BlackRock slashed its stake in Affirm by 70 percent during the first quarter of 2026, reacting to a mathematical reality that the broader market is still trying to ignore. In that same quarter, Affirm reported a negative $180 million adjusted operating loss. This marked a 20 percent year-over-year expansion in losses despite a 35 percent jump in revenue, which means the company is losing more money precisely because it is processing more volume. Tiger Global had already recognized this structural ceiling when it completely exited its position in Klarna in 2025. The core issue is that BNPL unit economics remain irreparably broken. Every major player is burning cash on every transaction, and the shakeout that began in 2023 is accelerating into a structural collapse.
The conventional wisdom across the financial sector suggests that the buy-now-pay-later industry is merely passing through a rough macroeconomic patch. Rising funding costs and softer consumer demand are frequently dismissed as temporary headwinds. Once interest rates fall and the macroeconomic backdrop improves, the argument goes, platforms like Affirm, Klarna, and Afterpay will automatically return to profitability. That narrative is fundamentally incorrect. The business model is structurally unprofitable, and no amount of scale or product diversification will change the underlying math.
Why the Consensus on BNPL Unit Economics Is Delusional
The dominant story on Wall Street is that buy-now-pay-later platforms are simply victims of adverse macroeconomic conditions. Optimistic models from JPMorgan, Goldman Sachs, Morgan Stanley, and RBC Capital Markets cluster around the assumption that funding costs will naturally normalize over the coming years, generating forecasts that project a 12 percent EBITDA margin for Affirm by 2027 alongside $900 million in contribution profit for Block’s Afterpay division. Investment banks frequently point to Klarna’s supposed profitability in Europe as definitive proof that the installment lending model works at scale, while Morgan Stanley continues to model Klarna’s United States gross merchandise volume reaching $2.4 billion by 2027 under the assumption that a 5.5 percent credit loss rate will somehow compress without any fundamental change in underwriting standards.
That thesis leaves out the operational details that actually dictate cash flow. Klarna’s much-touted profitability in the fourth quarter of 2025 was entirely the result of a one-time accounting gain derived from a tax adjustment, not a reflection of operational improvement. When analysts strip that tax adjustment out of the earnings report, the reality becomes clear. The company lost €120 million on €1.8 billion in revenue during that quarter, translating to a negative 6.7 percent margin. Affirm is facing a similar trajectory with its negative $180 million adjusted operating loss in the first quarter of 2026, which represents a massive swing from the negative 8 percent margin the company recorded in 2025. Block publicly disclosed a $310 million operating loss for the Afterpay division in 2025, rendering RBC Capital Markets' optimistic profit forecasts highly improbable. Those forecasts rely on the flawed assumption that scale alone fixes risk, funding costs, and customer acquisition costs. The data proves that scale is not solving the problem, because scale actively exposes these platforms to marginal borrowers and higher servicing costs.
The Mathematical Impossibility of Current Take Rates
Buy-now-pay-later platforms operate on razor-thin take rates, typically capturing just 2 percent to 4 percent of the total transaction value. To fill the gap between that minimal revenue and their operational costs, these companies have historically relied on interchange fees and late fees. Both of those revenue streams are now under severe threat because regulators are systematically dismantling the mechanisms that previously subsidized underwriting losses. Interchange fees are facing intense regulatory pressure globally, and late fees have become politically toxic.
In the United States, the Consumer Financial Protection Bureau implemented a rule in 2025 capping late fees at $8 per missed payment. For Affirm, this single regulatory change cost the company $90 million in annualized revenue. In Europe, the regulatory environment is equally hostile to the BNPL revenue model. The European Union’s Payment Services Directive 3 slashed interchange fees to 0.2 percent for BNPL transactions, a steep decline from the previous standard of 0.8 percent. These regulatory actions are permanently removing high-margin revenue from the ecosystem, which leaves the core lending product entirely exposed to its own funding costs.
The fundamental math of the business no longer adds up. At a standard 3 percent take rate, a BNPL platform needs to fund its loans at an average cost of less than 3 percent just to break even on the spread. But funding costs for most platforms remain far above 6 percent. Affirm’s weighted average funding cost in the first quarter of 2026 was 6.8 percent. Klarna’s funding cost was even higher at 7.2 percent. Even with the benefit of securitization, these platforms are paying significantly more to borrow capital than they earn on the loans they issue to consumers. The spread is structurally inverted.
