‘Buy Now, Pay Later’ is expanding fast, and that should worry everyone

Nigel Morris, co-founder of Capital One and an early BNPL investor, expresses significant concern over the rapid growth and increasing default rates within the Buy Now, Pay Later (BNPL) sector, noting that 25% of 91.5 million U.S. users now finance essential groceries, with late payment rates reaching 42% in 2025. He warns that BNPL's largely unreported 'phantom debt' creates a critical lack of visibility for lenders, particularly among subprime borrowers, and highlights parallels to the 2008 mortgage crisis as BNPL debt is increasingly securitized. This opaque, lightly regulated market, combined with broader economic headwinds and regulatory rollbacks, poses a growing risk for cascading effects across consumer credit, despite not yet being a systemic threat in overall market size.

Analysis

Nigel Morris, co-founder of Capital One and an early investor in BNPL services, expresses significant concern over the U.S. economy, citing that 25% of 91.5 million BNPL users now finance essential groceries, indicating widespread financial stress. This shift from discretionary to necessity-based BNPL usage is accompanied by accelerating default rates, with 42% of users making at least one late payment in 2025, up from 34% in 2023. This trend suggests a deteriorating credit quality among a growing segment of consumers.

A critical issue is the prevalence of "phantom debt," as most BNPL loans are not reported to credit bureaus, creating a severe lack of visibility for other lenders into borrowers' true financial obligations. Regulatory efforts by the CFPB to oversee BNPL were rescinded, leaving a fragmented state-by-state regulatory environment and a significant data gap, particularly concerning the long-term performance of the entire user base versus first-time borrowers. This opacity, combined with the concentration of BNPL debt among already-stressed borrowers, raises red flags.

Morris draws parallels to the conditions preceding the 2008 mortgage crisis, noting the increasing securitization of BNPL debt (e.g., KKR's acquisition of PayPal's BNPL debt, Affirm's ABS issuances) despite its opaque nature. Broader economic headwinds, including rising unemployment at 4.3%, the end of student loan forbearance, and reduced business investment, amplify the risk of cascading defaults across consumer credit products. The Federal Reserve Bank of Richmond has warned of potential spillover effects, as borrowers may prioritize smaller BNPL payments, leading to defaults on larger debts like credit cards and auto loans.

Key Decisions for Investors

• Investors should closely monitor BNPL default rates and the broader consumer credit health, particularly among subprime borrowers, as these indicators signal potential economic stress beyond the BNPL sector.
• Evaluate exposure to financial institutions with significant BNPL partnerships or securitized BNPL debt, as the lack of transparency and regulatory oversight could mask underlying credit risk.
• Consider the potential for cascading defaults in other consumer credit products (e.g., credit cards, auto loans) as consumers prioritize smaller BNPL payments, impacting traditional lenders.
• Assess the regulatory landscape for BNPL, as fragmented state-level actions and federal inaction create uncertainty and potential for future disruption or increased risk.