The Ghost in the Financial Machine: Are Buy Now, Pay Later Services Hiding a Looming Crisis?
When a titan of the financial industry expresses concern, it’s wise to pay attention. Nigel Morris, a name synonymous with groundbreaking financial innovation as the co-founder of Capital One and a pioneer in subprime lending, is sounding an alarm. His deep understanding of consumer financial resilience, honed by years of building an empire on precisely that metric, now sees him watching a trend that fills him with unease: the burgeoning use of Buy Now, Pay Later (BNPL) services for everyday necessities.
“To see that people are using [BNPL services] to buy something as basic and fundamental as groceries,” Morris confided on stage at Web Summit in Lisbon, “I think is a pretty clear indication that a lot of people are struggling.” His observation is not an isolated anecdote; it’s a sentiment increasingly backed by stark data.
The Explosive Growth of BNPL: More Than Just Gadgets
The landscape of consumer finance has been dramatically reshaped by BNPL. These services, once marketed for discretionary purchases – think the latest tech gadgets or stylish apparel – have exploded in popularity. In the United States alone, BNPL boasts a staggering 91.5 million users, according to financial services firm Empower. More worryingly, a significant 25% of these users are now turning to BNPL to finance their groceries, a fundamental need, as revealed by survey data from lending marketplace Lending Tree earlier this year.
This shift from wants to needs is a critical red flag. It suggests that the bedrock of consumer spending is becoming increasingly reliant on installment debt, a pattern that Morris, with his seasoned perspective, finds deeply concerning.
A Silent Tide of Defaults: The ‘Phantom Debt’ Problem
The expansion of BNPL isn’t just about increased usage; it’s also about a concerning rise in repayment struggles. The same Lending Tree data paints a grim picture: default rates are accelerating. In 2025, a significant 42% of BNPL users reported at least one late payment, an uptick from 39% in 2024 and 34% in 2023. This escalating trend signals a growing strain on consumers’ ability to manage their financial obligations.
But the true danger of this burgeoning BNPL market lies not just in the defaults themselves, but in their near-invisibility. A vast majority of BNPL loans are not reported to credit bureaus. This creates what regulators term “phantom debt.” Imagine a scenario where an individual can take out multiple BNPL loans across various platforms – perhaps five or more – without this debt appearing on their credit report. For traditional lenders, this creates a blind spot, an inability to accurately assess an individual’s true debt burden.
Echoes of 2008? A Hidden Financial Vulnerability
This lack of transparency and the concentration of debt among potentially vulnerable consumers have drawn parallels, albeit with crucial distinctions, to the warning signs that preceded the 2008 financial meltdown. While the sheer scale of BNPL debt is not yet comparable to the trillions in mortgage-backed securities from two decades ago, the hidden nature of this debt presents a unique and evolving risk.
Morris elaborated on this critical point: “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 Nigel may have taken out 10 of these things in the last week,” he explained. “[That’s] absolutely true.” This disconnect means the credit system is essentially flying blind, unable to grasp the full extent of consumer indebtedness.
Unpacking the Data: A Disturbing Trend
Even the available, albeit somewhat dated, data from the Consumer Financial Protection Bureau (CFPB) is cause for concern. Following market monitoring orders to major BNPL providers like Affirm, Afterpay, and Klarna, the CFPB released data showing that a significant 63% of borrowers took out multiple simultaneous BNPL loans at some point during the year, with 33% engaging with multiple lenders.
Furthermore, in 2022, one-fifth of consumers with a credit record financed at least one purchase with a BNPL loan, up from 17.6% in 2021. Roughly 20% of borrowers were identified as “heavy users,” originating more than one BNPL loan on average each month, an increase from 18% in 2021. The average number of new loans per borrower also climbed from 8.5 to 9.5.
The borrower profile is particularly telling. As of 2022, nearly two-thirds of BNPL users had lower credit scores, with subprime and deep subprime applicants being approved a staggering 78% of the time. This indicates that BNPL services are increasingly being utilized by individuals who may already be facing financial challenges.
Regulatory Headwinds and Shifting Sands
The lack of more up-to-date statistics is partly attributed to regulatory uncertainty. Under the Biden administration, the CFPB attempted to bring BNPL transactions under the purview of the Truth in Lending Act, akin to credit card purchases. However, this approach faced reversals, particularly with actions taken in early May where the CFPB decided not to prioritize enforcement of that rule. Subsequently, acting director Russell T. Vought rescinded numerous interpretive rules, including the BNPL guidance, stating they offered "little benefit to consumers" and imposed a "substantial burden" on businesses – a move widely seen as a win for BNPL industry lobbying efforts.
This regulatory ambiguity has created a complex environment. While New York has implemented licensing requirements for BNPL companies, the state-by-state approach results in a fragmented regulatory landscape that sophisticated financial firms can easily navigate.
Storm Clouds Gathering on the Economic Horizon
Morris, ever the astute observer of economic tides, carefully avoids declaring an immediate crisis. “So I think it is a real issue,” he stated, referring to the economic climate. “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.”
His concerns are amplified by several converging economic pressures. Unemployment has risen to 4.3%, its highest level in nearly four years. Tumult surrounding immigration, tariffs, and recent government shutdowns has created an atmosphere of uncertainty, making small and medium-sized businesses hesitant to invest. Furthermore, the end of the student loan payment moratorium, representing a significant asset class outside of mortgages, has plunged millions of borrowers into default or late-stage delinquency, according to a September Congressional Research Service analysis.
