When Nigel Morris says he’s concerned about the economy, it’s worth paying attention. As those in the know are aware, Morris co-created Capital One and was a pioneer in lending to borrowers with less than ideal credit, building a vast enterprise on a detailed knowledge of how much financial pressure the average American can withstand. Now, as an early backer of Klarna and other buy-now-pay-later firms such as Aplazo in Mexico, he’s observing a trend that’s causing him significant worry.
“Seeing that people are leveraging [BNPL services] to purchase items as essential and basic as food,” Morris stated during a Web Summit panel in Lisbon this week, “I believe that’s a very clear sign that numerous individuals are struggling financially.”
Statistics are validating his concerns. Buy-now-pay-later options have surged to encompass 91.5 million users in the U.S., according to data from the financial services company Empower, with 25% utilizing these services to pay for their groceries, as per survey results published in late October by the Lending Tree lending marketplace.
These aren’t the optional purchases — the luxury handbags and the latest Apple devices that BNPL was originally intended for. Moreover, borrowers are failing to repay. Lending Tree’s data shows that default rates are climbing: 42% of BNPL users had at least one late payment in 2025, a rise from 39% in 2024 and 34% in 2023.
This is bigger than just a consumer finance issue; it’s an early warning signal for the wider venture-backed fintech sector and beyond. It indicates a potentially serious issue — one that mirrors the lead-up to the 2008 mortgage crisis, with one key difference: it’s largely hidden.
Why the obscurity? Because the vast majority of BNPL loans don’t get reported to credit agencies, resulting in what regulators are calling “phantom debt.” That implies that other lenders have no visibility into a situation where an individual has secured five separate BNPL loans across numerous platforms. The credit system is operating without crucial information.
“In a scenario where a buy-now-pay-later provider isn’t checking data from credit bureaus, nor are they providing data to credit bureaus, they’re unaware that Nigel might have taken out 10 of these arrangements recently,” Morris pointed out. “[That’s] absolutely correct.”
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Dark clouds gathering
The available numbers paint a grim, albeit somewhat outdated, picture. Data from the Consumer Financial Protection Bureau released in January of this year — subsequent to the agency issuing market monitoring orders to leading BNPL providers like Affirm, Afterpay, and Klarna — revealed that around 63% of borrowers took out multiple simultaneous loans at some point during the year, and 33% borrowed from more than one BNPL lender.
The data also indicated that in 2022, one in five consumers with a credit history used a BNPL loan for at least one purchase, a jump from 17.6% in 2021; approximately 20% of borrowers were frequent users, originating more than one BNPL loan per month on average, up from 18% in 2021; and the average count of new loans created per borrower increased from 8.5 to 9.5.
The borrower profile is also cause for concern: as of 2022, nearly two-thirds had lower credit scores, with subprime or deep subprime applicants getting approved 78% of the time.
To clarify, BNPL isn’t yet a systemic threat. The entire market is quantified in the hundreds of billions, not trillions. Nevertheless, the lack of transparency surrounding this debt — coupled with its prevalence among borrowers who are already struggling — deserves closer attention.
Indeed, given that the economy is in worse shape for numerous subprime individuals now compared to three years ago — especially in auto lending — these statistics are likely significantly higher today.
The reason for the dated BNPL data stems from regulatory uncertainty. Under the Biden administration, the CFPB sought to classify BNPL transactions similarly to credit card transactions, thereby extending Truth in Lending Act safeguards to them.
The Trump administration changed course. In early May, the CFPB announced it wouldn’t prioritize enforcing that rule. Shortly after, CFPB acting director Russell T. Vought withdrew 67 interpretive rules, policy statements, and advisory opinions dating back to 2011, including the BNPL rule. The agency asserted that the regulations offered “little benefit to consumers” while imposing a “substantial burden” on regulated businesses. (In other words: BNPL companies successfully lobbied against it.)
Soon after, the CFPB issued a fresh report with a strikingly different viewpoint. The agency focused solely on first-time borrowers, stating that customers with subprime or no credit repaid their BNPL loans 98% of the time, and that there was no evidence that BNPL access leads to debt issues.
The difference between this positive depiction and the 42% late payment rate reveals the data gap at the core of the issue: Currently, we lack clear insights into the long-term impact on borrowers, especially those managing multiple BNPL accounts. The optimistic report considered first-time users; the worrisome data comes from the whole user base.
In May, the state of New York introduced licensing requirements for BNPL companies to address this gap. However, state-by-state regulation results in a fragmented landscape that sophisticated financial entities can easily maneuver around.
When asked if he identified parallels between the current situation and 2008, Morris — who, as a fintech investor for the past 18 years, has maintained a keen awareness of financial matters — was careful not to exaggerate the comparison.
“I believe it’s a legitimate concern,” he remarked about the economy, carefully choosing his words. “If we step back a bit and examine the U.S. consumer at present, and consider the various businesses involved in lending to this consumer — so far, so good. Delinquency isn’t rising yet. Charge-offs aren’t rising yet. Nonetheless, dark clouds are certainly on the horizon.”
He mentioned unemployment reaching 4.3%, the highest in nearly four years. He noted the “turmoil surrounding immigration, tariffs, and the recent government shutdown.” Small and medium-sized businesses “are extremely reluctant to invest. Individuals have significantly reduced their spending in the last nine months due to all the uncertainty.”
Also contributing is the end of the student loan payment pause — “the largest asset class besides mortgages,” Morris pointed out. As per a September analysis by the Congressional Research Service, roughly 5.3 million borrowers are in default, and another 4.3 million are in late-stage delinquency.
Morris emphasizes that the current scenario isn’t yet a crisis. “Delinquency isn’t rising yet. Charge-offs aren’t rising yet,” he admitted. However, the confluence of factors — hidden debt, growing unemployment, the end of student loan forbearance, and regulatory rollbacks — sets the stage for potential rapid escalation of issues.
