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Starting Finance Club STATALE presents - EPIDEMIC OF BUY NOW, PAY LATER: a silent debt crisis?

Starting Finance Club STATALE presents - EPIDEMIC OF BUY NOW, PAY LATER: a silent debt crisis?

SFClub Statale
March 24, 2025

Over the past few years, Buy Now, Pay Later (BNPL) services have exploded in popularity, offering consumers a seemingly effortless way to make purchases without the immediate burden of full payment. BNPL is a short-term financing option that allows consumers to make purchases and pay for them over time in equal installments, usually without interest if payments are made on time. Unlike traditional credit cards, BNPL typically does not require a hard credit check, making it accessible to a wider range of consumers. Several popular BNPL platforms worldwide exist, such as Klarna, Afterpay, and Scalapay, which have recently become quite popular in Italy.¹

Top players in BNPL market

Source: Nimble Appgenie

Buy Now Pay Later platforms are in increasing demand in the economy. According to Juniper Research, there are 360 million users of Buy Now Pay Later platforms and they have predicted that the users will reach up to 900 million in 2027, implying there will be a whopping 157% increase in the user base of BNPLs.² The outstanding success rate of these platforms can be attributed to their appealing and frictionless user experience. As stated above, unlike credit cards, BNPL services often don’t require credit checks, making them accessible to a wider range of consumers, including those with limited financial history.

BNPL platforms have gained widespread popularity due to their seamless and instant approval process, allowing consumers to integrate them effortlessly into both online and in-store checkouts. Their appeal lies in breaking down payments into smaller, manageable chunks, making purchases feel more affordable, and reducing the psychological barrier to spending. Many consumers see BNPL as a way to avoid high-interest credit card debt, making it an attractive alternative, especially for younger demographics. Gen Z, in particular, has embraced BNPL, as they are less inclined to use traditional credit cards but still seek flexible and accessible payment options.³

BNPL adoption among age groups in 2024

Source: Finder.com

Along with Gen Z, lower-income households also turn to BNPL platforms, as they often lack disposable income and view these services as a way to access products they otherwise might not be able to afford with ease. This can include the purchase of luxury items such as clothing, or travel, and sometimes it can include heavy, but necessary expenses such as household essentials. In fact, according to Motley Fool Money, household essentials comprised 29% of payments made through BNPL platforms. However, both Gen Z and lower-income consumers are among the most financially vulnerable groups, often lacking the financial literacy to fully understand the long-term risks of accumulating debt through multiple BNPL transactions.

The Economic Implications of Rising Use of BNPL

The rapid rise of BNPL services is like a double-edged sword that has introduced both opportunities and risks to the global economy. While it has enabled greater consumer spending and driven retail growth, there are rising concerns about its long-term economic consequences. The increasing reliance on BNPL has the potential to impact household debt levels, financial institutions, and overall economic stability. Following is a discussion of how these platforms have affected the global economy.

1. Boosting Consumer Spending and Retail Growth

One of the most significant economic benefits of BNPL is its ability to stimulate consumer spending. By allowing shoppers to break payments into smaller, interest-free installments, BNPL encourages more purchases, particularly in the e-commerce and retail sectors. This has been a driving force behind increased sales for businesses, especially among younger consumers who may not have access to traditional credit. Retailers see BNPL as a way to reduce cart abandonment and boost sales conversions, making it a lucrative tool for businesses looking to capitalize on consumer demand.

Image: Global BNPL market; Source: Nimble Appgenie

2. Rising Household Debt and Financial Strain

While increased consumer consumption boosts the economy, the rising level of debt might not be good overall. BNPL has contributed to rising household debt levels, particularly among low-income and younger consumers. Since BNPL transactions often do not require extensive credit checks, many users accumulate multiple BNPL loans across different platforms, leading to a growing debt burden. Studies have shown that over 40% of BNPL users have missed at least one payment, resulting in late fees, financial penalties, and potential credit score damage in cases when a hard check is conducted by BNPL platforms. This debt accumulation could have long-term consequences, reducing disposable income and limiting financial flexibility for millions of consumers.

