The burgeoning popularity of Buy Now, Pay Later (BNPL) services, once hailed as a modern convenience for discretionary purchases, is now sounding alarms among seasoned financial experts. Nigel Morris, a co-founder of Capital One and an early investor in prominent BNPL firms like Klarna, has expressed profound disquiet regarding the sector’s accelerating expansion and its evolving usage patterns. His apprehension stems from a deep understanding of consumer financial behavior, forged during his pioneering work in subprime lending. Morris notes with concern that an increasing number of consumers are leveraging these short-term installment plans for essential needs, such as groceries, a stark indicator of underlying economic stress that warrants immediate attention.

The BNPL Phenomenon: A Disruptive Payment Evolution

Buy Now, Pay Later represents a relatively new iteration of installment credit, allowing consumers to divide purchases into several, typically interest-free, payments over a short period. This model typically involves four payments, with the first due at the time of purchase and subsequent installments spread over weeks or months. Its origins can be traced to a desire for greater payment flexibility, particularly among younger demographics and those wary of traditional credit cards. Companies like Klarna, Afterpay, and Affirm emerged as pioneers, integrating seamlessly into online retail checkout processes and offering an enticing alternative to conventional credit, often with minimal upfront credit checks.

The appeal of BNPL is multi-faceted. For consumers, it offers immediate gratification without the immediate financial outlay, and crucially, often without interest charges, provided payments are made on time. For merchants, it translates into increased conversion rates, larger average order values, and access to new customer segments. The global e-commerce boom, particularly amplified during and after the pandemic, provided fertile ground for BNPL’s explosive growth. It capitalized on a cultural shift towards instant access and simplified digital transactions, positioning itself as a frictionless bridge between desire and purchase. However, as the sector matures and penetrates deeper into the consumer economy, its initial promise of responsible, interest-free financing is being shadowed by concerns about its broader implications for financial stability.

Shifting Sands: From Discretionary Indulgences to Everyday Necessities

A significant and troubling shift in BNPL usage has emerged. Initially, these services were predominantly utilized for higher-value, discretionary items—fashion apparel, electronics, and home goods—offering a convenient way to manage larger expenses. However, recent data paints a different picture, indicating a widespread reliance on BNPL for basic necessities. Morris highlighted this trend during a recent appearance at Web Summit in Lisbon, stating, "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."

This anecdotal observation is supported by hard statistics. The user base for BNPL services in the United States has surged to an estimated 91.5 million, according to financial services firm Empower. More critically, a survey conducted by Lending Tree earlier this year revealed that 25% of these users are employing BNPL to finance their grocery purchases. This isn’t merely about convenience; it signifies a deeper societal issue where segments of the population are resorting to short-term credit solutions to cover essential living expenses. This trend underscores the cumulative impact of persistent inflation, wage stagnation for many households, and the rising cost of living, pushing consumers to defer payments even for items once considered non-negotiable, everyday purchases. The cultural impact is profound: what began as a tool for aspirational spending has morphed into a coping mechanism for financial precarity, blurring the lines between wants and needs in an increasingly complex economic landscape.

The Opaque Debt Crisis: "Phantom Debt" and Accelerating Defaults

Perhaps the most alarming aspect of the BNPL expansion is the pervasive lack of transparency within the lending ecosystem, often referred to as "phantom debt." Unlike traditional credit products such as credit cards or mortgages, many BNPL loans are not reported to major credit bureaus. This creates a significant blind spot for other lenders, who remain oblivious to a borrower’s existing BNPL obligations across multiple platforms. This regulatory loophole means that a consumer could accumulate several simultaneous BNPL loans without any single lender, or the broader financial system, having a comprehensive view of their total debt burden.

