When Nigel Morris, co-founder of Capital One and a pioneer in subprime lending, expresses concern about the economy, the financial world takes note. Having built an empire on understanding consumer financial stress, Morris, now an early investor in Klarna and other Buy Now, Pay Later (BNPL) companies like Aplazo, is witnessing a trend that makes him deeply uncomfortable.

Speaking at Web Summit in Lisbon, Morris highlighted a troubling shift: "To see that people are using [BNPL services] to buy something as basic and fundamental as groceries, I think is a pretty clear indication that a lot of people are struggling." This observation is backed by alarming statistics. BNPL services have surged to 91.5 million users in the U.S., according to Empower, with 25% using them for groceries as of early this year, per Lending Tree survey data. This represents a significant departure from BNPL's original market for discretionary purchases like designer bags or electronics.

Compounding the issue, borrowers are increasingly failing to repay these loans. Lending Tree reports accelerating default rates, with 42% of BNPL users making at least one late payment in 2025, a rise from 34% in 2023. This isn't merely a consumer finance problem; it's a potential "canary in the coal mine" for the broader fintech ecosystem, echoing precursors to the 2008 mortgage crisis, but with one critical difference: its invisibility.

Most BNPL loans are not reported to credit bureaus, creating what regulators term "phantom debt." This lack of transparency means other lenders are unaware when an individual has accumulated multiple BNPL loans across various platforms, leaving the credit system "flying blind." Morris explained, "In a world where, if I’m a buy-now-pay-later provider, and I’m not checking bureau data, I’m not feeding bureau data, I am oblivious to the fact that Nigel may have taken out 10 of these things in the last week. [That’s] absolutely true."

Storm Clouds on the Horizon

Available data, though often dated, paints a concerning picture. Consumer Financial Protection Bureau (CFPB) data from January, following market monitoring orders to major BNPL providers like Affirm, Afterpay, and Klarna, revealed that approximately 63% of borrowers originated multiple simultaneous loans during the year, and 33% borrowed from multiple BNPL lenders. In 2022, one-fifth of consumers with a credit record used BNPL, up from 17.6% in 2021. Heavy users, originating more than one BNPL loan per month, increased to 20% from 18% in 2021, with the average number of new loans per borrower rising from 8.5 to 9.5.

The borrower profile is equally troubling: as of 2022, nearly two-thirds had lower credit scores, with subprime or deep subprime applicants approved 78% of the time. While BNPL isn't yet a systemic threat, its lack of visibility and concentration among already-stressed borrowers warrant closer scrutiny. Given that economic conditions have worsened for many subprime populations, particularly in auto lending, these numbers are likely higher now.

The scarcity of recent BNPL data is largely due to regulatory shifts. The Biden administration's CFPB attempted to regulate BNPL transactions like credit card purchases under the Truth in Lending Act. However, the Trump administration reversed course. In early May, the CFPB stated it would not prioritize enforcement of that rule. Days later, acting director Russell T. Vought rescinded 67 interpretive rules, policy statements, and advisory opinions, including the BNPL rule, claiming they offered "little benefit to consumers" and placed a "substantial burden" on regulated entities—a move widely seen as a result of successful lobbying by BNPL companies.

Soon after, the CFPB released a new report with a surprisingly different message, focusing solely on first-time borrowers. It claimed customers with subprime or no credit repaid BNPL loans 98% of the time and found no evidence that BNPL access causes debt stress. This discrepancy between the optimistic report (first-time users) and the concerning data (entire user base) highlights a critical data gap: a lack of visibility into long-term borrower behavior, especially for those juggling multiple BNPL accounts. In response, New York state imposed licensing requirements on BNPL companies, but state-by-state regulation creates a patchwork easily circumvented by sophisticated financial firms.

Morris, a fintech investor for 18 years, cautiously avoided overstating parallels to 2008 but acknowledged the gravity of the situation. "I think it is a real issue," he stated, noting that while delinquency and charge-offs aren't yet rising for the U.S. consumer, "there’s clearly storm clouds on the horizon." He pointed to unemployment hitting 4.3%, its highest in nearly four years, alongside "tumult around immigration and around tariffs and around the recent government shutdown." Small and medium businesses are "very loath to invest," with people pulling back "dramatically in the last nine months."

Adding to the mix is the end of the student loan payment moratorium, which Morris called "the largest asset class outside of mortgage." A September Congressional Research Service analysis reported approximately 5.3 million borrowers in default and another 4.3 million in late-stage delinquency. While Morris emphasizes that the current situation isn't yet a crisis, the confluence of phantom debt, rising unemployment, the end of student loan forbearance, and regulatory rollbacks creates conditions ripe for rapid problem acceleration.

