BNPL’s Crossroads: Rocket-Ship Growth Meets Card-Like Scrutiny

BNPL’s Crossroads: Rocket-Ship Growth Meets Card-Like Scrutiny

Buy Now, Pay Later (BNPL) has surged from niche checkout button to mainstream payment rail in just a few years, reshaping how consumers finance everything from burrito bowls to big-ticket items. In the U.S., transaction volume has multiplied since 2019, while product scope is expanding into physical cards and longer-term loans. At the same time, rising late payments, selective loss pressure, and evolving oversight are pushing BNPL to look and behave more like traditional credit. This matters now because 2025 is turning into an inflection point: merchant partnerships are scaling, credit bureaus and FICO are adapting, and regulators are recalibrating. All figures are in U.S. dollars and reflect the 2019–2025 period unless noted.

Quick Summary

• BNPL transaction volume in the U.S. has multiplied by 20x since 2019.
• Typical “pay-in-four” example: a $41 order split into 4 x $10.40 over six weeks, at 0% interest.
• Merchant fees can reach ~5% of transaction value; providers say 90%+ of income comes from merchants.
• Affirm mix: roughly 20% of loans at 0% APR and 80% interest-bearing.
• LendingTree: 25% of BNPL users bought groceries with BNPL, up from 14% in 2024.
• CFPB: over two-thirds of BNPL loans went to borrowers with lower credit scores.
• Klarna reported a 17% YoY increase in consumer credit losses (May, tied to higher origination in Q1’25).
• 41% of BNPL users paid late in the past year, up from 34% a year earlier (LendingTree).
• Affirm says customer defaults have decreased (figure not disclosed).
• FICO will add BNPL to credit scoring; Affirm shares data with bureaus; Klarna/Afterpay are withholding until treatment is clarified.

Sentiment and Themes

Overall tone: Positive 30% / Neutral 45% / Negative 25% — strong growth and adoption balanced by credit risk signals and regulatory uncertainty.

Top 5 Themes

• Explosive adoption and channel expansion
• Credit risk management and late-payment trends
• Merchant-funded economics and competition for integrations
• Product evolution (interest-bearing terms, physical cards)
• Regulatory and credit-reporting convergence with cards

How BNPL Works—and Why Merchants Fund It

The pitch and the checkout moment

At checkout—online or increasingly in-store—consumers opt for pay-in-four installment plans. Providers approve the loan in real time, pay the retailer the next day, and assume nonpayment risk. For consumers, the appeal is transparent repayment schedules, no compounding interest, and a low-friction experience that can make purchases feel more affordable.

Merchant economics, not consumer fees

BNPL is primarily merchant-funded. Providers charge retailers a fee (sometimes up to about 5% of the transaction) in exchange for higher conversion and basket sizes. Executives emphasize that more than 90% of their income comes from merchants, not consumers—a model that helps BNPL position itself as a consumer-friendly alternative to revolving cards.

From pay-in-four to interest-bearing terms

While zero-interest installments remain the category’s hallmark, product breadth is expanding. Affirm says roughly 80% of its volume carries interest, and both Affirm and Afterpay offer longer-term, monthly options for larger-ticket items at simple or stated interest. The strategy: preserve pay-in-four for mainstream baskets while capturing higher yields and bigger carts with longer durations.

Into the store: physical cards and pre-approved spends

BNPL issuers are rolling out physical cards that enable point-of-sale installment financing, effectively doubling addressable market by unlocking offline transactions. Providers can approve a specific spend (say, $500 for a jacket) ahead of the swipe and then attach the loan to the in-store transaction when the card is chipped.

Growth, competition, and the Walmart effect

U.S. BNPL volume has exploded 20x since 2019, intensifying competition for both consumers and retail integrations. Klarna’s exclusive deal with Walmart via the retailer’s fintech arm underscores the land-grab for marquee partners. Specialists argue there’s still ample white space, with many transactions yet to be BNPL-enabled.

