“The Ghost of Christmas Present” might turn out to be the phantom debt consumers accrued on gifts this holiday season: Shoppers put a record $10 billion worth of purchases on buy now, pay later plans in November, Adobe found, and $1 billion on Cyber Monday alone. About half of Americans have used BNPL services, according to industry estimates, to purchase everything from designer purses to burritos.
In fact, from that vantage point, the debt might be less like the cheery spirit that showed Ebenezer Scrooge what a good time his poorer acquaintances were having on December 25 and more akin to the ominous specter that Charles Dickens dubbed “The Ghost of Christmas Yet to Come.”
It’s difficult to peg exactly how big the BNPL debt pile is because it’s largely invisible. BNPL lenders aren’t required to report totals to credit bureaus, and generally don’t have to follow regulations that financial offerings like credit cards do.
Before regulations catch up to the relatively recent fintech, a generation of so-called “Klarnamaxxers” could find themselves more beholden to lenders than they realize.
Pay in 4 (ever)
BNPLs have taken off in a short period of time. Capital One found that Americans bought more than $116 billion via the plans in 2023, up from $2 billion in 2019. BNPL giants rake in revenue from these loans mainly by charging merchants transaction fees. Klarna debuted on the NYSE in September at a $15 billion valuation and, in its first publicly reported quarter, made $903 million, a 26% jump from the same time last year.
Borrowers, approved without a credit report, can instantly access credit lines up to $20,000—and they can increase their shopping budget manyfold by tapping funds from multiple companies at once. Klarna’s competitors include Affirm, PayPal, Afterpay, Zip and Sezzle.
Because they offer short-term installment plans, BNPL lenders don’t have to follow the rules of the CARD Act, which tightened qualification standards for credit cards in 2009, or the Truth in Lending Act, which sets out requirements for consumer transparency (like clearly disclosing rates and fees) for loans longer than four months. Although typical BNPL plans spread payments over four to six weeks, they can last much longer.
Regulators haven’t cracked down:
- The CFPB investigated BNPL companies in 2021 and sought to treat them like credit cards, but the agency reversed course under President Trump. There’s a patchwork of state-level regulations on the companies, but those are simple to skirt.
- Still, consumers could soon be deterred from taking on too many installment plans, since FICO plans to start including BNPL debts in their loan histories. It’s unclear how FICO will get the info from the companies, though.
Swiping In: Traditional financial institutions are trying to take some business from their young fintech rivals. Credit cards from Citi, Chase and American Express have rolled out installment plans. But not to be outdone, Klarna introduced a debit card.