When Nigel Morris tells you he’s apprehensive in regards to the economic system, you hear. As business observers know, Morris co-founded Capital One and pioneered lending to subprime debtors, constructing an empire on understanding precisely how a lot monetary stress the common American can deal with. Now, as an early investor in Klarna and different buy-now-pay-later firms like Aplazo in Mexico, he’s watching one thing that makes him deeply uncomfortable.

“To see that persons are utilizing [BNPL services] to purchase one thing as fundamental and basic as groceries,” Morris advised me on stage at Web Summit in Lisbon this week, “I believe is a fairly clear indication that lots of people are struggling.”

The statistics again up his unease. Purchase-now-pay-later companies have exploded to 91.5 million customers in america, in accordance with the monetary companies agency Empower, with 25% utilizing the companies to finance their groceries as of earlier this yr, in accordance with survey data launched in late October by lending market Lending Tree.

These aren’t the discretionary purchases — the designer baggage and newest Apple headphones that BNPL was marketed for initially. Debtors aren’t paying it again, both. In response to Lending Tree, default charges are accelerating: 42% of BNPL customers made at the least one late fee in 2025, up from 39% in 2024 and 34% in 2023.

This isn’t only a client finance story; it’s a canary within the coal mine for all the venture-backed fintech ecosystem and past. It factors to what might develop right into a significant issue — one which echoes what preceded the 2008 mortgage disaster apart from one factor: it’s largely invisible.

Why’s that? As a result of most BNPL loans aren’t reported to credit score bureaus, creating what regulators name “phantom debt.” Meaning different lenders can’t see when somebody has taken out 5 completely different BNPL loans throughout a number of platforms. The credit score system is flying blind.

“In a world the place, if I’m a buy-now-pay-later supplier, and I’m not checking bureau information, I’m not feeding bureau information, I’m oblivious to the truth that Nigel might have taken out 10 of this stuff within the final week,” Morris defined. “[That’s] completely true.”

Storm clouds on the horizon

The numbers which are out there are each ugly and dated. Client Monetary Safety Bureau information revealed in January of this yr — after the company issued market monitoring orders to main BNPL suppliers together with Affirm, Afterpay, and Klarna — confirmed that roughly 63% of debtors originated a number of simultaneous loans sooner or later through the yr, and 33% took out loans from a number of BNPL lenders.

The information additionally revealed that in 2022, one-fifth of customers with a credit score file financed at the least one buy with a BNPL mortgage, up from 17.6% in 2021; about 20% of debtors have been heavy customers originating multiple BNPL mortgage on common every month, a rise from 18% in 2021; and the common variety of new loans originated per borrower elevated from 8.5 to 9.5.

The borrower profile is as regarding: as of 2022, practically two-thirds had decrease credit score scores, with subprime or deep subprime candidates being accredited 78% of the time.

To be clear, BNPL isn’t but a systemic risk. The entire market is measured in tons of of billions, not trillions. However the lack of visibility into this debt — mixed with its focus amongst already-stressed debtors — is value watching way more rigorously.

Certainly, on condition that the economic system is worse now than three years in the past for a lot of subprime populations — significantly in auto lending — these numbers are probably quite a bit increased now.

As for why BNPL information isn’t newer, thank regulatory upheaval. Underneath the Biden administration, the CFPB tried to deal with BNPL transactions like bank card purchases, bringing them beneath Fact in Lending Act protections.

The Trump administration reversed course. In early Could, the CFPB stated it might not prioritize enforcement of that rule. Days later, CFPB performing director Russell T. Vought rescinded 67 interpretive guidelines, coverage statements, and advisory opinions relationship again to 2011, together with the BNPL rule. The company stated the laws offered “little profit to customers” and positioned a “substantial burden” on regulated entities. (Translation: BNPL firms lobbied efficiently.)

In reality, quickly after, the CFPB launched a brand new report with a surprisingly different message. Focusing solely on first-time debtors, the company stated prospects with subprime or no credit score repaid their BNPL loans 98% of the time, and that there was no proof that BNPL entry causes debt stress.

