BNPL: Four Years of Growth
From Curiosity to Comfort

Abstract: Buy Now, Pay Later (BNPL) has advanced from retail novelty to a serious component of consumer finance. Its rise is driven by two dominant models: merchant-subsidised “Pay-in-4” loans and longer, interest-bearing instalments. Properly run, they offer clarity and access to credit while boosting merchants’ sales and providing investors with steady returns. Poorly governed, they risk encouraging over-spending and destabilising thinly capitalised providers. With clearer regulation and reporting, BNPL is poised to settle into the financial mainstream.

Back on December 15th, 2021, at RetailX in Chicago, I was invited to moderate a fireside chat with two rising stars of digital finance: Chris Faught, Vice-President of Omnichannel at Affirm, and Lindy Crea, Head of U.S. Partnerships at Klarna. The room buzzed with curiosity. The pandemic was about to push e-commerce into overdrive, and these firms promised to remake checkout credit. Their models seemed elegant: short instalments with no interest, or longer loans disclosed in plain language.

Even then, the questions were clear: could BNPL keep defaults low, fund its growth, and avoid the traps that had ensnared earlier waves of consumer finance? The CLA published a FAQ debunking some of the misunderstanding among the media. BNPL myth debunking

Three years on, those queries remain relevant. What is BNPL:

BNPL is an old idea—instalment finance—reborn in mobile form. Two structures account for nearly all activity.

• Merchant-subsidised, zero-interest “Pay-in-4”: A shopper buying a $100 pair of trainers can split payment into four $25 tranches, settled over six to eight weeks. The BNPL firm pays the merchant up front—perhaps $96–98—retaining the balance as a merchant discount fee. Retailers tolerate this because sales conversion and basket size rise sharply when BNPL is offered. Short tenor and granular underwriting keep losses modest.
• Interest-bearing instalments: For furniture, bicycles or electronics, customers may stretch payments across three to 36 months at a fixed APR. Merchants sometimes “buy down” the rate to zero; otherwise the customer pays interest. These loans, financed through warehouse lines or securitisation, behave like prime instalment credit dressed in digital ease. Max Levchin of Affirm recalls building a system for people “with no financial footprint”, refusing late-fee income and underwriting each purchase individually. If the algorithm judges a transaction unaffordable, the answer is simply “no”.

7% –> 26%

The appeal of BNPL is behavioural: the psychology of the till. Research shows that when instalments are available, purchase likelihood rises from 17% to 26% and basket value by about 10%. For retailers, this is worth paying for; for buyers, it is a lifestyle convenience that is for most a fraction of the cost of a traditional card.

Millennials and Gen-Z dominate uptake. Many lack lengthy credit histories and find fixed repayment dates less menacing than revolving card balances. Where providers report data to credit bureaux, punctual payers gain a record that cards alone might deny them.

Cards vs. BNPL

BNPL trims complexity but is not a substitute for cards’ ubiquity or their mature dispute regimes.

Wall (Bay) Streets Interest

The asset side is quietly robust. KKR and others have acquired billions in receivables. Portfolios provide unusually rich data, purchase types, return habits, payment methods—while losses remain better than most prime consumer credit. Investor scrutiny discourages providers from gambling on late-fee revenue or loose lending.

For several years, Buy Now, Pay Later operated in a regulatory twilight. Because the loans were small and short-term, they often escaped the consumer-credit laws that govern credit cards and personal loans. That freedom helped the sector grow quickly but left gaps in oversight: disclosures were inconsistent, late fees were sometimes opaque, and lenders did not always assess whether borrowers could afford to take on extra debt.

Some governments are closing those gaps and pulling BNPL into the mainstream of financial regulation. Singapore has introduced a code of practice requiring providers to present terms in plain language, advertise responsibly, and limit repeat borrowing by customers who fall behind. In Britain, the Treasury and the Financial Conduct Authority are preparing rules that would bring BNPL formally under consumer-credit law. These will oblige lenders to check affordability, share repayment data with credit bureaux, and give users clearer rights in the event of disputes or refunds.

The recent boom in Buy Now, Pay Later has been helped by a decade of strong consumer spending and unusually cheap capital. Its most popular product, the short “Pay-in-4” loan, is relatively insulated from deep losses because the sums are small and repayment comes due within a few weeks. If the economy slows, merchants may originate fewer loans, but the risk of a wave of unpaid debts is limited. Longer instalment plans, which stretch over several months or years, are more exposed to rising interest rates and job losses: customers could struggle if incomes fall. Even so, fixed repayment schedules make these debts easier to manage than revolving balances. The sector’s real weak spot is business rather than household: firms that rely on generous promotional subsidies or unstable sources of funding may find their economics unravel when money becomes scarcer.

In Canada, buy-now-pay-later remains only lightly regulated. The Financial Consumer Agency of Canada (FCAC) has issued guidance explaining how these products work and warning of risks such as unclear fees and over-borrowing. Provinces apply existing consumer-credit statutes, with Québec in particular policing advertising and disclosure. For now, providers operate under a patchwork of rules rather than a bespoke regime, and credit-reporting remains voluntary and inconsistent. The emphasis is still on education and monitoring rather than wholesale regulation. This is wise with a nascent service.

It is History

Max Levchin, the CEO of Affirm has argued that most BNPL customers would benefit if their on-time payments were visible on their credit files, helping them build a positive history. Providers that hesitate to share data, he suggests, may be reluctant because a large part of their revenue comes from arrears fees, income that could shrink if customers were screened more carefully and rewarded for punctual repayment.

BNPL is no longer a curiosity. Properly run, its two engines can modernise instalment lending, help the credit-invisible, and give merchants a measurable sales lever. But its future depends on four disciplines:

1. Transparent pricing and no “gotchas”.
2. Proportionate affordability checks, especially when loans stack.
3. Integration with credit bureaux, rewarding timely payers and warning against overreach.
4. Sound, diversified funding.

If these rules hold, the “fireside” finance I discussed in Chicago has graduated from experiment to a stable fixture of modern credit.

Five Key Points

1. BNPL’s surge is powered by two models: merchant-funded Pay-in-4 and longer, interest-bearing instalments.
2. Behavioural lift is central: splitting payments reduces friction and lifts sales.
3. Investor appetite enforces prudence: securitised portfolios reward low-loss lending.
4. Comparing with cards shows complementarity: BNPL offers clarity; cards offer reach and rewards.
5. Rigour will define success: transparency, affordability, data-sharing and solid funding are essential for BNPL’s future.