The consequences of this opacity are already manifesting in rising default rates. Lending Tree data indicates an acceleration in late payments, with 42% of BNPL users missing at least one payment in 2025, a notable increase from 39% in 2024 and 34% in 2023. Further insights from the Consumer Financial Protection Bureau (CFPB), derived from market monitoring orders issued to major BNPL providers like Affirm, Afterpay, and Klarna, reveal a concerning borrower profile. As of 2022, roughly 63% of borrowers originated multiple simultaneous loans, and 33% took out loans from multiple BNPL lenders. The average number of new loans per borrower climbed from 8.5 to 9.5, signaling a pattern of serial reliance. Moreover, nearly two-thirds of BNPL users in 2022 had lower credit scores, with subprime or deep subprime applicants experiencing approval rates as high as 78%. This concentration of debt among financially vulnerable individuals, coupled with the lack of systemic visibility, creates a precarious foundation for consumer credit.

Regulatory Labyrinth and Conflicting Data Signals

The rapid evolution and widespread adoption of BNPL services have posed a significant challenge for regulators. Under a previous administration, the CFPB had initiated efforts to bring BNPL transactions under the purview of the Truth in Lending Act, aiming to provide consumers with protections similar to those afforded by credit cards. However, this regulatory trajectory experienced a notable reversal. In early May, the CFPB announced it would not prioritize the enforcement of such rules, and soon after, rescinded 67 interpretive rules and policy statements, including those pertaining to BNPL. The agency cited "little benefit to consumers" and a "substantial burden" on regulated entities as reasons for the rollback, a decision that many industry observers attributed to successful lobbying efforts by BNPL companies.

This regulatory shift was followed by a subsequent CFPB report presenting a surprisingly optimistic outlook, asserting that first-time borrowers, including those with subprime or no credit, repaid their BNPL loans 98% of the time and found no evidence that BNPL access causes debt stress. This finding stands in stark contrast to the 42% late payment rate observed across the entire user base, highlighting a critical data gap. The discrepancy underscores the challenge: without comprehensive reporting to credit bureaus and long-term tracking of all BNPL users, understanding the true impact on consumer financial health remains elusive. In response to this federal regulatory vacuum, some states have begun to act. New York, for instance, imposed licensing requirements on BNPL companies in May, aiming to establish a framework for oversight. However, a fragmented, state-by-state regulatory approach creates a patchwork system that sophisticated financial entities can often navigate, potentially limiting its overall effectiveness.

Broader Economic Indicators: "Storm Clouds on the Horizon"

Morris’s concerns about BNPL are not isolated; he views them as symptomatic of broader economic vulnerabilities. While acknowledging that overall delinquency and charge-off rates have not yet seen a dramatic surge, he points to several "storm clouds on the horizon" that could rapidly deteriorate the situation. The unemployment rate, for example, has climbed to 4.3%, its highest level in nearly four years, signaling a weakening labor market.

Furthermore, despite recent positive wage growth, the cumulative effect of inflation from 2021-2023 has not been fully offset for many American households, eroding purchasing power and contributing to financial strain. Key stress indicators, such as auto loan delinquencies and long-term unemployment, continue to show signs of deterioration. Adding to this precarious mix is the resumption of student loan payments following a prolonged moratorium. Student loans constitute the largest asset class outside of mortgages, and their reintroduction into household budgets is significant. A September Congressional Research Service analysis reported that approximately 5.3 million borrowers are in default, with another 4.3 million in late-stage delinquency, indicating the immense pressure this places on consumers. The confluence of these factors—rising unemployment, the lingering effects of inflation, and the return of substantial student loan obligations—creates an environment where the hidden stress from BNPL could trigger wider financial instability. The Federal Reserve Bank of Richmond has explicitly warned about BNPL’s potential systemic risk arising from its "spillover effects onto other consumer credit products," suggesting that BNPL stress serves as an early warning sign of broader consumer financial distress. Crucially, because BNPL loans are typically smaller, borrowers often prioritize keeping them current, meaning larger debts like credit cards, auto loans, and student loans may be the first to fall into delinquency.

