The ugly side of BNPL

Buy now, pay later (BNPL) firms have a lot of fans, especially among millennial and Gen Z consumers, according to several surveys. Now a new report from the Federal Reserve Bank of Kansas City revealed that BNPL is especially popular with consumers and who are way over their heads in debt.

And if financial reporting by two of these firms—Affirm and Klarna—is an indication, default rates could run high. Affirm Holdings, one of best known BNPL companies posted a $518 million loss for the fiscal year that ended June 30, 2024; the previous year losses were $985 million, according to financial statements. Klarna, a BNPL firm headquartered in Sweden logged a $92 million pretax loss for the first quarter of 2025.

Many BNPL users financially vulnerable

According to consumer surveys between 14 percent and 25 percent of U.S. consumers used BNPL services in 2023, the Kansas City Fed noted in its new report, Financial constraints among buy now, pay later users. BNPL owes its popularity to the dual factors that increasing numbers of merchants offer BNPL and they only require a "soft" credit check that does not take into consideration a consumer's credit score.

Using data compiled by the Federal Reserve Board for its 2023 survey of household economics and decision making (SHED), the Kansas City Fed created financial constraint indicators for BNPL users and found that they were more financially vulnerable than were nonusers, and that it is not uncommon for these individuals to overspend or overextend their debt through BNPL.

Plus, there is the added problem that BNPL users often are unable to return items, and they lack federal consumer credit protections such as the ability to dispute transactions. (The Consumer Financial Protection Bureau had, during the Biden Administration, approved a rule that would have subjected BNPL to the same consumer protections as credit cards, but that rule was rescinded by the Trump Administration.)

Consumers finding it tough to repay

"The benefits and risks of BNPL services may be especially salient for consumers who face financial constraints," the Kansas City Fed stated in its report. In fact, in 2023 just 12 percent of BNPL users had no indicators of financial constraints, as defined by the SHED.

Here are a few other characteristics of BNPL users, using the Fed Board's financial constraint indicators:

• About 14 percent made at least one late payment.

• There is a correlation between consumers who make late payments on BNPL loans and those who have a higher number of financial constraint indicators.

• More than 15 percent of BNPL users with late payments exhibit nine or more indicators of severe financial constraints, compared to less than 2 percent of those without late payments. Some of the constraints considered include having no means to cover three months' expenses, the inability to cover an emergency expense of $400, having medical debt, and receiving government assistance payments.

"Our results suggest a high correlation between BNPL users' late payments and their financial vulnerability or distress potentially implying that BNPL users may have overspent or overextended their debt through BNPL," the Kansas City Fed report stated. "Some may even have a heightened default risk."

But it's not all doom and gloom. "[M]any BNPL users, especially those without late payments, may use BNPL to help relieve financial constraints; if consumers use BNPL service as a substitute for alternative credit services or credit cards, they can avoid high costs or interest charges."

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