The buy-now-pay-later (BNPL) market is experiencing a resurgence, driven by the growth of fintech companies like Affirm and Klarna, which are quickly becoming dominant players in the sector. Despite economic uncertainties, the model is gaining momentum, buoyed by evolving consumer behaviors and favorable financial conditions. As BNPL continues to grow, the question arises: What impact will this have on the broader economy?
Affirm, a U.S.-based BNPL provider, recently signaled a strong future outlook by projecting positive operating income for the fourth quarter of its 2025 fiscal year. Max Levchin, Affirm’s CEO, highlighted that lower interest rates on the horizon are expected to fuel even more user engagement. “The most exciting thing about the reduction in the fed-funds rate is we’ll just have more active users. We’ll have more repeat users because we’ll be able to approve more people,” Levchin said. This optimism is shared by many in the industry, who view interest rate cuts as a potential boost for growth in the BNPL space.
Klarna, a European BNPL giant, also demonstrated promising financial performance by reporting it was “effectively break-even” in the second quarter of 2024. This marked a significant milestone for the privately held company as it prepares for a potential initial public offering (IPO). Gross profit at Klarna grew by 22% year-over-year, a pace faster than its 16% rise in gross merchandise volume (GMV), showing that profitability can be achieved even in a high-interest-rate environment.
Why the Buy-Now-Pay-Later Model Is Gaining Traction
One key reason for BNPL’s growth is its appeal to both consumers and merchants. Consumers prefer the flexibility of splitting payments into manageable installments, while merchants see higher sales conversions when offering BNPL options. According to Michael Linford, CFO of Affirm, partnerships with major retailers like Amazon are just scratching the surface of the BNPL sector’s potential. “Our partnerships are still in the very early innings. As more customers adopt this payment method and move away from traditional credit cards, we expect even more opportunities ahead,” Linford noted.
Indeed, consumers’ desire for alternative financing options has been rising, especially as traditional credit card debt becomes more expensive amid fluctuating interest rates. Affirm’s ability to expand its borrower pool, even to riskier credits, demonstrates the resilience of the BNPL model in varying economic conditions. In its most recent quarter, Affirm reported that revenue as a percentage of gross merchandise volume (GMV) exceeded 9%, a significant rise compared to the 8% range it hovered around for much of the past two years. This uptick indicates that consumers are using the service more frequently and are willing to take on higher transaction costs, driven by the convenience BNPL offers.
The Economic Impact of Buy-Now-Pay-Later
As BNPL services grow, they are becoming an important part of the retail ecosystem, which could positively and negatively affect the broader economy. On the positive side, BNPL encourages consumer spending, which drives retail sales and boosts merchant revenues. This is particularly important at a time when traditional consumer confidence metrics have been fluctuating due to inflation concerns. By making purchases more accessible, BNPL can play a stabilizing role in the retail sector.
However, some economists warn that increased BNPL usage could lead to rising consumer debt levels. While BNPL services are seen as a more transparent and interest-free alternative to credit cards, late payments and delinquencies are rising in the sector. Affirm recently reported that 2.4% of its monthly U.S. installment loans were delinquent by 30 days or more, an increase from 2.1% the year prior. Though this rise is marginal, it raises concerns about the long-term financial health of consumers, especially in the event of an economic downturn.
“A hard economic landing would, of course, rewrite the script not just for buy-now-pay-later providers but for all kinds of lenders,” says an analyst at Bank of America. The concern is that if economic conditions worsen, defaults on BNPL loans could spike, leading to financial stress for both providers and borrowers.
Interest Rate Cuts: A Boon for the BNPL Sector?
With the Federal Reserve signaling possible interest rate cuts, BNPL companies like Affirm and Klarna are well-positioned to benefit. Reduced rates will lower funding costs for these firms, allowing them to offer more favorable terms to consumers while still maintaining profitability. Affirm’s recent move to increase its APR cap to 36%, up from 30%, is expected to drive GMV growth and boost yields. As Bank of America analysts pointed out, “Rate cuts would be beneficial to Affirm’s funding costs and for gains on loan sales. The higher APR cap should remain a tailwind for yields and GMV growth.”
This aligns with Affirm’s projections for future growth. The company expects GMV to increase from under $27 billion in 2024 to more than $33.5 billion in 2025, representing a growth rate of 26% or better. If interest rates decline as expected, BNPL services could see even more substantial gains, as higher borrowing limits would make the service available to a larger customer base.
The Future of Buy-Now-Pay-Later
While buy-now-pay-later has experienced significant growth, its future hinges on how well the sector can navigate changing economic conditions. Profitability remains a key milestone for investors, but growth at scale is what will ultimately drive the industry forward. As Mizuho analysts noted, “Affirm’s prospect of turning GAAP operating income-positive will be a major milestone, and partnerships like its upcoming one with Apple Pay will add even more to its total addressable market.”
In a time of economic uncertainty, BNPL services could become a lifeline for consumers seeking flexible payment options. However, there are still challenges ahead. Should the economy face further downturns, late payments and delinquencies could become a larger issue, potentially undermining the sector’s growth. But in a soft-landing scenario, BNPL providers could continue to thrive, bolstered by strong consumer demand and favorable interest rates.
For now, the buy-now-pay-later model appears to be on an upswing, reshaping the way consumers pay for goods and services. As Max Levchin succinctly put it, “We’re really firing on all cylinders.” Whether BNPL can sustain its momentum in the face of economic headwinds remains to be seen, but one thing is clear: the sector is here to stay, and it’s poised to play a growing role in the global economy.
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