Klarna, the leading global provider of buy now, pay later (BNPL) loans, is facing an existential moment. Customers, everyday Americans more than anyone else, are finding it harder and harder to make loan payments. This trend has raised concerns over the sustainability of the BNPL model, which enables consumers to split payments into manageable installments. Data indicates that Klarna’s defaulted loans increased internationally to 0.51% in the first quarter of 2024. This year, that percentage jumped to 0.54%. The company’s consumer credit losses jumped 17% in Q1. They reached $136 million, a 29% increase over this time last year.
The BNPL framework provides a way for consumers to acquire goods on credit and to repay them in four installments or less. Normally, it takes an upfront payment at the point of sale. These loans are marketed as zero-interest loans. Of those, most of them don’t do a credit check period, or they only do a soft credit check. In 2022, the six largest BNPL providers—Affirm, Afterpay, Klarna, PayPal, Sezzle, and Zip—issued an estimated 277.3 million loans. At almost $33.8 billion in merchandise, these loans represented nearly 1% of all credit card spending for the year.
A recent report by Bankrate released in mid-May exposed a shocking double standard. More than one in four consumers used Buy Now, Pay Later (BNPL) loans because they were easier than getting a credit card. An April report from the online lender LendingTree pointed to an even more troubling trend. Almost four out of ten enrollees in these plans experienced an inappropriate late payment in the last year, an increase from one in three enrollees the year before.
Further complicating the picture, the regulatory landscape surrounding BNPL loans has changed. A regulation enacted last year aimed to protect borrowers by preventing automatic payments and banning multiple fees for missed payments. The Consumer Financial Protection Bureau (CFPB) has intervened by stating that it will not enforce this regulation. This is a hopeful signal that the Biden administration will commit to this. Most recently, the Trump administration’s non-enforcement decision in this area was lauded as a necessary step toward focusing the department’s resources on protecting hardworking American taxpayers.
Justine Farrell chairs the marketing department at the University of San Diego’s Knauss School of Business. She underscored the burden that inflation and high interest rates are placing on consumers today. She stated, “Consumers’ financial positions feel more spread thin than they have in a long time.” Farrell pointed out how increasing costs of basics such as groceries and housing force consumers to turn to BNPL products.
“The cost of food is continuing to go up, on top of rent and other goods … so consumers are taking advantage of the ability to pay for items later.” – Justine Farrell
Adam Rust, the director of financial services at Consumer Federation of America, condemned CFPB’s non-enforcement posture in the harshest possible terms. He said that this type of approach favors big technology companies over regular consumers. He remarked, “By taking a head-in-the-sand approach to the new universe of fintech loans, the new CFPB is once again favoring Big Tech at the expense of everyday people.”
Though we face at times tremendous headwinds, in bad times, a representative from Klarna last week claimed there was “no indication of a softening U.S. consumer.” This publicity statement is intended to calm alarmed stakeholders operations in a time of increasing credit losses and defaulting loan payments.
The Federal Reserve has weighed in, warning of the risk BNPL lending can pose. Authors of a Federal Reserve study noted that while these loans provide credit access to financially vulnerable consumers, they may lead those same individuals to overextend themselves financially.
As a result, BNPL lending is increasing in popularity at breakneck speed. Yet, as we approach a record $200 billion in unpaid loans, serious questions persist about its sustainability and impact on consumers’ financial well-being. The changing regulatory landscape is sure to have a major impact on the future direction of this emerging lending model.
