As investor interest waned and authorities launched lawsuits against BNPL providers, the success of these largely unregulated companies diminished in 2022 after the pandemic saw consumers flock to buy-now, pay-later loans.

Lawsuits have been brought against some BNPL providers, alleging that their installment plans are predatory. A BNPL loan typically consists of a four-installment payback, usually with a down payment of 25% and the remaining three installments due in two-week intervals. Failure to pay may incur a late fee, typically around $7 per missed payment on an average loan of $134. BNPL providers offer their service in two ways: by contracting with online retailers to embed their payment options on checkout pages or by acquiring direct applications from consumers. Once approved, consumers receive access to a virtual shopping mall of merchants, and some BNPL companies issue cards for use in brick-and-mortar stores. Merchants get paid in full regardless of lawsuit.

As inflation continues to climb, BNPL providers are feeling the squeeze. To keep up with increased demand, many companies have hired more employees and expanded into new markets. However, their losses have mounted, leading to layoffs and cost-cutting measures. Public companies have seen their stock prices drop, while private companies have seen their valuations slashed. Despite these troubles, BNPL remains extremely popular with shoppers. The payment processing firm Worldpay predicts that by 2025, BNPL will account for 5.3% of global ecommerce transaction value. This is up from 2.9%, or $157 billion, in 2021. While the lawsuit against BNPL providers is ongoing, it remains to be seen how it will affect the industry in the long run.

The Financial Health Network reported that financially vulnerable households are nearly four times more likely to use BNPL services, resulting in delinquency rates that are outpacing those of credit cards. Loan stacking, the act of taking out multiple BNPL loans concurrently, is also a concern in the BNPL industry. Poor public data and the lack of repayment reporting to credit bureaus make it difficult to track this activity. In response, the Consumer Financial Protection Bureau initiated a lawsuit against five BNPL companies – Affirm, Afterpay, Klarna, PayPal, and Zip – requesting data from them. The five companies originated $24.2 billion in gross merchandise volume loans in 2021 in the U.S., nearly triple the figure of $8.3 billion in 2020.

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