3. Financial Institutions and Credit Market Disruptions

The rise of BNPL is reshaping the traditional credit landscape. Even if the influence is not that strong and impactful, it might be challenging for banks and credit card companies. Unlike credit cards, which generate revenue through interest and fees, BNPL providers rely on merchant commissions and late fees. As a result, banks are seeing reduced demand for traditional credit products, potentially impacting their revenue streams. At the same time, there are concerns about the risk exposure of BNPL firms, many of which lack the financial reserves of traditional banks. If BNPL default rates continue to rise, these companies could face significant financial instability, potentially leading to a wave of bailouts similar to past financial crises.

4. Inflation and Macroeconomic Risks

BNPL-driven spending could also potentially contribute to inflationary pressures. By making goods and services more accessible through delayed payments, BNPL artificially boosts demand, potentially driving up prices. This effect is particularly concerning in sectors like fashion, electronics, and travel, where BNPL adoption is highest. Additionally, as consumers take on more BNPL debt, their ability to withstand economic downturns diminishes. In times of recession or financial crisis, high BNPL debt levels could lead to increased defaults, reduced consumer spending, and slower economic recovery.

These points show that while BNPL has undeniably revolutionized consumer spending, its long-term economic implications remain uncertain. If left unchecked, BNPL could contribute to rising debt levels, financial instability, and potential economic downturns.

Hidden Risks of BNPL for Consumers

While most consumers treat the opportunity of instant purchases and deferred payments as a boon, there might be some hidden risks associated with these kinds of purchases that are often overlooked. The easy accessibility and lack of strict credit checks mean that many users accumulate multiple BNPL loans without fully understanding their financial obligations. Here’s where the risks emerge:

Debt Accumulation: As BNPL doesn’t feel like traditional debt, many consumers stack multiple BNPL loans across different platforms, leading to a financial snowball effect.

No Immediate Credit Score Impact (Until It's Too Late): Unlike credit cards, BNPL transactions often don’t appear on credit reports, until a payment is missed, which can lead to unexpected damage to credit scores.

Lack of Consumer Protection: Unlike credit cards, BNPL lacks many fraud protections, leaving consumers vulnerable to scams and disputes.⁴

Late Fees & Hidden Costs: While BNPL claims to be “interest-free,” late fees can be hefty, sometimes exceeding traditional credit card interest. The late payment fee can range between $10 and $41 depending on the platform used and the amount of expense.⁴

Encouragement of Impulse Buying: Studies show that BNPL users are more likely to overspend, as they feel less immediate financial strain.

While Buy Now, Pay Later offers convenience and flexibility, it comes with significant risks that consumers must be aware of. The consumer must be informed and mindful of hidden risks such as the potential for debt accumulation, credit score damage, hidden fees, impulse spending, and lack of consumer protection.

The Global Regulatory Response

As BNPL's popularity skyrockets, regulators worldwide are beginning to take notice, recognizing both the benefits and risks associated with this rapidly expanding credit model. While BNPL provides a convenient and accessible financing option for consumers, the lack of clear regulation has raised concerns about its potential to lead to widespread debt accumulation, financial instability, and data privacy risks. In response, various governments and financial watchdogs are starting to implement or propose regulatory measures to ensure consumer protection and maintain financial stability.