Shifting use cases: from fashion to consumables

BNPL began in e-commerce retail at average tickets of $100–$200 but now covers smaller tickets and consumables. LendingTree reports that 25% of users have financed groceries with BNPL, up from 14% in 2024. This broadening suggests embedded finance is moving from occasional splurges to everyday spend—raising questions about consumer cash-flow stress and provider underwriting guardrails.

Credit performance: mixed signals

Warning lights are not uniform. LendingTree found 41% of BNPL users paid late in the past year (up from 34% prior), and Klarna reported a 17% YoY increase in credit losses, attributing it to higher loan issuance in Q1’25 and noting record on-time/early repayment shares in Q2. Affirm reports decreasing defaults (no figures disclosed). Afterpay stresses strict controls: accounts are disabled at the first missed installment, limiting loss severity given lower ticket sizes.

Regulation and credit reporting: converging with cards

The CFPB issued an interpretive rule in 2024 to apply credit card regulations to BNPL, though the agency later said it would not prioritize enforcing that rule. Meanwhile, FICO plans to incorporate BNPL into credit scoring. Affirm already shares consumer data with bureaus; Klarna and Afterpay are holding back until they see frameworks they believe won’t penalize customers unfairly. Industry leaders argue that BNPL’s short-term, transaction-level underwriting merits a distinct regulatory and scoring approach.

Will BNPL dethrone cards?

Experts suggest coexistence: BNPL could replace cards for certain consumers and specific transactions, but not universally. Even providers who champion the “death of revolving credit” acknowledge that sustained scale will require card-like compliance, transparency, and performance discipline.

Analysis & Insights

Growth & Mix

20x growth since 2019 signals durable consumer demand and merchant adoption. Mix is bifurcating: zero-interest pay-in-four drives conversion; interest-bearing terms (e.g., Affirm’s ~80% share) expand yield and ticket size. Physical cards extend BNPL into offline retail, lifting addressable volume.

Profitability & Efficiency

Merchant-funded take rates (up to ~5%) support revenue density relative to cards, but require low losses and tight fraud control. Transaction-level underwriting and immediate account disabling (Afterpay) indicate loss containment strategies, while record on-time repayment share (Klarna, Q2) highlights the importance of cohort management post-origination.

Cash, Liquidity & Risk

Providers pay merchants next day and hold nonpayment risk; underwriting quality and collections cadence are critical. Late-payment incidence (41%) and higher losses at some lenders imply elevated monitoring needs. Credit bureau reporting and FICO integration could improve risk differentiation but may also temper demand if consumers perceive downside to credit standing.

Notable Quotes

• “We pay the retailer the next day, and then we take all of the nonpayment risk.”
• “The lion’s share of our income, 90-plus percent of our
  income, comes from merchants—not consumers.”
• “Miss a payment and the account shuts off; small tickets keep losses small.”
• “BNPL will only scale sustainably if we deliver card-like transparency, controls, and performance.”

Conclusion & Key Takeaways

• BNPL is mainstreaming fast: 20x U.S. volume growth since 2019 and expansion into physical cards signal durable demand and channel breadth. Why it matters: distribution into stores and bigger-ticket categories expands revenue pools and competitive stakes.
• Economics hinge on loss discipline: Merchant-funded take rates can be attractive, but rising late pays and mixed loss trends put a premium on underwriting, fraud controls, and rapid collections. Why it matters: even small deterioration at scale can compress contribution margins.
• Product mix is shifting toward yield: Longer-term, interest-bearing loans are growing (e.g., Affirm’s majority mix), lifting unit economics while inviting card-like scrutiny. Why it matters: investors should watch APR disclosure practices, cure rates, and cohort returns.
• Reporting and regulation converge: Credit bureau integration and evolving CFPB posture push BNPL toward card-style compliance. Why it matters: better risk differentiation could lower losses, but visibility into credit files may curb demand from marginal borrowers.
• Near-term catalysts: scaled retail partnerships (e.g., big-box exclusives), physical card rollouts, FICO’s treatment of BNPL data, and holiday-season cohorts. Why it matters: these events will test conversion, approval rates, and credit performance simultaneously.