Growing Risks of "Buy Now, Pay Later" in a quite Scary Economy

The market is clearly plagued with fear, and consumers are at the forefront of it with the implementation of tariffs.

With uncertainty looming over the economy, financial analysts and consumers alike are eager to uncover signs of what may come next. Traditional indicators such as retail sales, corporate earnings reports, and consumer debt loads all paint a picture of financial health, but new purchasing trends—like the widespread adoption of Buy Now, Pay Later (BNPL) programs—offer additional insight.

Klarna, a major BNPL lender, recently disclosed a troubling trend: consumer credit losses climbed 17% in Q1 compared to the same period last year. Despite strong revenue growth exceeding $700 million, net losses doubled to $99 million. The company, along with competitors like Affirm, has pointed to short loan durations as a safeguard against broader economic downturns, yet increasing delinquencies suggest cracks in consumer financial stability. A LendingTree survey found that 41% of BNPL users reported late payments within the last year—up from 34% the previous year—while 25% admitted to using these loans for essential purchases like groceries.

The BNPL sector's struggles intersect with the broader stock market as consumer spending patterns shift. While companies involved in deferred payment solutions have attempted to recover from weaker earnings, concerns remain about their long-term viability should a recession occur. Klarna’s postponement of its IPO and Affirm’s fluctuating stock value reflect market uncertainty about consumer reliance on credit-fueled purchasing. A significant economic correction could force BNPL providers to tighten underwriting standards, making access to easy credit more difficult.

The surge in BNPL borrowing affects multiple areas of the economy, from retail and banking to technology and food services. Consumers increasingly turn to these payment methods to afford both discretionary and essential goods. However, higher default rates and spending dependency on credit signal a potential slowdown in traditional consumer spending patterns. If borrowing becomes unsustainable, retailers and financial institutions relying on BNPL-generated revenues may feel the consequences of lower repayment rates.

While BNPL data alone doesn't dictate the economy’s fate, its trends contribute to the larger conversation about financial stability. As credit card delinquencies rise alongside BNPL late payments, analysts may view these indicators as early signs of distress. Whether this ultimately results in tighter lending policies or broader stock corrections remains to be seen. But one thing is clear—consumer spending behaviors are evolving, and the market is paying close attention.