier

A more significant danger looms with the advent of business-to-business (B2B) BNPL. The trade credit market, where suppliers lend to purchasing companies, represents a staggering $4.9 trillion in payables among American firms alone – four times the size of the entire U.S. credit card market. Having largely conquered consumer lending, BNPL companies are now aggressively moving into this massive space.

Providers like Hokodo report that small businesses accessing B2B BNPL increase their spending by an average of 40%. While seemingly good for commerce, this translates to more debt, accumulating faster.

Disturbingly, this debt is being packaged and sold at a pace reminiscent of 2008. Elliott Advisors acquired Klarna’s $39 billion British loan portfolio last year. In 2023, KKR agreed to purchase up to $44 billion in BNPL debt from PayPal. As of June, Affirm had issued approximately $12 billion in asset-backed securities.

This mirrors the subprime mortgage playbook: fragment risky consumer debt, sell it to investors who believe they comprehend the risk, and construct layers of financial engineering that obscure the actual exposure. Crucially, much of this underlying debt is not reported to credit bureaus.

Two Bubbles, One Overlooked

The current economic landscape presents two potential bubbles. While the AI bubble currently dominates headlines with its sky-high valuations and venture rounds, the BNPL situation is equally critical, yet largely ignored. It’s an invisible, lightly regulated phenomenon disproportionately affecting the most vulnerable Americans – an estimated 40% of the population. This includes individuals financing groceries in installments and recent graduates grappling with student loan payments alongside multiple BNPL accounts.

In certain buoyant sectors, the easy flow of capital makes it simple to overlook this burgeoning problem. However, when consumer debt becomes unsustainable, the pain will be widespread, impacting venture capitalists and their portfolio companies alike.

Morris, observing his BNPL investments from a unique vantage point, appears to grasp these warning signs better than most. He isn’t predicting an imminent crash but rather urging vigilance. The critical question remains: will regulators act before it’s too late?