Can BNPL startups survive past 2025?

If you are an avid online shopper, chances are that you have come across buy now, pay later offerings from online shops, where they show an icon of a fintech company that allows you to use the service. 

The most notable examples of buy now pay later, or BNPL, startups include Affirm in the United States and Klarna in Sweden, which has grown to serve the entire EU market.

While such services are incredibly convenient for consumers, the business model can be notoriously volatile and susceptible to outside shocks, such as rising interest rates, which can destabilize fintech startups unless they have reached a stage where they can be continuously profitable. 

Increased uncertainty and potential long-term hawkish monetary policy can make it difficult for BNPL businesses to persist and continue offering their services to consumers.

How BNPL works and inherent risks

The BNPL business model is a type of payment option frequently used by ecommerce websites that allows consumers to purchase items immediately and pay for them in installments over time, often without interest if payments are made on time.

When shoppers pick BNPL at checkout, they can choose a method, such as Affirm, Klarna, or Afterpay.

After this, the BNPL service assesses eligibility with a soft credit check, which typically does not have any impact on the user’s credit score. 

The client pays the first installment upfront, while the remaining payments are deducted in the following weeks/months. 

Where the risks lie for BNPL companies are the difficulties consumers may have when it comes to paying back the installments. Furthermore, they rely on merchant fees, as opposed to interest rates, which makes it difficult to reach and maintain profitability. 

For this reason, BNP startups tend to be notoriously volatile, which is evident in the stock price of Affirm, which is among the rare number of BNPL fintech firms that are publicly traded. The stock has a 52-week Beta coefficient of 3.48, which means that Affirm is 3.48 times more volatile as the broader market. 

Rising interest rates and consumer spending habits

While we have established that BNPLs do not rely on charging interest for their revenue, interest changes do still invariably affect their bottom line. 

For example, when interest rates rise, consumers tend to spend less and save more, which hurts the revenue and net income figures of BNPL service providers. 

Which is what has happened on the US and EU stock markets in recent years. The markets have struggled to adjust to the changes brought about by interest rates increasing from near-zero levels to the 3.5-5% range. 

This effect on consumer behaviour has caused BNPL companies to continuously struggle with profitability. For example, Affirm has not recorded a profitable quarter since going public in 2021.

These issues have compounded for a difficult 2025 for BNPLs, with some analysts questioning the future prospects of such a business model, particularly in the scenario where interest rates keep rising in the coming years. 

Could BNPL companies go bust in 2025?

Interest rates are unlikely to rise in 2025, regardless of the relatively doveish stance of the Federal Reserve in the United States, which reduces the probability of BNPLs going insolvent in 2025. However, unless the broader economic performance improves, the likes of Affirm and Klarna are likely to face more headwinds throughout the year. 

The decline in savings among consumers also negatively affects the business of BNPLs, as less disposable income and savings reduces the demand for their services.

Investors in these companies will be hopeful of an economic turnaround, in the hopes of more consumer spending and increased volumes of online shopping.

On the other hand, an economic downturn and a full-fledged recession are virtually guaranteed to sink the BNPL business model in its current form. 

It is also worth noting that the introduction of interest payments through BNPLs would remove much of the appeal of such offerings, which places Affirm, Klarna and other firms on the market, in a challenging position. 

Conclusion

Buy now pay later, or BNPL services, gained a massive following, particularly since the start of the 2020s, as more and more consumers opted to shop online this way. Investors saw the potential and started investing in the likes of Affirm, Klarna, Afterpay and others.

However, the market seems to have soured towards these businesses, as consumers have less savings and disposable income, which reduces online shopping volumes and the need for BNPL services as a consequence. 

If such businesses are to survive and thrive, better economic conditions and relatively low interest rates are necessary, which prompt consumers to spend more - Directly affecting the bottom line of BNPL services.