Our canary in the coal mine: Buy now pay later

BNPL brings undeniable benefits. For millions historically excluded from the U.S. financial system, these services provide convenient, affordable credit without requiring traditional credit checks. For merchants, the impact is massive — through their Affirm partnership, Shopify merchants see a 21% average order value increase and 27% higher conversion rates. Klarna, which processed $105 billion in 2024, filed for a proposed NYSE listing just last month.

Here’s where our economic canary looks unwell: the very features making BNPL inclusive also make it dangerous. Federal Reserve Bank of Boston research shows BNPL users tend to have very low credit scores, are more likely to have filed for bankruptcy, and maintain low checking account balances. What began as a convenience has become a necessity for many, potentially masking deeper economic distress.

What we’re witnessing is effectively hyper growth of a shadow banking system operating outside of traditional credit monitoring. Most BNPL loans never appear on credit reports, creating what the Consumer Financial Protection Bureau calls “phantom debt,” or financial obligations invisible to anyone except the borrower and individual BNPL provider.

The demographics are concerning. Gen Z has embraced BNPL enthusiastically (58% having used it) with millennials close behind. Together, they account for three-fourths of all U.S. users. Racial disparities are notable: Black and Hispanic women use BNPL at more than double the rate of white women and Black consumers overall are 63% more likely to use these platforms than white consumers.

Consider the “lipstick effect” — during financial stress, consumers typically shift from expensive luxury items to smaller, more visible, more affordable indulgences. The economic theory was first coined by economics and sociology professor Juliet Schor in 1998, which was reinforced with makeup and nail polish sales data during periods of economic volatility in 2001, 2008 and 2022. But with BNPL, a dangerous cocktail is created today allowing consumers to acquire previously unattainable high-ticket items in a way that feels like an affordable indulgence.

The numbers should make us nervous. A January 2025 CFPB study revealed 63% of BNPL borrowers hold multiple simultaneous loans. With no centralized view, literally no one — not even traditional lenders — has visibility into a borrower’s complete debt picture.

The real danger lies in debt displacement. BNPL makes it easy to have little luxuries but much harder to save for much larger car and credit card payments on time when the remaining payments are auto-debited and easily forgotten. While Klarna boasted a low 0.55% credit loss rate in 2023, we do not see how BNPL impacts users’ ability to pay other financial obligations. Meanwhile, auto loan delinquencies hit 8% in 2024 and credit card delinquencies reached nearly 9%. HUD reports 5.9% of homeowners are behind on mortgage payments (the third consecutive monthly increase), and FHA loans represent 90% of new mortgage delinquencies in the last year. Additionally, 12.8% of total U.S. rental households are behind on rent, also the third consecutive month of increases. 

This debt displacement effect is particularly pronounced among younger borrowers, who exceed pre-pandemic delinquency levels on traditional credit while maintaining good standing with BNPL services. The bite-sized payments create a false sense of financial capability that eventually collides with larger fixed expenses when checking accounts bottom out. Our financial systems operate under the assumption that consumer debt visibility is holistic, when it absolutely is not. When BNPL debits hit accounts simultaneously with rent, car payments, and utilities, something has to give. What gives first? Inevitably the larger, more consequential financial obligations.

The paradox of BNPL is that it both addresses and perpetuates financial inequality. It offers credit to those traditionally excluded and underserved while easily straddling those same people with new forms of invisible debt that lack consumer protections. When the economy inevitably faces its next downturn, this phantom debt structure threatens to collapse quickly. Today, the warning looks clear, and we are still early enough to do something about it by enabling BNPL to be a credit building tool. Convenience that encourages blindness elsewhere isn’t progress, it’s an illusion disguised as inclusion. Our canary is still singing, but softly. 

Annie Tsai is chief operating officer at Interact (tryinteract.com), early stage investor and advisor with The House Fund (thehouse.fund), and a member of the San Mateo County Housing and Community Development Committee. Find Annie on Twitter @meannie.