Figure 1: Buy Now, Pay Later (BNPL) concept
It’s 11:47 pm. You’re scrolling through an online store and spot a
jacket for £200. It feels a bit expensive. Then you see the option to pay £50
today and split the rest over four months. Suddenly, it feels affordable and
you click “buy.” Nothing about the price has changed, but the way it’s
presented makes it easier to justify. Instead of thinking about the full £200,
you focus on the £50 in front of you.
Figure 2 shows how this plays out over time. The dotted line represents
what consumers feel they are paying, low at first, then rising. The solid line
symbolises real cost: flat and unchanged from day one.The gap between them is
where financial trouble starts.
Figure 2: Perceived vs Actual Cost over time under BNPL
The problem? This changes how we see cost and risk, leading to both
individual debt and market failure.
In the UK, around 27% of adults have used Buy Now, Pay Later (BNPL) in
the past year (Poll and Byrne, 2021, p.6). This shows how normalised this form of borrowing
has become. BNPL works by shifting attention away from the total cost and
towards the first instalment. This reflects present bias, where individuals
place more weight on immediate payments than future ones. The £50 feels
manageable, while the remaining payments are treated as less important. This
can be explained by hyperbolic discounting (Laibson, 1997), where future costs
are heavily discounted, leading consumers to judge affordability based only on
the present.
In reality, this creates a gap between perceived affordability and
actual financial commitment. Many users underestimate the risks, with 42%
reporting that they did not fully understand what they were signing up for, and
2 in 5 users having used BNPL without even realising it (Poll and Byrne, 2021,
p.3). As a result, payments can quickly build up. The report shows that 41% of
users have struggled to make a repayment, while FCA evidence similarly
highlights that many consumers do not fully understand the terms and risks of
BNPL. This suggests that consumers are misjudging affordability and taking on
financial obligations they cannot sustain. BNPL, therefore, does not reduce the
cost of consumption; it changes how that cost is perceived, often leading to
higher spending and financial strain.
The Information Gap: When 'Buy Now' Meets
'Pay Later'
This misperception is not accidental. It is rooted in a deeper economic
problem: asymmetric information.
The core issue is that both sides are guessing. Unlike banks that run
deep credit checks, BNPL providers approve most purchases in seconds with
almost no background checks, creating an adverse selection problem. Risky
borrowers are the very people attracted to BNPL services because other lenders
have already said no. Meanwhile, people with excellent credit have little
reason to use BNPL when their rewards credit cards offer better perks. Over
time, this drives away the "good" customers and leaves BNPL platforms
with borrowers who are more likely to default. This is a version of
"lemons problem," described by George Akerlof in the used-car market:
when buyers can't tell a good car from a bad one, the market gets flooded with
bad cars, or "lemons".
At the same time, moral hazard creeps in on both sides. Consumers take
more risks because a missed payment won’t immediately wreck their credit score.
BNPL providers don't report most of these small loans to credit bureaus,
traditional banks can't see how much BNPL debt a person is carrying. This means
they can lend to someone who is already drowning in debt without other lenders
knowing, and without bearing the full
cost if that borrower eventually collapses (Berg, 2025).
But the information gap isn't one-way. Many users misunderstand the
penalties for missed payments or how quickly a small debt can snowball (Di
Maggio et al., 2022). BNPL interfaces are designed to feel casual and
low-stakes, not like a binding credit agreement. Regulators in Norway have even
accused BNPL provider, klarna of hiding the true cost of borrowing (Norwegian
Consumer Authority, 2022). In early 2025, Klarna's credit losses jumped 17% as
more customers struggled to keep up (Chosunbiz, 2025), highlighting the risks
created by information gaps and the need
for transparency.
Regulations and Recommendations
To address these issues, the Financial Conduct
Authority (FCA) of the UK will start regulating BNPL deferred payment credit
from July 15, 2026. Service providers must obtain FCA authorisation and conduct
strict affordability checks to prevent irresponsible lending. At the same time,
loan terms must be fully disclosed to reduce consumer misunderstandings (FCA,
2026-1).