The Blurring Lines: BNPL Integrates into Mainstream Finance

The evolution of BNPL extends beyond its usage patterns; it is fundamentally transforming the landscape of financial services. What began as a niche offering is rapidly becoming embedded financial infrastructure. Major BNPL players are blurring the lines between fintech and traditional banking. Klarna, for example, has operated as a licensed bank in Europe since 2017, expanding its financial offerings. Affirm now boasts nearly 2 million debit cardholders, enabling installment financing for in-store purchases and seamlessly integrating "invisible debt" into brick-and-mortar retail. Both companies have integrated their services into major digital wallets like Apple Pay and Google Pay, making BNPL as ubiquitous and frictionless as tapping a phone.

Not to be outdone, traditional financial institutions are aggressively adopting BNPL models. PayPal processed $33 billion in BNPL spending in 2024, experiencing 20% annual growth. Major banks are now offering customers the ability to split purchases into installments after the fact. Through strategic partnerships with payment processors like Adyen, JPMorgan Payments, and Stripe, Klarna’s services are now accessible to millions of merchants automatically. This trend signals a broader phenomenon of "embedded finance," where non-financial companies integrate financial services directly into their core offerings. Morris observes this shift across industries, noting that software companies are increasingly projecting that embedded finance—lending, payments, and insurance—will eventually generate more revenue than their core software products. This transformation means entire industries are quietly morphing into financial services providers, carrying the associated risks but often operating without the traditional oversight that typically accompanies banking.

The Next Frontier: Business-to-Business BNPL and Securitization Concerns

The most significant and potentially hazardous evolution of the BNPL model lies in its expansion into the business-to-business (B2B) sector. The trade credit market, where suppliers extend credit to businesses purchasing their products, is enormous, representing an estimated $4.9 trillion in payables among American firms alone—a figure four times larger than the entire U.S. consumer credit card market. Having established a strong foothold in consumer lending, BNPL companies are now aggressively targeting this vast B2B space.

B2B BNPL providers like Hokodo claim that when small businesses gain access to their services, their spending increases by an average of 40%. While this might seem beneficial for commerce, it translates into more debt accumulating at an accelerated pace, often with even less visibility than its consumer counterpart. This expansion is deeply concerning, particularly given parallels to the practices that precipitated the 2008 financial crisis. The debt generated by BNPL, both consumer and increasingly B2B, is being packaged and sold to investors at a rapid clip. Elliott Advisors, for instance, acquired Klarna’s $39 billion British loan portfolio last year, while KKR agreed to purchase up to $44 billion in BNPL debt from PayPal in 2023. Affirm, another major player, has issued approximately $12 billion in asset-backed securities. This securitization process, where risky debt is bundled and sold off in tranches, eerily mirrors the subprime mortgage playbook. It involves layering financial engineering to obscure where the true exposure lies, but with a critical difference: much of the underlying BNPL debt remains unreported to credit bureaus, making risk assessment significantly more challenging and potentially masking systemic vulnerabilities until it’s too late.

A Call for Vigilance: Two Bubbles, One Overlooked

The current economic environment presents what some experts view as two distinct bubbles, yet only one commands widespread attention. The fervent speculation and massive investments in artificial intelligence, with its sky-high valuations and multi-billion-dollar data centers, frequently dominate headlines and spark debates about its sustainability. However, the BNPL situation, while less visible and lacking the technological glamour of AI, represents an equally pressing, if not more immediate, concern for consumer welfare and broader economic stability.

This invisible problem disproportionately affects the most vulnerable segments of the American population, estimated to be around 40% of consumers. It manifests in scenarios where individuals finance their meals in multiple installments or recent graduates struggle to juggle student loan repayments with a multitude of BNPL accounts. The perceived ease of access and the absence of clear, consolidated debt reporting create an illusion of financial flexibility that can quickly spiral into unmanageable obligations. While Nigel Morris is careful to avoid predicting an outright crash, he strongly advocates for heightened vigilance. The combination of burgeoning "phantom debt," rising indicators of consumer distress, the end of critical financial forbearance programs, and a relaxed regulatory environment creates fertile ground for problems to accelerate swiftly. The critical question remains whether regulators will establish comprehensive oversight and implement robust safeguards before this pervasive, yet often overlooked, financial fault line triggers widespread economic pain.