The primary concern isn’t solely BNPL debt; it’s the domino effect. The Federal Reserve Bank of Richmond has cautioned that BNPL’s potential systemic risk arises from its “spillover effects on other consumer credit products.”
A crucial point is that, as BNPL loans are generally smaller than credit card balances or auto loans, borrowers tend to prioritize keeping them current, which results in defaults on other, larger debts first. A person might maintain a perfect record on their four BNPL accounts while their credit card, car loan, and student loan all become delinquent.
Applying ‘the mom test’ to consumer lending
Morris has experienced both aspects of this situation. At Capital One, he transformed subprime lending. Later, he supported fintech startups aiming to disrupt the established order, including Klarna, which went public earlier this year and now boasts a $13.5 billion market cap, despite barely achieving profitability (partly because it bears all the default risk of borrowers).
Given his years of experience, I asked him on stage: “Where do you draw the line between catering to and supporting an underbanked community versus enabling individuals to create financial problems for themselves? Have these companies crossed that boundary?”
Morris appeared to genuinely grapple with the question, informing the investor attendees who had gathered to learn from the discussion that it’s a “very, very difficult question to answer. I believe that the presence of a moral compass is extremely important in consumer lending.”
He described “the mom test” from his Capital One days: “If you were to present this idea to your mother, and she called you and asked, ‘Son, should I use this product?’ And if you couldn’t wholeheartedly answer, ‘Yes, it’s a good product,’ you shouldn’t offer it to the American public.”
Presumably, Morris wouldn’t place BNPL companies in this category, given his investments. However, perhaps the rest of us should, particularly while the regulations — or the lack thereof — remain as they are. Bear in mind that because most BNPL companies don’t report to credit agencies, it not only complicates visibility into them but also prevents borrowers from leveraging successful repayment to gain access to lower-cost credit.
That’s part of the business model, incidentally. “Some of these buy-now-pay-later companies don’t want that to happen” — they don’t want their customers to improve their credit scores — “because they don’t want the consumer to graduate,” Morris explained.
While Morris and I were debating these ethical concerns, the problem is poised to escalate significantly, with BNPL permeating every aspect of the financial system, and the boundaries between this unregulated lending type and traditional banking vanishing entirely.
Klarna has been operating as a licensed bank in Europe since 2017. Affirm now has almost 2 million debit cardholders who can finance purchases in physical stores, introducing invisible installment debt into brick-and-mortar retail. Both companies are integrated into Apple Pay and Google Pay, making BNPL as seamless as tapping your phone.
Not wanting to be outdone, more established finance firms are now rapidly moving towards BNPL as well. PayPal reported processing $33 billion in BNPL spending in 2024, with annual growth of 20%. Major banks now provide customers with the option to split purchases after they’ve been made. Through agreements with payment processors such as Adyen, JPMorgan Payments, and Stripe, Klarna’s services now automatically reach millions of merchants. What began as a niche checkout option is evolving into fundamental financial infrastructure.
Morris sees this trend happening universally. “When I speak with software companies that are now incorporating payments, lending, and insurance,” he told me, “and I ask, ‘Okay, where do you anticipate generating your revenue five years from now?'” the answer even surprises seasoned investors like him. “They say, ‘You know, I think I’m going to earn more from embedded finance than from my core software.'”
Morris continued: “It starts as a simple add-on, but when market forces reduce returns in the primary business, these financing businesses often demonstrate the greatest durability and market power.”
A possible second bubble?
The true threat lies in what’s coming next: business-to-business BNPL. The trade credit market, where suppliers extend credit to businesses purchasing their goods, accounts for $4.9 trillion in payables among U.S. firms alone, according to data reported by The Economist. That figure is four times larger than the entire U.S. credit card market. And BNPL companies, having dominated consumer lending, are now aggressively entering this area.
When small businesses secure access to BNPL, their spending increases by an average of 40%, as reported by B2B BNPL providers such as Hokodo. This sounds positive for commerce until you realize the implications: more debt, accumulating more rapidly.
Indeed, the debt itself is being packaged and sold at a rate that should concern anyone who recalls 2008. Last year, Elliott Advisors acquired Klarna’s $39 billion British loan portfolio. In 2023, KKR agreed to purchase up to $44 billion in BNPL debt from PayPal. As of June of this year, Affirm had issued about $12 billion in asset-backed securities.
This is a replay of the subprime mortgage playbook in real-time: break down risky consumer debt, sell it to investors who believe they comprehend the risk involved, and build financial engineering structures that obscure the location of the actual exposure. Except that, this time, much of the underlying debt isn’t being reported to credit bureaus.
My main takeaway from my conversation with Morris — and my research beforehand — is that we’re observing two potential bubbles at the moment, but only one is receiving the attention it deserves, especially in Silicon Valley.
The AI bubble has been prominent in recent headlines, with an increasing number of individuals questioning the $100 billion data centers, inflated valuations, and remarkable venture rounds that we’re seeing.
The BNPL situation is different yet equally concerning. It’s hidden, lightly regulated, and impacting the most vulnerable Americans — approximately 40% of them. These are individuals paying for their groceries in four installments and recent graduates juggling student loan payments alongside three separate BNPL accounts.
The exuberance is so widespread in particular sectors of the economy that it’s easy to overlook this significant issue, but when consumer debt becomes unsustainable, it will cause widespread pain, affecting VCs and their venture-backed businesses as well.
As Morris observes his BNPL investments from a new perspective, he appears to grasp these warning signs more clearly than most. He isn’t predicting a collapse — he’s advocating vigilance. The question is whether regulators will take action before it’s too late.
