- US BNPL sales—the total value of BNPL purchases—are expected to grow an average of 17.4% from $75.60 billion in 2022 to $143.44 billion in 2026.
- Funding challenges, increasing competition, and a pending recession, however, are threatening profitability for both BNPL providers and retailers.
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Over the last four years, buy now, pay later (BNPL) has taken off in the US. Drawing widespread adoption with a unique ease and flexibility that blends the benefits of credit, short repayment terms, and app-based shopping, BNPL rose to success during the pandemic as consumers with tighter wallets looked for alternative funding methods. Consumers flocked to major installment loan providers Klarna, Afterpay, and Affirm, catching the attention of Big Tech companies looking to siphon customers and dollars.
Escalating competition, however, is only the beginning of BNPL’s ongoing challenges. Recent market volatility and regulatory criticism has decimated valuations, made funding scarce, and increased pressure from investors to show profits—all while the added prospect of a recession continues to threaten growth.
The current landscape is undoubtedly rocky, but staying informed can help retailers and providers minimize risk. Here, we explore the short- and long-term issues impacting the BNPL market, offering analysis and data to help navigate this era of uncertainty.
Investor funding in financial services is more expensive
In 2021, global fintech funding smashed records, more than doubling to reach $131.5 billion—that’s over one in every five venture capital dollars. The Pay in 4 model—payment plans made up of four interest-free installments—caught investor attention, as providers snapped up customers at an even faster rate than did other strong fintech categories, such as neobanking and crypto.
Today, however, the tides have turned. Funding has dried up, and many fintechs that IPO’d in 2021 have seen their valuations halved, or worse—and BNPL businesses were not immune. As of June 21, Klarna’s valuation has fallen by roughly two-thirds from last year, and Affirm’s stock price has fallen more than 88% from its November 2021 high. Investor confidence and market sentiment isn’t likely to improve in the short term, so fintechs need to brace themselves for a leaner and meaner second half in which new capital is harder to come by.
Competition in the BNPL industry is heating up
Growth in BNPL payment value will continue in the double digits through to 2026, albeit without the dramatic spike it saw this year. In fact, Insider Intelligence estimates that over $142 billion will be transacted on BNPL platforms in 2026 by over 104.6 million US consumers.
More than half of that share of US BNPL users is expected to be Gen Z—a crucial market that fintechs and Big Tech companies have their sights set on. Gen Zers are flocking to BNPL to avoid paying credit card interest, to make payments that otherwise wouldn’t fit in their budgets, to borrow money without a credit check, and because they don’t like using credit cards, according to The Motley Fool.
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This growth has led to more entrants to the BNPL industry, including established players such as Block, PayPal, and Apple. With an already extensive customer base and a wide product offering, these entrants pose a mounting threat to BNPL providers that rely solely on Pay in 4 no-card loans. On top of that, providers are also contending with the growing number of BNPL upstarts, many of which are segment-specific—like Uplift or Walnut—or promise more transparency.
As the BNPL industry saturates with increasing competition, incumbents are forced to diversify their revenue drivers. Affirm, for example, offers both Pay in 4 and short-term financing, going toe-to-toe with Apple—and more providers are adding debit cards, which can be used in-store. BNPL providers touting the most widely used shopping apps can also lean into revenues generated by millions of marketing leads.
A looming recession could disrupt BNPL profitability
Recession fallout will taper the BNPL growth curve, making it harder for some providers to reach the scale required for profitability. If consumers pull back from spending, it could negatively affect BNPL purchases. And while managing deteriorating consumer risk by approving fewer loans would staunch losses, BNPL providers would do so at the expense of growth.
But there is a silver lining. We expect retailers to clamor for high-quality BNPL solutions to help forestall consumer spending declines, thereby driving customer acquisitions. And consumers increasingly sensitive to loan interest and fees could migrate to BNPL solutions. Additionally, providers offering debit-based BNPL solutions could benefit from a consumer migration away from payment options that add debt and toward those that draw from cash on hand.