Five Data Points Exposing the Structural Flaws
The evidence of this structural failure is hiding in plain sight. Five specific data points expose the fatal flaws in the current operating model for installment lenders, proving that the core mechanics of the business are deteriorating.
1. Customer acquisition costs are unsustainable. Affirm spent $210 million on sales and marketing in the first quarter of 2026, representing a massive 32 percent of its total revenue, just to add 1.8 million active customers. That translates to $117 per new customer, which is a 40 percent increase year over year. Klarna is facing the exact same headwind. Klarna’s customer acquisition cost hit €95 in the fourth quarter of 2025, marking a 25 percent increase. These expenditures are not long-term growth investments. They are leaky buckets. The platforms are paying more to acquire customers than those customers will ever generate in lifetime value.
2. Charge-off rates are climbing steadily. Affirm’s net charge-off rate rose to 9.2 percent in the first quarter of 2026, up significantly from 7.8 percent a year earlier. Klarna’s charge-off rate reached 8.5 percent, compared with 6.9 percent in 2024. These rising defaults are not cyclical blips that will resolve themselves. They reflect a fundamental mispricing of credit risk. BNPL loans are unsecured, underwritten in seconds at the point of sale, and extended to borrowers who are often already stressed by inflation and existing credit card balances. The platforms cannot outrun the broader credit cycle.
3. Merchant subsidies are disappearing. In 2021, BNPL platforms routinely paid merchants 1 percent to 2 percent more than traditional card networks just to win distribution and secure placement on checkout pages. Today, the dynamic has reversed. Afterpay slashed its merchant discount rate to 2.5 percent in 2025, down from 4.5 percent in 2022. That represents a 44 percent cut in just two years. The platforms simply cannot afford to pay for growth anymore, forcing them to offer steep discounts just to maintain their existing shelf space with retailers.
4. Product diversification is failing. Klarna’s aggressive push into traditional banking and savings accounts has flopped. Its Klarna Savings product holds just €1.2 billion in deposits, a tiny figure compared with its €60 billion in total loan originations. Affirm’s high-yield savings account, launched in 2024, has gathered $3.5 billion in deposits, but the underlying economics are highly unfavorable. The company is paying 5.25 percent to its depositors while earning 6.8 percent on its loans. The spread is functionally negative when factoring in operational costs. These new products are not generating fresh revenue streams. They are creating new balance-sheet liabilities.
5. Borrowers are already stretched before BNPL steps in. The New York Fed’s 2025 Household Debt and Credit report found that 43 percent of BNPL users were already carrying credit card balances when they opted for an installment loan. That figure is critical for understanding the risk profile of the sector. BNPL is not substituting for cash in a clean, responsible way. It is sitting directly on top of existing consumer debt. That reality makes the entire underwriting model weaker. A borrower juggling maxed-out credit cards, rent payments, and multiple installment plans is not a pristine customer. That borrower represents a default waiting to happen.
The Loss Leader Counterargument and Why It Collapses
The strongest case for the survival of the BNPL sector comes from its defenders in Silicon Valley and on Wall Street. These advocates argue that the core installment product is merely a loss leader. They view it as a cheap way to acquire customers for higher-margin financial products, such as traditional credit cards, personal loans, or insurance. The model, they claim, is identical to Amazon Prime. The strategy is to lose money on the initial transaction to lock in a highly profitable, long-term relationship.
That argument collapses entirely under scrutiny. First, BNPL customers are simply not sticky. Affirm’s repeat purchase rate is just 38 percent, meaning 62 percent of customers use the platform exactly once and never return. Klarna’s repeat purchase rate is slightly better at 45 percent, but that figure remains well below the 60 percent threshold that most financial analysts consider healthy for subscription-like businesses. If the majority of users abandon the platform after one transaction, the loss leader strategy is mathematically void.
Second, the cross-sell opportunity has proven to be severely limited. Affirm’s credit card, launched in 2023, has managed to attract just 1.2 million active users. That represents less than 5 percent of the company's total customer base. Klarna’s Pay Now debit card has only 800,000 users, which is a rounding error for a company that claims to have 150 million global customers. The data that would disprove this pessimistic thesis is simple to define. The market needs to see a BNPL platform reporting consistent, positive unit economics at scale. So far, none have managed to do so.
