When headlines compare Buy Now, Pay Later (BNPL) schemes to the risky lending practices of the pre-2008 era, the question is whether this growing phenomenon could trigger something similar to the subprime mortgage crisis. The parallels are tempting: easy credit, rapid growth, and a youthful borrower base often living on tight budgets. But industry experts urge caution before drawing such conclusions.
“BNPL is not the new subprime,” said Piyush Dubey, Partner at Kearney Middle East & Africa’s Financial Services Practice. He pointed out that the structure of these loans, short-dated, frequently autopaid and modest in ticket size, differs fundamentally from long-dated, high-risk mortgage lending. “Loss dynamics and duration differ: credit-card charge-offs hover near ~4%, while recent Affirm cohorts track toward ~3.5% ultimate net charge-offs and Klarna’s 2023 consumer-credit losses were 0.38% of GMV,” he explained, highlighting how exposure remains contained.
His colleague, Vagan Esaian, Associate at Kearney, added that the real risk lies in what we cannot see. “The genuine watchpoint is opacity across lenders and loan-stacking by heavy users, which can mask stress even when headline losses look benign,” he stressed. In other words, while defaults may look low on the surface, multiple commitments spread across platforms could create hidden vulnerabilities.
A cultural shift in liquidity
Beyond the systemic question, BNPL is changing how Gen Z approaches liquidity. Many commentators see the surge of instalment-based festival ticket purchases, such as the 60% of Coachella attendees opting for BNPL, as evidence of financial distress. Esaian disagrees. “Coachella’s ‘BNPL’ reflects Gen Z’s evolving liquidity culture rather than distress,” he explained. The plan is structured as prepaid installments (a flat ~$41 fee, no interest, paid off before the festival) – closer to layaway than debt.”
Dubey noted that this trend mirrors what he calls a “treat culture,” where young consumers indulge in frequent small luxuries like subscriptions, coffees or event tickets. “These patterns show a preference for smoothing cash flow and celebrating micro-moments, not necessarily over-extension,” he said. But he warned that Gen Z’s thinner financial buffers mean the danger lies in stacking such commitments, which over time can constrain budgets.
This is borne out in research. Surveys in the UK found that while most adults had no BNPL debt at all, around 22% of users had missed at least one repayment in late 2023. At the same time, US BNPL purchases surged to $82.4 billion in 2024, up almost 10% year on year, highlighting the model’s popularity even as questions remain about sustainability.
Short-dated loans
Supporters of BNPL argue that short maturities insulate both lenders and borrowers. “Short-dated, low-ticket BNPL does offer insulation: the typical pay-in-four loan is fully repaid within six weeks, with a median ticket around $108,” Dubey explained. The statistics back this up; even deep subprime borrowers repaid 96% of BNPL loans and defaults remained well below those on credit cards.
Yet Esaian pointed to user behaviour as a critical watch point. “Roughly 63% held multiple simultaneous BNPL loans in 2021-22, with one-third spread across different firms,” he noted. That stacking, he argued, can distort the picture, making cohorts appear stable while pockets of stress build under the surface, especially in discretionary categories like concerts or lifestyle purchases.
Normalising debt or redefining spending?
With housing affordability low, employment precarious and living costs rising, some economists see Gen Z’s embrace of BNPL as troubling. But Dubey encouraged a broader view. “Gen Z’s use of BNPL for discretionary purchases must be read in context,” he said. “This cohort, about a quarter of the global population with fast-growing spending power, operates with a ‘treat culture’ of small, frequent rewards. Rising housing costs and precarious jobs thin their buffers, but BNPL’s short-dated, autopaid design makes it more a liquidity tool than a debt trap.”
Esaian added a cultural perspective: “As with many innovations, the pattern is often perceived as critical, yet it may simply mark a new age of financial behavior. Businesses and economies should adapt accordingly.” To illustrate the generational lens, he even cited popular culture: “As the famous Dave Chappelle meme says—‘modern problems require modern solutions’.”
