If you have clicked “split into four payments” at checkout, you are not alone. Buy now, pay later has surged both online and in stores as shoppers look for a simple budgeting tool that shows costs upfront and avoids revolving credit. Adobe reported record BNPL use during the 2023 holiday season, with growth of more than 40% year over year. Even so, the biggest banks and credit card issuers are still treading carefully. They are expanding slowly, favoring card-based installments, and weighing whether the economics and risks add up.
At the heart of their caution are familiar pressure points: thin margins in zero-interest plans, funding costs when rates are high, gaps in credit visibility that can elevate losses, and the risk of cannibalizing rich card revenue. Regulators are also tightening expectations around statements, dispute rights, and refunds, which raises compliance costs. The result is a strategic bet by incumbents that installments belong on the card rails they already control, not in a separate, high-friction land grab.
What BNPL Is and Why It Caught On
Short-term, interest-free “pay-in-4” plans let shoppers split a purchase into equal payments over a few weeks, typically funded by merchant fees. Longer point-of-sale loans with interest target bigger-ticket items like travel, home improvement, and healthcare. Merchants like BNPL because it boosts conversion, reduces cart abandonment, and can lift average order values. Consumers like the predictable schedule, clearer upfront costs, and the perception of lower risk than revolving debt.
Fintech names such as Affirm, Klarna, Afterpay, and PayPal helped popularize BNPL, while Visa, Mastercard, PayPal, Apple, and major marketplaces now provide rails and wallets that present installment options. The appeal is real, but so are the trade-offs. Consumer advocates have warned that small, fast credit can add up quickly, and repayment schedules can collide with paychecks, fees, and refunds.
Why Banks and Card Issuers Are Cautious
The economics are tight. Merchant-funded, zero-interest plans can move product, yet margins for lenders are slim once funding, servicing, fraud, and losses are accounted for. Elevated interest rates compress those margins further unless merchant fees rise or risk falls. Building a two-sided network of merchants and shoppers is expensive, while banks already have large customer bases and do not want to pay twice to acquire the same spend.
There is also cannibalization risk. Installments on a card can be a useful feature, but if they replace revolving balances, issuers may lose high-margin interest and late fee revenue. Operationally, returns, split shipments, and disputes create heavy servicing for small balances. That drives many banks to prefer post-purchase installments on existing cards, where they already have the relationship, the data, and the statement infrastructure.
Credit, Fraud, and Compliance Challenges
A historical gap in real-time credit reporting made it hard to see all obligations a BNPL customer held, which opened the door to loan stacking across providers. BNPL also skews younger and includes borrowers with thinner files, which can be more volatile in a downturn. The Consumer Financial Protection Bureau has reported rising delinquency and charge-off rates for BNPL in recent years, with charge-offs among major providers reaching nearly 4% in 2021. Consumer-protection reviews have also found that BNPL users often show other financial stress signals, such as overdrafts.
Streamlined checkout flows are great for conversion but can invite fraud, including synthetic identities and account takeovers. Managing chargebacks, refunds, and partial returns is labor-intensive relative to ticket size. Regulators in the United States, the United Kingdom, the European Union, and Australia are moving to bring BNPL closer to credit card-style protections. That narrows the compliance gap that once favored fast-moving fintechs and raises fixed costs for everyone.
How Traditional Players Are Adapting
Card issuers have added installment features to existing cards, including post-purchase plans that convert a purchase into fixed payments for a fee or interest. Networks like Visa and Mastercard have introduced APIs that let issuers present installment offers while keeping transactions on the card rails, preserving interchange and dispute processes. Some banks quietly fund BNPL behind the scenes or via white-label partnerships, letting fintechs run the front-end experience while the bank manages underwriting and compliance.
Big tech has shifted as well. Apple ended its in-house Apple Pay Later and is enabling bank- or partner-funded installments inside Apple Pay, a sign that regulated lenders’ infrastructure is becoming the preferred path. For higher-ticket categories where APR-bearing loans can support underwriting and servicing costs, banks are more willing to play.
Klarna’s Rise Mirrors the Economy
Klarna’s arc shows how the market has evolved. The company grew into one of the largest BNPL providers globally by integrating deeply with merchants and offering a slick checkout. It then absorbed heavy losses in 2022 as funding costs rose and investors prioritized profitability. By 2023, Klarna returned to profitability, tightened underwriting, and broadened revenue streams with advertising and shopping tools.
That journey reflects the broader economy. Consumers still want budgeting help, especially as living costs squeeze wallets, but higher rates and investor scrutiny demand resilient unit economics. In this environment, scale, data depth, and disciplined risk management matter more than growth at any cost.
What Could Change Next
Expanded BNPL reporting to credit bureaus and better real-time data sharing can curb stacking and improve underwriting. Clearer and more harmonized rules could favor well-capitalized lenders that already run robust compliance programs. Merchant appetite will swing with margins, ad costs, and logistics pressure. Advances in identity verification, risk scoring, and dispute automation can cut fraud and servicing costs, helping the math.
The Outlook
Convergence is likely. Installments will become a standard feature across cards, wallets, and merchant checkouts rather than a standalone product. Banks will keep spend on their networks with card-linked options and targeted offers, especially for prime customers and larger purchases. Fintechs will differentiate with merchant integrations and user experience while leaning on bank funding and regulation-ready infrastructure.
For consumers, BNPL’s advantages are real, including transparent costs, short-term interest-free plans, and a budgeting aid that can reduce anxiety. The pitfalls are real too, from overextension and fees to refund confusion and the risk of missed payments that can damage credit. Used thoughtfully, installments can be a helpful tool. Used carelessly, they can become just another form of costly debt.
