Finance & Economics

BNPL financing faces unprecedented challenges

While Apple is working on its Buy Now Pay Later solution, the booming industry itself is facing challenges unseen before



The buy-now-pay-later market has exploded in popularity as online shopping rates surged.

It is expected to grow at a CAGR of 29.36% from 2022 to 2026. At the same time, this growth is not a healthy indicator. The challenges for the BNPL industry are unconventional yet pressing. 

What’s BNPL?

The Buy Now, Pay Later (BNPL) scheme is a short-term retail loan. BNPL allows consumers to make instant purchases and pay for them over a certain period, often interest-free. 

Although the installments are free for consumers, retailers pay their fees to BNPL companies. Merchants typically pay the BNPL provider between 2% and 8% of the purchase cost or a small per-transaction charge. They are willing to pay the price as these point-of-sale loans increase retail conversion rates by 20%-30% and lift the average ticket size between 30% and 50%. 

BNPL is most popular among Millennials and Gen Z. As for the regional spread, Sweden has the largest market share. It is no wonder since BNPL giant Klarna has Swedish roots. Buy now, pay later solutions rely less on (or bypass altogether) traditional credit scores and reports. That makes them appealing to people with limited savings and low credit scores. 

Though such a payment plan has been available for years, it gained enormous popularity during the pandemic. Firstly, more people shifted to online shopping. The need for flexibility in online shopping overall, and flexible payment options specifically, enhanced the use of BNPL methods. Secondly, adult shoppers started splurging on luxury goods. Luxury spending outpaced pre-pandemic sales in 2021. Expensive goods often require extended financing options. 

Inflation impact

However, recent retail trends show that luxury items and large purchases are not the main BNPL drivers. The most common purchases for BNPL today are clothing, shoes, accessories, handbags, home decor, home improvement or appliances. Moreover, 49% of Forbes Advisor survey respondents used BNPL for mid-range purchases (under $500). Heavy online shoppers need payment flexibility the most. Easy loans encourage them to spend beyond their means. 

The J.D. Power’s report finds that almost one-third of younger consumers spend more than their budget allows with BNPL. Such financing schemes can make it easier to fall into a debt trap, particularly among financially vulnerable or low-income households. Statistics confirm it’s already happening. Mizuho Americas Analyst Dan Dolev found that customer delinquency rates and total delinquencies for the BNPL provider Affirm rose in May. A recent survey by Citizens Advice also suggested that almost 40% of consumers were using credit cards and other forms of debt to make BNPL repayments.

Rising bad debt may increase the risk that banks and other lenders cut off the BNPL companies or demand much higher interest rates. Investors also demand higher yields on the packaged-up debt they purchase from buy-now-pay-later businesses. 

Clients who choose BNPL over credit cards to avoid interest payments feel the impact of the ongoing global crisis. In May, when BNPL delinquencies registered an increase, the consumer price index spiked by 8.6% year-over-year, higher than economists expected. Rising household costs and fears of a recession are hovering over American consumers. Besides, the stimulus cash is already gone. 

Meanwhile, BNPL companies often rely on credit lines whose rates rise and fall along with the Federal Reserve’s benchmark rate. The rate experienced the third hike this year, lifted by 0.75 percentage points to battle inflation. Lower interest rates ensured cheaper funding costs and plenty of cash to loan. As borrowing costs increase, BNPL lenders are entering uncharted territory. Not only will such companies suffer from reduced spending ability, but also they’ll find it harder to finance the loans.


Another aspect that puts successful BNPL companies at risk is rising competition. For instance, Apple announced last month that it would launch its deferred payments service. The Apple Pay Later service will allow users to pay for things over four monthly instalments without interest. In the U.S., Apple Pay remains the top mobile payment player, with 43.9 million users in 2021. Worldwide, over 507 million people are using the service. That is almost half of the global iPhone user base. Expanding an array of financial services would position Apple’s new BNPL solution ahead of its competitors. 

PayPal has also debuted PayPal Pay Monthly, a BNPL offering issued by WebBank this June. Customers can make purchases between $199 and $10,00. The cost splits into payments over a six-month to two-year period, with the first payment due one month after purchase. The company’s earlier Pay in 4 product has been successful so far. 


The British government has recently announced plans to strengthen the regulation of interest-free Buy-Now Pay-Later credit agreements. 

  • Lenders will be required to carry out checks to ensure that loans are affordable for consumers, 
  • Advertisements must be fair and not misleading. 
  • The Financial Conduct Authority (FCA) will approve the lenders. 
  • Borrowers may complain about BNPL schemes to the Financial Ombudsman Service.

Australia’s financial services minister also said the government would push to regulate BNPL lenders under credit laws. 

Market reaction and forecasts

The shares of the top BNPL players have seen a steep fall this year. 

  • Affirm Holdings has lost 75% of its value since Jan 2022. Its stock price fell to $23,34 from the highs of $168 last November. 
  • Zip Co is trading at 0.53AUD, compared to 8AUD in late 2021.
  • Afterpay Limited has lost almost 20% YTD.
  • Sezzle Inc went down by over 94% during a year.
  • Block Inc, which bought Afterpay, went from $164 to $67 this year.  

Klarna raised a new funding round at a valuation of $7 billion. BNPL provider’s business value is now far below last year’s $45.6B valuation

BNPL companies more resistant to economic stresses include Klarna and Block. Those fintechs have bank charters and could fund with deposits. Others will struggle to get financing from banks and financial institutions. Investors are also likely to shy away from the BNPL industry, anticipating financial risks from a potential recession. 

“I think some small players will probably go out of business, or they’ll try to connect onto some other tech players or some consolidation to the bigger players,” said Deutsche Bank’s senior payments analyst Bryan Keane. Therefore, M&A opportunities in the sector significantly rise. 

BNPL firms are also likely to add more scrutiny to the loan application process. Affordability checks, in particular, may be introduced sooner than the related legislation becomes effective. Those will create more friction in the customer experience and slow down BNPL growth. 


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Nina Bobro

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Nina is passionate about financial technologies and environmental issues, reporting on the industry news and the most exciting projects that build their offerings around the intersection of fintech and sustainability.