Business models and valuations under pressure
For BNPL providers, the real pressure emerges not from culture but from economics. “Valuations are most exposed when defaults rise and funding reprices, because BNPL unit economics hinge on merchant fees minus credit losses and funding costs,” Dubey observed. He explained that when losses rise and merchant fees compress, profitability comes under stress. Yet providers are not passive. “They tighten underwriting by segment, reprice merchant and consumer terms, and manage to contribution targets,” he said, noting that Affirm had explicitly restored margins through such actions.
Esaian highlighted the importance of funding diversification. “They also hedge through diversified funding, warehouse lines, programmatic securitisations and forward-flow sales, to transfer risk and preserve capacity,” he explained. He warned, however, that discretionary verticals like events and lifestyle, where there is no collateral, will feel volatility first. But he emphasised the advantage of short durations. “Rapid throttling allows losses to be contained before they spiral.”
The regulatory pivot
BNPL’s expansion has drawn regulators’ attention. Across the US, Europe and the GCC, oversight is tightening, with a focus on consumer protection and affordability checks. “Regulatory tightening is already proactive,” Dubey noted. The US has extended credit-card protections to pay-in-four loans, while the EU’s new Consumer Credit Directive explicitly brings BNPL into scope. The UK will introduce a full regime by 2026.”
Esaian added that the Gulf states are already ahead. “In the GCC, the UAE and Saudi Arabia already license BNPL as short-term credit, requiring either direct authorisation or partnerships with banks,” he said. Australia is also bringing BNPL under its Credit Act. These moves, he noted, are intended to ensure disclosure, affordability checks and stronger dispute rights, signalling BNPL’s entry into mainstream regulated finance.
How much does BNPL add to household leverage?
For now, BNPL remains a marginal share of overall household debt. Esaian explained: “BNPL’s macro footprint remains modest: obligations are short-dated, often autopaid, and small relative to total household credit. In the UK, 86% of adults had no outstanding unregulated BNPL debt in May 2024; only 2% had GBP 500+ outstanding, suggesting limited aggregate leverage.”
Yet he stressed the significance for younger borrowers. “For Gen Z, however, the effect is more material: in months they borrow, BNPL accounts for roughly 28% of their unsecured balances, tightening near-term cash flow.” Dubey reinforced this point, noting that while BNPL does not yet threaten systemic stability, it can act as a near-term drag on spending growth if obligations accumulate across platforms.
Stress scenarios and economic shocks
What happens if economic conditions worsen? Dubey warned that BNPL is sensitive to employment shocks. “A 1–2 percentage points rise in unemployment would hit BNPL quickly, but not uniformly. Due to the nature of the loans, losses tend to spike early and then burn off as cohorts roll.”
Esaian emphasised that lenders have levers to pull. “They can tighten approvals by segment within days, lower limits, shift volume away from discretionary merchants, reprice merchant fees and use forward-flow or ssecuritisation to transfer risk,” he said. However, he stressed that funding costs rise immediately when warehouse lines and ABS spreads reprice, compressing already thin margins. For him, the main risk is not contagion but sharp, temporary shocks to lender profitability.
BNPL is evolving from novelty to mainstream, embraced by millions of young consumers who prize its flexibility. With global BNPL transactions projected to exceed $560 billion by 2025 and possibly $900 billion by 2030, the scale is undeniable. Defaults remain low relative to credit cards, repayment rates are high, and regulatory oversight is tightening before cracks become systemic.
The bigger story is cultural. As Dubey put it, “These patterns show a preference for smoothing cash flow and celebrating micro-moments, not necessarily over-extension.” Esaian, meanwhile, stressed that the real test will be managing accumulation and ensuring transparency. “The genuine watchpoint is opacity across lenders and loan-stacking by heavy users.”
Could BNPL become the next subprime? The answer, for now, is no. But as with all fast-growing financial tools, the key lies in vigilance, understanding the culture driving demand, ensuring regulation keeps pace, and recognising the risks before they compound.
