What Happened to Buy Now Pay Later (BNPL)?

Buy Now Pay Later (BNPL) emerged in the early 2000s with services like PayPal Credit, but gained widespread popularity in the mid-2010s through fintech companies such as Klarna, Affirm, and Afterpay. This innovative payment model allows consumers to split purchases into smaller, often interest-free, installments, providing a flexible alternative to traditional credit cards. The convenience and ease of access, particularly at online checkouts, fueled a period of 'hyper-growth' during the COVID-19 pandemic, as e-commerce surged and consumers sought new ways to manage their finances.

However, this rapid expansion also brought increasing scrutiny from regulators and consumer advocates. Concerns mounted regarding potential consumer over-indebtedness, lack of transparency in terms, and the absence of robust affordability checks, especially as a significant portion of BNPL users fell into subprime or near-subprime categories. By 2024-2025, while the market continued to grow, the explosive growth rate began to level off, signaling a shift towards a more mature phase.

The regulatory landscape has significantly evolved in 2025 and 2026. In the UK, the Financial Conduct Authority (FCA) introduced a new regime for deferred payment credit (DPC), which came into full force on July 15, 2026. These regulations require BNPL providers to obtain FCA authorization, conduct proportionate affordability assessments, offer clear disclosures, and provide access to the Financial Ombudsman Service for complaints. Similarly, the European Union's Directive (EU) 2023/2225 (DCC2), effective November 20, 2026, will broaden the scope of consumer credit to include all installment payments, regardless of duration or amount, subjecting BNPL to associated legal obligations. In the United States, states like Illinois have also enacted comprehensive BNPL Loan Consumer Protection Acts, establishing licensing frameworks and consumer protection requirements, effective January 1, 2028.

Amidst these regulatory changes, BNPL providers are facing profitability pressures from rising funding costs, increased competition, and credit losses. While official default rates remain relatively low (around 1.8%-2%), self-reported late payment rates have climbed significantly, reaching 47% of users in 2026, up from 34% in 2024. This indicates widespread short-term cash flow pressure among users and highlights the challenges in balancing growth with responsible lending. Major players are adapting; Klarna, for instance, reported strong Q1 2026 results, showing profitability, and is pursuing a U.S. bank charter to diversify its revenue streams beyond traditional BNPL services.

As of August 2026, the BNPL market is characterized by continued user adoption and market expansion, but with a strong emphasis on compliance and risk management. The global BNPL market reached approximately $560.1 billion in Gross Merchandise Volume (GMV) in 2025, with projections for continued growth. Companies like Block (Afterpay) are expanding their BNPL offerings, integrating them more deeply into their ecosystems like Cash App. Affirm is also actively expanding partnerships and preparing to announce its Q4 fiscal year 2026 results. The industry is navigating a complex environment where balancing consumer demand for flexible payments with robust regulatory frameworks and sustainable business models is paramount.