The rise of “Buy Now Pay Later” (BNPL) services reflects a change in consumer behavior among young generations who are wary of credit cards. Klarna, a Swedish fintech company, is leading this charge.
What is BNPL
Klarna, Afterpay, and Affirm are all major BNPL services that offer payment processing services for the e-commerce industry. These programs offer interest-free instalments, typically over four equal periods. They are similar to old layaway programs found at stores like Sears, where you could place a deposit, and the store would reserve the items until you paid it off. These programs became less popular as credit cards modernized, but reemerged with the rise of e-commerce and digital-first finance.
Size of Market/Rise in Popularity
The BNPL industry is experiencing rapid expansion. The global market is projected to reach $560.1B by 2025, growing at an annual rate of 13.7%. From 2021 to 2024, the market achieved a 21.7% CAGR, much due to initial excitement, yet it’s forecasted to grow at 10.2% annually through 2030, reaching an estimated $911.8 B.
Several trends fueled this growth:
A shift from a cash-based society to a finance-driven one
Social media-driven consumption, where influencers and trends accelerate spending habits
Decreasing financial literacy among young adults
Concern for Consumers
Non-mortgage consumer debt has totaled $4.73 trillion, enough to purchase every single professional sports league in America. While roughly 2/3 is attributable to auto loans and student loans, that leaves behind $1.57 trillion in other debt.
BNPL services may seem harmless with their interest-free payments, yet they come with a set of psychological traps that encourage overspending.
Smaller, consistent payments seem more manageable, raising overall willingness to pay
Gratification is much higher from an immediate purchase, compared to saving up
BNPL sites create a false sense of urgency through limited-time offers
While the financial structure seems consumer-friendly, the behavioral design is optimized to drive higher conversion rates and checkout at the cost of financial well-being.
Concern for Klarna
Klarna and its peers face significant structural and financial risks. While BNPL offers instant approval and ease of use, it also contributes to loan stacking, where borrowers take on multiple loans across different platforms. 63% of BNPL users hold more than one active loan, and 69% already have existing debt, such as credit card balances. This is because, unlike credit cards, which require an application, credit check, and interest payments, BNPL makes it easier to accumulate debt quickly.
Klarna has felt pressure on missed payments, reporting $136 million in consumer credit losses, 17% higher than Q1 2024. While revenue rose by 15% to $701 million in Q1, they are facing 41% of users who struggle to repay on time, up from 34% the previous year. This looks concerning, yet Klarna is not alarmed, as unpaid balances represent 0.54% of total lending. The assurances don’t seem too strong as Klarna postponed its $15B IPO into late 2025.
Further risk comes from overly high confidence. Brands pay BNPL providers a higher fee than traditional credit cards (often double the 1–3% rate). The model is sustained through merchant fees, late payment charges (2–25%), and selling bundled consumer loans to banks. These loan packages slightly resemble Mortgage-Backed Securities from the 2007-2008 financial crisis, raising concerns of overexposure and systemic risk if consumers don’t have the ability to pay. While this scenario is extremely scaled down, it is very similar in the fact they are offering extreme financing options, to anyone.