The primary concern isn't BNPL debt in isolation, but its cascading effects. The Federal Reserve Bank of Richmond has warned that BNPL's potential systemic risk stems from its "spillover effects onto other consumer credit products." Because BNPL loans are typically smaller, borrowers often prioritize keeping them current, leading to defaults on larger debts like credit cards, car loans, and student loans first.

Consumer Lending Takes 'The Mom Test'

Morris has experienced both sides of this equation, revolutionizing subprime lending at Capital One before investing in fintech disruptors like Klarna, which, despite its $13.5 billion market cap, remains barely profitable due to absorbing borrower default risk. When asked about the line between helping the underbanked and enabling financial distress, Morris wrestled with the question. He stressed the importance of a "moral compass in consumer lending," recalling Capital One's "mom test": "If this idea was presented to your mother and she called you up and said, ‘Son, should I take this product?’ And if you can’t unequivocally say, ‘Yes, it’s a good product,’ you should not be offering it to the American people."

While Morris's investments suggest he wouldn't place BNPL in this problematic category, the lack of credit bureau reporting for most BNPL companies not only obscures debt but also prevents borrowers from building credit to access lower-cost options. This is, in fact, part of the business model. Morris noted, "Some of these buy-now-pay-later companies don’t want that to happen... because they don’t want the consumer to graduate."

The BNPL problem is poised to grow, bleeding into every corner of the financial system as the lines between unregulated lending and traditional banking blur. Klarna has operated as a licensed bank in Europe since 2017, and Affirm's debit cardholders can finance in physical stores, embedding invisible installment debt into retail. Both are integrated into Apple Pay and Google Pay, making BNPL frictionless. Established finance companies are also racing to adopt BNPL; PayPal processed $33 billion in BNPL spending in 2024, growing 20% annually. Major banks now offer post-purchase installment options, and through partnerships with payment processors like Adyen, JPMorgan Payments, and Stripe, Klarna's services reach millions of merchants. What began as a niche checkout option is rapidly becoming embedded financial infrastructure.

Morris observes this pervasive shift: "When I talk to some of these software companies that are now embedding payments, lending and insurance, and you say, ‘Okay, five years from now, where are you going to make your money?’" The surprising answer, even for veteran investors, is often: "I think I’m going to make more money in embedded finance than I am in my core software." He added, "It starts off as a nice little add-on, but when the powers of the marketplace drive down the returns in the core business, it’s often these financing businesses that have the greatest longevity and market power."

A Second Bubble?

The true danger may lie in the next frontier: business-to-business (B2B) BNPL. The trade credit market, where suppliers lend to companies, represents $4.9 trillion in payables among American firms alone, four times the size of the entire U.S. credit card market. Having conquered consumer lending, BNPL companies are now aggressively moving into this space. B2B BNPL providers like Hokodo report that small businesses increase spending by an average of 40% with access to BNPL, which, while beneficial for commerce, also means more debt accumulating faster.

Alarmingly, this debt is being packaged and sold at a pace reminiscent of 2008. Elliott Advisors recently purchased Klarna’s $39 billion British loan portfolio. In 2023, KKR agreed to buy up to $44 billion in BNPL debt from PayPal. Affirm has issued around $12 billion in asset-backed securities. This mirrors the subprime mortgage playbook: slicing up risky consumer debt, selling it to investors who believe they understand the risk, and creating layers of financial engineering that obscure actual exposure. The crucial difference this time is that much of this underlying debt remains unreported to credit bureaus.

The takeaway from Morris's insights and related research is that two potential bubbles are forming, but only one receives adequate attention. The AI bubble, with its massive data centers, sky-high valuations, and venture rounds, dominates headlines. The BNPL situation, however, is equally critical. It's invisible, lightly regulated, and disproportionately affects the most vulnerable Americans—roughly 40% of the population. This includes individuals financing groceries in installments and recent graduates juggling student loan payments with multiple BNPL accounts.

The current economic exuberance in certain sectors makes it easy to overlook this growing problem. However, when consumer debt becomes unsustainable, widespread pain will ensue, impacting venture capitalists and their portfolio companies alike. As Morris observes his BNPL investments, he appears to grasp these warning signs better than most. He isn't predicting an immediate crash but urges vigilance. The pressing question remains whether regulators will act before it's too late.