The Accounting Reckoning for Buy Now, Pay Later

I was at the dentist a couple of weeks ago. Amid the usual posters about flossing, there was a sign for a payment plan. It wasn’t traditional financing. It was a Buy Now, Pay Later (BNPL) service. For dental work.

BNPL is no longer a niche tool for online shopping. It has moved from sneakers and electronics to groceries and healthcare. This explosive growth should make us all take a closer look. Services like Klarna, Affirm, and Afterpay were once fintech darlings. Now, they are facing a moment of reckoning. The core issue is a surge in late payments, and it signals a major red flag for the industry and the economy.

How Did We Get Here?

BNPL emerged in the 2010s as a digitally native solution for e-commerce. It appealed to younger generations who were wary of traditional credit cards. The premise was simple: get your product now and pay for it in a few interest-free installments.

It was a win-win.

• For Consumers: A seemingly interest-free way to buy things immediately and spread out the cost. Buying a $200 item felt less painful when it was four payments of $50.
• For Merchants: A powerful sales tool. Studies showed that offering BNPL increased conversion rates and average order sizes. In exchange, merchants paid the BNPL provider a fee of 2-8% per transaction.

The model worked because BNPL companies operated in a regulatory gray area. They argued they weren’t providing traditional credit, which allowed for rapid, unchecked expansion without the same scrutiny as a credit card company.

The Tipping Point

The story is changing. The core problem is that a growing number of people can’t pay back what they owe.

Data shows that 42% of BNPL users have now made at least one late payment. (Note: Data from 2024-2025 reports this figure at ~41%). That’s a sharp increase from 34% just two years ago. This isn’t just because more people are using the service. The percentage of users missing payments is climbing, which points to a systemic issue.

Three factors are driving this shift:

1. Mainstream Adoption: BNPL has moved from an online niche to a dominant payment method everywhere. You can use it in physical retail stores, for travel, and even for essentials like groceries.
2. Economic Pressure: Inflation and economic uncertainty are pushing more people to use BNPL to cover everyday expenses, not just discretionary purchases. They are using it to stretch budgets that are already thin.
3. The Regulatory Hammer: Regulators like the Consumer Financial Protection Bureau (CFPB) are finally catching up. They are starting to treat BNPL like traditional credit, requiring stricter reporting and affordability checks.

The Accountant’s Headache: Credit Loss

For accountants and auditors, the rise in defaults creates a massive challenge. The single most critical accounting issue for a BNPL provider is estimating and booking the provision for bad debt, also known as credit loss.

This is incredibly difficult for two main reasons.

• Limited Historical Data: Unlike banks with decades of data, many BNPL portfolios are young. Their customers often have thin or nonexistent credit files. This makes forecasting who will default a process filled with judgment and potential error.
• Rapidly Changing Conditions: Even a good model based on past data can become useless quickly. High inflation, changing employment rates, and other economic factors are changing constantly, making it hard to create an accurate forecast.

This raises a key question for auditors: Are the firm’s models for expected credit losses adequate? Do the financial statements properly reflect the risk we see in the rising delinquency numbers?

I’ve heard that, much like mortgage lenders, BNPL providers are actively working with customers to restructure payments to avoid classifying them as delinquent. While this helps the consumer, it can also mask the true level of risk on the company’s books.

The Path Forward: Regulation Will Reshape the Industry

The era of frictionless, unregulated growth is over. New rules from global regulators will fundamentally change the BNPL landscape. As accounting professionals, we need to stay ahead of these changes.

Here’s what to expect:

• Affordability Checks: Mandatory checks will add friction to the checkout process. This will likely reduce defaults but may also reduce the value proposition for merchants and consumers. The question becomes: how is this different from a credit card?
• Clearer Fee Structures: BNPL providers will be required to be more transparent about late fees and other charges. This addresses the predatory reputation they’ve gained as more users miss payments.
• Standardized Reporting: BNPL loans will likely be reported to credit bureaus. This will end the era of “hidden debt” and give lenders a more accurate picture of a consumer’s financial health.

Key Takeaways

The Buy Now, Pay Later industry is undergoing a fundamental shift. It’s moving from a “growth-at-all-costs” fintech disruptor to a mature financial service facing significant risk.

• Rising defaults are the biggest red flag. The trend of consumers missing payments is accelerating, indicating widespread financial stress.
• The accounting is getting harder. Accurately forecasting credit losses is the central challenge for BNPL companies, and the lack of historical data makes it a high-stakes guessing game.
• Regulation is coming. The industry’s “wild west” days are over. New rules will force BNPL providers to operate more like traditional lenders.
• “Hidden debt” is a risk to the broader economy. Because BNPL loans often don’t appear on credit reports, they create a blind spot for other lenders assessing a person’s ability to pay back a mortgage or car loan.

The headline numbers on consumer defaults are no longer just a market trend. They are a direct input into the core accounting judgments that will determine the future viability of these companies.

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