Therefore, we suggest that regulators require all BNPL
platforms to share users’ total debt information and present real total costs
and repayment risks in a unified, clear format. This will enable platforms to
assess a user’s overall indebtedness before offering new credit, and also allow
consumers to understand the full financial obligation before purchasing (FCA,
2026-2).
These rules will bring greater transparency and
fairness to the BNPL market and address market imbalances caused by information
gaps.
Conclusion:
Why This Matters
Present bias tricks you into focusing on the £50. Asymmetric
information means BNPL doesn't know your
true risk, and you don't know the true cost. Adverse selection brings risky
borrowers to the front of the line. Moral hazard encourages carelessness on
both sides. The lemons problem then drives good customers away.
These concepts don't exist in separate boxes. They feed into each
other. A consumer with present bias takes on a BNPL plan they can't really
afford. Because BNPL doesn’t run proper credit checks, they get approved anyway. Since BNPL doesn't share data with other lenders, no
one sees the debt adding up. When that consumer misses a payment, their credit
score stays intact, so they do it again.
The result is market failure. Resources are misallocated, debt rises, and consumers end up worse off than if BNPL had never existed. The FCA's 2026 rules and our suggested data-sharing requirement would help close the information gap. But the best protection is still the simplest. Next time you see "pay £50 today," pause and ask yourself: can I really afford £200?
References:
1. Akerlof, G. A. (1970), The Market for
'Lemons': Quality Uncertainty and the Market Mechanism, Quarterly Journal
of Economics, Vol. 84, No. 3, pp. 488-500
https://www.jstor.org/stable/1879431
2. Berg, J. (2025), Klarna and Afterpay
Keep BNPL Data From Credit Bureaus, PYMNTS.com, August 2025
https://www.pymnts.com/buy-now-pay-later/2025/klarna-afterpay-keep-bnpl-data-from-credit-bureaus/
3. Chosunbiz (2025), Klarna's Credit Losses
Jump 17% as BNPL Defaults Rise
https://biz.chosun.com/en/en-international/2026/02/20/BXF6RDDP4FB4FAZY7X25K5ZSWY/
4. Davenport, Evans, Hurwitz & Smith, LLP
(2024), Managing a Buy Now, Pay Later Loan Program, Davenport Evans
https://dehs.com/managing-a-buy-now-pay-later-loan-program/
5. Di Maggio, M., Williams, E., & Kalda,
A. (2022), Buy Now, Pay Later: Credit Supply, Consumer Demand, and Welfare, National
Bureau of Economic Research (NBER) Working Paper No. 30535
https://www.nber.org/papers/w30535
6. Financial Conduct Authority. (2026-1). Buy
Now Pay Later. https://www.fca.org.uk/consumers/buy-now-pay-later
7. Financial Conduct Authority. (2026-2). New
protections confirmed for Buy Now Pay Later borrowers. https://www.fca.org.uk/news/press-releases/new-protections-confirmed-buy-now-pay-later-borrowers
8. Laibson, D. (1997) ‘Golden Eggs and
Hyperbolic Discounting’, The Quarterly Journal of Economics, 112(2), pp.
443–478. Available at: https://doi.org/10.1162/003355397555253.
9. Norwegian Consumer Authority (2022), Klarna
Criticized for Misleading Marketing and Hidden Costs
https://www.forbrukertilsynet.no/english/klarna/
10.
Poll,
H. and Byrne, G. (2021) Buy Now...Pain Later? Citizen’s Advice.
Available at: https://assets.ctfassets.net/mfz4nbgura3g/1YG7ZltPP1JfBXDLfAIPgI/132a8617c04231d32eca733af7cdbcfe/BNPL_20report_20_FINAL_.pdf.
11.
Protections
to help Buy Now Pay Later borrowers navigate their financial lives (2025) FCA. Available at: https://www.fca.org.uk/news/press-releases/protections-help-buy-now-pay-later-borrowers-navigate-financial-lives.
