Yves here. Satyajit Das looks at the newest way to fleece not just typically subprime borrowers but also merchants, via BNPL, or more formally, buy now pay later loans. BNPL charges bigger merchant discounts than credit cards, which means higher costs that they spread across all customers. They also extract from customer by charging late fees and payment rescheduling fees that annualized are in the payday loan to loan shark range. In other words, if you thought credit card interest rates were predatory, BNPL makes them look like pikers
So how can BNPL claim to have low defaults? Because they put their hand in the borrower’s pocket by debiting payments due from a bank account or putting them on a credit card.
By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequence – Reloaded (2016 and 2021). His latest book is on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is a version of a piece first published in the New Indian Express.
Fin-tech firms are targeting consumer financing with BNPL (buy-now-pay-later) products, also known as ‘point-of-sale’ financing.
The simple idea is that when you purchase anything you do not pay the full purchase price immediately but rather in 3 to 4 instalments usually over 6 to 8 weeks. It is an adaptation of layaways or laybys where you selected an item and made a series of payment to cover the purchase price. The difference is under BNPL you get the item today rather than having to wait until you have paid in full. It is similar to purchases using a credit card or loan allowing payments to be spread over time.
The largest segment is integrated shopping BNPL apps like Klarna and Afterpay which cater to low values purchases (typically less than $300) usually of groceries, meals and clothes. There are equivalents which focus on larger items, typically electronics, furniture, home goods, sports or home fitness equipment, and travel, repayable over 8 to 9 months.
BNPL now accounts for over $300 billion against around $2 billion a decade ago. This growth was partially driven by the growth in online shopping during the Pandemic. BNPL users are generally younger and less financially literate.
Attractions include availability at point of purchase, ease-of-use via apps, product independent financing, credit with limited checks and seemingly no interest charges. The cost is covered by the seller who pays a merchant fee plus a 4-6 percent discount on the value of the sale. In effect, the seller has a receivable which is being factored to the BNPL firm at an annualised funding cost of around 30 percent. These charges reduce merchant profit margins significantly. As BNPL encourages impulse purchases, seller may face additional costs of higher rates of returns.
The only way the costs can be recovered is increasing the price of the items where competitive conditions permit. As you cannot specifically target BNPL buyers, all customers, including those who don’t use the financing service, must pay, effectively subsidising the buyers on credit.
BNPL firms also charge fees for late payments, usually $5 to $15 which on a modest fortnightly payment equate to a large penalty. User can face additional fees for subsequent unpaid instalments if they miss a payment.
The economics are attractive for fin-tech entrepreneurs and venture capitalists providing capital. High effective interest income and fees funded by borrowed money, typically from banks or securitising the receivables, at rates of around 6-7 percent generates generous margins. In theory, costs of the platform are fixed with modest ongoing costs providing significant operating leverage.
There are low regulatory costs. While BNPL firms essentially are money lenders like banks, they have, to date, been largely unregulated. The labelling of what are economically interest payments as fees under the guise of ‘fin-tech’, which regulators are keen to encourage, has allowed avoidance of rigorous requirements imposed on traditional consumer lenders.
The major potential risk is credit losses. Assessment of individual ability to repay is far from demanding. Unlike traditional time-consuming credit processes, it is generally automated, increasingly relying on AI engines, based on public information and even social media. Claims of advanced technological capabilities, distinctive merchant underwriting and consumer-fraud models is marketing puffery. While data is scarce, available information suggests that most BNPL borrowers are riskier. They tend to have lower credit scores, lower savings, and significant levels of other unsecured debts like credit cards and consumer debt. The industry argues that defaults have been low and less than other similar forms of credit such as credit cards or unsecured personal finance. One possible explanation for low losses is a favourable business cycle. In essence, the true level of defaults will become apparent only in a major downturn.
A subtler reason for low losses to date is the structural arrangements. Most BNPL providers require that customers establish authorities for automatic deduction of payments from available cash sources such bank account or other credit cards. This means that BNPL lenders gain de facto priority access to the borrower’s available funds or credit card limits. That creates the potential for BNPL repayments to transfer the default risk to other lenders.
Despite these advantages, BNPL platforms are on average unprofitable. Early extravagant valuations have proved over optimistic. Swedish BNPL firm Klarna was valued at $5.5 billion in 2019, $46 billion in 2021 and $6.7 billion in July 2022. In September 2025, Klarna completed an initial public offering at a $15 billion valuation.
The industry now faces headwinds. Governments may establish a regulatory framework like that applicable to other lenders to increase transparency over costs, protect consumers and prevent misuse of private data collected. At the same time, credit bureaus are increasingly including BNPL borrowing in individual credit assessment. Facing loss of income to newer forms of borrowing, credit card companies, banks, payment firms like PayPal and Stripe, and merchants like Apple are launching competing instalment credit products.
Ironically, it is forcing BNPL firms to move in the opposite direction converting themselves into banks losing some of their cost advantage. The new disingenuous claim is their competitive advantage comes from accelerated customer acquisition at low cost because the expense is partially borne by the merchant. This allows them to cross sell traditional banking products to the acquired customer based and generate revenues from advertising and affiliate marketing.
None of this addresses the underlying societal cost of excessive borrowing which is also increasingly hidden and difficult to quantify. The frictionless interface, speed and ease of obtaining credit may encourage ‘loan stacking’. The absence of borrowing limits customary in other consumer credit means that individuals can incur large amounts of BNPL debt with overlapping loans from a range of providers alongside other borrowings increasing the risk of financial distress. This makes it more likely that borrowers will default on their BNPL loans themselves, or on other credit. American BNPL users had an overall credit delinquency rate of close to 18 percent, compared with about 7 percent for non-BNPL users. As BNPL businesses are funded by traditional banks or investors, any problems will leach into the broader financial system.
Fintech promoters argue they are democratising credit and encouraging greater competition. But the approach is poor, predatory and risky. BNPL may well come to mean “buy now, pain later” for all parties involved.
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