What: ‘Buy now, pay later’, a maxim of the fast-growing consumer finance phenomenon is leading to the rise of problem borrowing and risk of default.

Why it is important: The frictionless nature of BNPL is its greatest advantage but also creates the potential for debt to spiral due to the theoretically limitless quantity of spending possible.

Problem borrowing in this area (nicknamed “buy now, pain later”) is growing at least twice as fast as the BNPL industry itself. Unlike credit cards that have a preset spending limit, there are no limits on having several overlapping loans from a range of providers. This makes it far more likely that BNPL borrowers will default — either on their BNPL loans themselves, or on other credit. Regulators in the UK and US have recently launched legislative consultations on this largely unregulated area of consumer finance. Klarna, one of the largest players in BNPL, recently struck a deal with hedge fund Elliott to shift £30bn of future loans. A kind of securitisation based on risk transfer, this follows the refinancing trend among other BNPL providers. Both financial and consumer regulators are monitoring the emerging risks of BNPL.

Buy now, pain later — the looming risks of BNPL