United Kingdom: The UK government has proposed bringing BNPL under the Financial Conduct Authority (FCA) regulation, requiring stricter affordability checks to prevent reckless lending.⁶ Under the new proposals, BNPL providers will be obligated to conduct creditworthiness assessments and provide clearer disclosures about fees, penalties, and repayment structures. The move comes as a response to growing concerns about consumers accumulating unmanageable BNPL debt without fully understanding the long-term financial consequences.
United States: The Consumer Financial Protection Bureau (CFPB) has begun actively monitoring BNPL providers, citing concerns over consumer debt accumulation, lack of standardized reporting, and data privacy risks.⁷ One major issue raised is that BNPL debts are often not reported to credit bureaus, meaning lenders may not have a full picture of a borrower’s financial obligations, leading to over-lending. Additionally, the CFPB has scrutinized BNPL companies for their data collection practices, as many providers gather detailed spending behavior data to refine targeted marketing strategies, raising ethical and security concerns.
European Union: The EU is considering implementing stricter BNPL regulations, focusing on misleading marketing practices that encourage impulse spending. Regulators are particularly concerned about the way BNPL is advertised, often portraying it as an easy, risk-free alternative to credit cards without highlighting the potential risks of late fees and overspending. The European Commission is reviewing policies that would require BNPL providers to present clearer terms and conditions, emphasize the potential financial risks, and ensure consumers are aware of the consequences of missed payments.⁸
Other Countries: Countries like Australia, Canada, India, and Singapore are also beginning to explore regulatory approaches to prevent BNPL-related financial risks. Australia, for example, has announced plans to regulate BNPL as a form of credit, bringing it under the same legal framework as traditional lending institutions. This means BNPL companies would have to comply with responsible lending obligations, ensuring consumers can afford their repayments before approving transactions. Some regulators are considering mandating credit reporting of BNPL transactions to ensure transparency and responsible lending, while others are exploring consumer education initiatives to help users understand BNPL risks better.

Despite these regulatory efforts, BNPL remains largely unregulated compared to traditional credit, leaving millions of consumers vulnerable to financial distress. Many of these regulations are still in the early stages, and enforcement mechanisms remain weak in several regions. Without a globally standardized approach, the rapid expansion of BNPL could create an uneven regulatory landscape, where consumers in some countries receive more protection than others. The challenge for regulators is to strike a balance between fostering financial innovation and ensuring consumer safety, preventing BNPL from becoming the next debt crisis.

The Future of BNPL

The future of Buy Now, Pay Later (BNPL) is set to be shaped by a combination of growth opportunities and regulatory challenges. As BNPL becomes increasingly popular, governments and regulatory bodies around the world are implementing stricter rules to protect consumers from excessive debt and ensure the financial system remains stable. These regulations may slow down the rapid expansion of BNPL services, but they could also encourage responsible lending practices, which would help strengthen consumer trust and long-term adoption. One promising development is the rise of alternative BNPL models that prioritize responsible borrowing.

These models focus on providing transparent terms, clear repayment schedules, and lower interest rates, promoting healthier financial habits. In parallel, financial literacy initiatives are gaining traction, aiming to educate consumers about the potential risks and benefits of using BNPL. Looking ahead, while BNPL is unlikely to completely replace credit cards, it could provide a viable alternative for certain consumer segments by offering more flexibility and easier access to short-term credit. However, as the market matures, BNPL may face a backlash, particularly if overuse leads to widespread consumer debt, prompting greater scrutiny from regulators and a possible decline in its popularity.

Conclusion

Buy Now, Pay Later has revolutionized the way consumers approach spending, offering a seamless and flexible payment option that allows purchases to be split into manageable installments. However, despite its convenience, BNPL carries significant financial risks that many users fail to recognize. The ease of access and lack of stringent credit checks can lead to impulsive spending, causing individuals to accumulate multiple BNPL loans without fully grasping the long-term financial implications.⁹ As more consumers rely on these services without adequate financial awareness, there is a growing concern that BNPL could contribute to a widespread personal debt crisis.

To mitigate these risks, there is an urgent need for stronger regulatory frameworks that ensure transparency in BNPL terms, prevent predatory lending practices, and protect consumers from over-indebtedness. Governments and financial authorities must implement policies that require clearer disclosures, responsible lending practices, and better integration with credit reporting systems. While BNPL has the potential to provide financial flexibility, its long-term sustainability depends on responsible usage, regulatory oversight, and consumer education. A balanced approach that supports innovation while safeguarding financia l stability will be key to ensuring that BNPL remains a beneficial financial tool rather than a hidden debt trap.