What: Due to rising interest fees and service charges for ‘Buy Now, Pay Later’ providers, retailers are questioning the profitability of this payment method for smaller purchases.

Why it is important: The pandemic brought a surge in customers to ‘Buy Now, Pay Later’ services, but a challenging mix of rising interest rates, borrowers missing payments, overcrowding of new players and growing calls for regulation threaten the current model.

Many BNPL companies like Klarna have posted significantly lower valuations compared to last year. BNPL companies, Klarna and Affirm both posted values that dropped by around 40 billion USD compared to last year. Last month, the Australian BNPL company Latitude also rescinded its offer to acquire another company’s BNPL business, citing market conditions. BNPL companies are also starting to lay off staff hinting at growing trouble.

BNPL services are most frequently done for fashion and beauty products making sellers take notice. There is reason to believe BNPL purchases pose a great challenge to the industry. As the BNPL companies profit mainly from charging the merchants, smaller transactions are questionable in terms of profit and new client acquisition.

Regulations could also put capital requirements in place, forcing retailers to put clearer disclosures about the consequences of late payments, inform clients about credit risks at the point of checkout or they may add stricter checks to ensure shoppers can afford to make payments.

BNPL isn’t going to disappear, but theories are appearing regarding the direction of its evolution. Fees might go up, new rules could add more friction to the check-out process, and BNPL providers may use it as a tool to lure customers into other purchases and services.

Inflation threatens the ‘Buy Now, Pay Later’ business