The Cascading Effects of Invisible Debt
The paramount concern isn’t just the BNPL debt in isolation; it’s the potential for cascading effects. The Federal Reserve Bank of Richmond has highlighted BNPL’s potential systemic risk stemming from its “spillover effects onto other consumer credit products.” In essence, BNPL stress can act as an early warning signal for broader consumer financial distress.
The dynamic is particularly concerning because BNPL loans are typically smaller than credit card balances or auto loans. This can lead borrowers to prioritize keeping these smaller debts current, inadvertently allowing larger, more critical debts to fall into delinquency. The irony is that someone might maintain a perfect repayment record on their multiple BNPL accounts while their credit card, car loan, and student loans all slip into arrears.
The ‘Mom Test’: A Moral Compass in Lending
Nigel Morris’s career has spanned both sides of this financial equation. He revolutionized subprime lending at Capital One and later invested in fintech startups aiming to disrupt established norms, including Klarna. His insights from these diverse experiences led to a profound question posed on stage: “Where is the line between catering to and helping an underbanked population and enabling people to dig a hole for themselves? Have these companies crossed it?”
Morris acknowledged the immense difficulty of this question, emphasizing the critical role of a “moral compass in consumer lending.” He recalled the “mom test” from his Capital One days: a simple yet powerful ethical benchmark. “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.”
The Business Model of Obscurity
However, the current BNPL landscape often operates in a gray area that makes applying such a clear ethical standard challenging. The lack of transparency in BNPL company returns and, crucially, the decision not to report to credit bureaus, present a double-edged sword. Not only does this obscure the true debt picture for lenders, but it also prevents borrowers from leveraging successful repayment history to access more favorable, lower-cost credit.
Morris pointed out the strategic implications of this business model: “Some of these buy-now-pay-later companies don’t want that to happen” – meaning for their customers to build up their credit scores – “because they don’t want the consumer to graduate.” This suggests a business model that may actively discourage financial upward mobility for its users.
The Blurring Lines: BNPL Becomes Embedded Infrastructure
As these ethical questions are debated, the invisible problem Morris fears is escalating, with BNPL seeping into every facet of the financial system. The distinction between unregulated lending and traditional banking is rapidly dissolving.
Klarna, for instance, has operated as a licensed bank in Europe since 2017. Affirm has introduced debit cardholders who can finance purchases in physical stores, bringing installment debt into the realm of brick-and-mortar retail. Integration with platforms like Apple Pay and Google Pay makes BNPL transactions as seamless as a phone tap.
Even traditional financial institutions are embracing BNPL. PayPal reported processing $33 billion in BNPL spending in 2024, with 20% annual growth. Major banks now offer post-purchase payment splitting, and through partnerships with payment processors like Adyen, JPMorgan Payments, and Stripe, Klarna’s services are automatically available to millions of merchants.
What began as a niche checkout option is evolving into fundamental financial infrastructure. Morris observes this transformation across industries. Software companies, he notes, are increasingly looking to embed finance – lending and insurance – into their core offerings, anticipating that these financial services will eventually generate more revenue than their primary software products.
This means entire industries are quietly morphing from their original focus into financial services companies, inheriting both the risks and often circumventing the traditional oversight associated with such activities.
The Next Frontier: Business-to-Business BNPL and the Shadow of 2008
The real concern, however, lies in the emerging frontier of business-to-business (B2B) BNPL. The trade credit market, which facilitates lending between suppliers and their business customers, is a colossal $4.9 trillion market in the U.S. alone, dwarfing the entire U.S. credit card market. BNPL providers, having mastered consumer lending, are now aggressively entering this space.
While B2B BNPL can empower small businesses by increasing their spending capacity by an average of 40% (according to B2B BNPL providers like Hokodo), it also signifies more debt accumulating at an even faster pace, with potentially even less visibility than traditional consumer lending.
Adding to this ominous picture is the alarming pace at which this debt is being packaged and sold. Elliott Advisors acquired Klarna’s $39 billion British loan portfolio, and KKR agreed to buy up to $44 billion in BNPL debt from PayPal. Affirm has issued approximately $12 billion in asset-backed securities. This echoes the subprime mortgage playbook of 2008: risky consumer debt is sliced, diced, and sold to investors, creating layers of financial engineering that obscure the ultimate exposure. The critical difference this time is that much of this underlying debt isn’t being reported to credit bureaus.
Two Bubbles, One Unseen Danger
My analysis, informed by conversations with figures like Nigel Morris, suggests we are witnessing two potential economic bubbles: one in Artificial Intelligence, which garners significant headlines and venture capital attention, and another, less visible but no less concerning, in the BNPL space.
The BNPL situation is distinct but equally critical. It is characterized by its invisibility, light regulation, and its disproportionate impact on the most vulnerable segments of the population – approximately 40% of Americans. It’s the reality of individuals financing their daily meals and recent graduates struggling to manage student loans alongside multiple BNPL accounts.
While the champagne may be flowing freely in certain economic sectors, making this profound problem easy to overlook, the consequences of unsustainable consumer debt are far-reaching. When that debt reaches a breaking point, the pain will be felt across the board, and the venture capital-backed businesses at the heart of this trend will undoubtedly be among those impacted.
Nigel Morris, from his vantage point as a seasoned investor in this very sector, understands these warning signs better than most. He’s not predicting an imminent crash, but he is unequivocally urging vigilance. The crucial question remains: will regulators and policymakers act decisively before this invisible debt crisis truly unfolds?