The discrepancy between this rosy image and the 42% late fee price reveals the info hole on the coronary heart of the issue: We at the moment don’t have good visibility into what occurs to debtors over time, particularly these juggling a number of BNPL accounts. The optimistic report checked out first-time customers; the regarding information comes from all the person base.

The state of New York in Could imposed licensing requirements on BNPL firms to fill the void. However state-by-state regulation creates a patchwork that refined monetary firms can simply navigate round.

Requested if he sees parallels between this second and 2008, Morris — who has saved his finger on the heart beat of all issues monetary as a fintech investor for the final 18 years — was cautious to not overstate the comparability.

“So I believe it’s a actual subject,” he stated of the economic system, selecting his phrases intentionally. “If you happen to take a half step again and we have a look at the U.S. client for the time being, and we’ve got plenty of companies which are in and round lending to this client — thus far, so good. Delinquency is just not rising but. Cost-offs should not rising but. However there’s clearly storm clouds on the horizon.”

He pointed to unemployment hitting 4.3%, its highest degree in nearly 4 years. He cited the “tumult round immigration and round tariffs and across the latest authorities shutdown.” Small and medium companies “are very loath to take a position. Individuals have pulled again dramatically within the final 9 months given all that noise.”

Additionally within the combine is the tip of the coed mortgage fee moratorium — “the biggest asset class exterior of mortgage,” Morris famous. Roughly 5.3 million debtors are in default and one other 4.3 million are in late-stage delinquency, in accordance with a September Congressional Research Service analysis.

Morris is cautious to notice that the present state of affairs isn’t but a disaster. “Delinquency is just not rising but. Cost-offs should not rising but,” he acknowledged. However the mixture of things — phantom debt, rising unemployment, the tip of scholar mortgage forbearance, and regulatory rollback — creates circumstances the place issues might speed up rapidly.

The large concern isn’t BNPL debt alone — it’s the cascading results. The Federal Reserve Financial institution of Richmond has warned that BNPL’s potential systemic threat comes from its “spillover effects onto different client credit score merchandise.”

Necessary to grasp is that as a result of BNPL loans are usually smaller than bank card balances or auto loans, debtors are inclined to prioritize holding them present, which implies different, bigger money owed begin to default first. Somebody might need an ideal file on their 4 BNPL accounts whereas their bank card, automobile mortgage, and scholar mortgage all go delinquent.

Client lending takes ‘the mother take a look at’

Morris has lived either side of this equation. He revolutionized subprime lending at Capital One. Then he backed fintech startups making an attempt to disrupt the outdated guard, together with Klarna, which went public earlier this yr and at the moment boasts a $13.5 billion market cap, regardless that it’s barely worthwhile (together with as a result of it absorbs all of the default threat of debtors).

Given these years of insights, I requested him on stage: “The place is the road between catering to and serving to an underbanked inhabitants and enabling folks to dig a gap for themselves? Have these firms crossed it?”

Morris appeared genuinely to wrestle with the query, telling the investor attendees who’d gathered to study from the dialog that it’s a “very, very tough query to reply. I believe that the function of the ethical compass in client lending may be very, crucial.”

He described “the mother take a look at” from his Capital One days: “If this concept was introduced to your mom and she or he known as you up and stated, ‘Son, ought to I take this product?’ And when you can’t unequivocally say, ‘Sure, it’s product,’ you shouldn’t be providing it to the American folks.”

Presumably, Morris wouldn’t put BNPL firms on this camp given his investments. However maybe the remainder of us ought to, at the least whereas laws — or an absence of them — stay what they’re. Take into account that as a result of most BNPL firms don’t report back to credit score bureaus, it not solely makes visibility into them difficult, however it signifies that debtors can’t use profitable compensation to entry lower-cost credit score.

That’s a part of the enterprise mannequin, by the best way. “A few of these buy-now-pay-later firms don’t need that to occur” — which means for his or her prospects to construct up their credit score scores — “as a result of they don’t need the patron to graduate,” Morris stated.

