Here’s why banks, credit card companies are wary of buy now, pay later loans

Buy now, pay later plans have become a popular alternative to credit cards for many consumers. These plans allow purchases to be split into short-term, interest-free installments, making them an attractive option for those looking to make big purchases without the burden of high interest rates.

Michael Linford, the chief operating officer of Affirm, a leading buy now, pay later provider, believes that the rise in popularity of these plans is a sign that consumers are looking for alternatives to traditional credit cards. In fact, an estimated 86.5 million Americans used buy now, pay later loans in 2024, and that number is expected to rise to 91.5 million in 2025.

According to a recent survey by LendingTree, nearly half of Americans have used a buy now, pay later service at least once, with 11% using the service at least six times. This trend is concerning for traditional lenders such as banks and credit card companies, as it poses a direct challenge to their business model.

Moshe Orenbuch, a senior analyst at TD Cowen, notes that buy now, pay later plans were created for consumers who either did not want to use credit cards or did not have a lot of available credit. By offering an alternative to traditional credit, these plans are reducing card transaction activity and utilization, which are major revenue drivers for banks and financial institutions.

Kevin King, the vice president of credit risk and marketing strategy at LexisNexis Risk Solutions, points out that buy now, pay later plans create a “black hole” in the credit profile of consumers, making it difficult for traditional lenders to assess their credit quality. This lack of transparency is a cause for concern among financial institutions.

Overall, the rise of buy now, pay later plans signals a shift in consumer behavior away from traditional credit cards. As more Americans turn to these alternative payment options, banks and credit card companies will need to adapt to the changing landscape of consumer finance. Watch the video above to learn more about the popularity of buy now, pay later loans and the challenges they present to traditional lenders.