Whereas Morris and I have been discussing these moral questions, the issue is poised to develop a lot greater, with BNPL bleeding into each nook of the monetary system, and the borders between this unregulated type of lending and conventional banking disappearing totally.

Klarna has been working as a licensed financial institution in Europe since 2017. Affirm now has practically 2 million debit cardholders who can finance purchases in bodily shops, bringing invisible installment debt into brick-and-mortar retail. Each firms are built-in into Apple Pay and Google Pay, making BNPL as frictionless as tapping your telephone.

To not be left behind, extra established finance firms are racing towards BNPL now, too. PayPal stated it processed $33 billion in BNPL spending in 2024, rising at 20% yearly. Main banks now let prospects break up purchases after the actual fact. By offers with fee processors like Adyen, JPMorgan Funds, and Stripe, Klarna’s companies now attain tens of millions of retailers mechanically. What began as a distinct segment checkout choice is turning into embedded monetary infrastructure.

Morris sees this shift taking place all over the place. “Once I discuss to a few of these software program firms that are actually embedding funds, lending and insurance coverage,” he advised me, “and also you say, ‘Okay, 5 years from now, the place are you going to make your cash?’” the reply surprises even veteran buyers like him. “They are saying, ‘ what, I believe I’m going to earn more money in embedded finance than I’m in my core software program.’”

Continued Morris: “It begins off as a pleasant little add-on, however when the powers of {the marketplace} drive down the returns within the core enterprise, it’s typically these financing companies which have the best longevity and market energy.”

A second bubble?

The true hazard lies in what’s coming subsequent, which is business-to-business BNPL. The commerce credit score market, the place suppliers lend to firms shopping for their merchandise, represents $4.9 trillion in payables amongst American corporations alone, per information cited by The Economist. That’s 4 occasions bigger than all the U.S. bank card market. And BNPL firms, having conquered client lending, are actually shifting aggressively into this house.

When small companies acquire entry to BNPL, their spending will increase by a median of 40%, in accordance with B2B BNPL suppliers like Hokodo. It sounds nice for commerce till you notice what it means, which is extra debt, accumulating quicker.

Certainly, the debt itself is being packaged and bought at a tempo that ought to alarm anybody who remembers 2008. Elliott Advisors final yr bought Klarna’s $39 billion British loan portfolio. In 2023, KKR agreed to purchase as much as $44 billion in BNPL debt from PayPal. As of June of this yr, Affirm had issued round $12 billion in asset-backed securities.

That is the subprime mortgage playbook taking part in out in actual time: slice up dangerous client debt, promote it to buyers who consider they perceive the chance profile, and create layers of monetary engineering that obscure the place the precise publicity lies. Besides this time, plenty of that underlying debt isn’t being reported to credit score bureaus.

My very own takeaway from my sit-down with Morris — and my analysis main into it — is that we’re watching two potential bubbles proper now, however just one is getting the eye it deserves, at the least in Silicon Valley, actually.

The AI bubble has been dominating headlines in latest weeks, as a rising quantity or folks query the $100 billion information facilities, sky-high valuations, and jaw-dropping enterprise rounds we’re seeing.

The BNPL state of affairs is completely different however no much less value watching. It’s invisible, calmly regulated, and affecting essentially the most susceptible People — which is roughly 40% of them. It’s folks financing their meals in 4 installments and up to date graduates juggling scholar mortgage funds with three completely different BNPL accounts.

The champagne is flowing so freely in sure sectors of the economic system that it makes this very huge drawback simple to miss, however when client debt turns into unsustainable, there’s going to be plenty of ache throughout the board, and VCs and their venture-backed companies shall be amongst these to really feel it.

As Morris watches his BNPL investments from the opposite aspect of the desk, he appears to grasp these warning signs higher than most. He’s not predicting a crash — he’s urging vigilance. The query is whether or not regulators will do something about it earlier than it’s too late.