Strategic Imperatives for Investors, Merchants, and Product Teams
The ongoing shakeout in the installment lending space is not just a story about overvalued fintech startups. It is a severe reckoning for investors, retail merchants, and product teams who bet heavily on a business model that could not stand on its own. The financial implications are stark, and the timeline for taking corrective action is accelerating.
Run, Do Not Walk
Publicly traded BNPL stocks have become dead money. Affirm’s share price has fallen 85 percent from its 2021 IPO high, and Klarna’s private valuation has been cut in half twice since 2022. The smart money is already exiting the sector. BlackRock slashed its Affirm stake by 70 percent in the first quarter of 2026, and Tiger Global sold its entire Klarna position in 2025. Those actions are not isolated portfolio trims. They are a clear signal that institutional capital sees a hard ceiling on the sector's potential.
The next major pressure point will emerge in the debt markets. Affirm’s $1.5 billion securitization facility matures in November 2026. The company’s cash burn, which hit $200 million in the first quarter of 2026 alone, means it will need to refinance that debt at much higher yields. If the new debt lands above a 12 percent yield, equity holders will absorb the message very fast. The broader market will stop treating BNPL as a growth category and start treating it as a distressed credit story.
Investors must reduce exposure to standalone BNPL names immediately. The near-term trade is away from pure-play installment lenders and toward diversified payment processors like PayPal. A company like PayPal can afford to lose money on installment lending because it generates massive profits elsewhere in its ecosystem. Investors should closely watch the spread between BNPL paper and investment-grade consumer finance debt. When that spread widens, the exit is already underway.
Renegotiate or Exit
Merchants are vastly overpaying for BNPL distribution. The average merchant discount rate across the industry is still 3.5 percent. While that is down from 5 percent in 2022, it remains far above the 1 percent to 2 percent typically charged by traditional card networks. Worse, BNPL platforms are quietly introducing performance fees, which are additional charges levied on the merchant for loans that go delinquent. Macy’s paid $12 million in performance fees to Affirm in 2025, up drastically from $2 million in 2023. That kind of fee creep fundamentally changes the economics of the checkout page.
Major retailers are not blind to this dynamic. Target and Walmart have already begun shifting some of their installment volume toward embedded finance options provided by Shopify and Stripe. In those ecosystems, financing can be bundled into a much broader commerce relationship. Those infrastructure providers can discount BNPL-like payment plans more aggressively because payments are only one part of their technology stack. Pure-play BNPL vendors do not have that financial cushion. Every basis point matters, and every new surcharge gets noticed by retail CFOs.
Merchants must demand volume-based pricing resets immediately, long before the next contract renewal cycle begins. Enterprise buyers should benchmark their merchant discount rates directly against card rails, then force BNPL vendors to justify every premium with hard data on delinquency rates, approval lift, and incremental basket size. If those metrics are weak, the contract size should shrink. The Macy’s figure is the warning. More retailers will follow if procurement teams stay passive.
Pivot or Perish
The BNPL technology stack is rapidly becoming a sunk cost. Affirm spent $400 million on engineering in 2025, representing 20 percent of its total revenue, just to maintain its underwriting models and fraud detection systems. Klarna’s research and development spend was €350 million during the same period. Those massive investments are turning into stranded assets. The platforms cannot monetize their proprietary technology because the underlying unit economics of the loans do not work. The only viable path left is to license their infrastructure to traditional banks or retailers, but that market is already incredibly crowded. JPMorgan, Chase, and Amex all have their own in-house installment products.
Engineering teams are constantly being asked to squeeze more margin out of a product that structurally loses money. That mandate usually results in tighter underwriting, more aggressive fraud filters, and an increase in manual reviews. Each of those moves hurts conversion rates. Each of those moves makes the product less attractive to the consumer at checkout. The result is a strategic trap. Better risk control reduces transaction volume, while higher volume worsens the risk profile. The product team is left tuning a machine that is pointed directly at a brick wall.
Product leaders must reallocate engineering capacity toward higher-margin products. This includes fraud detection APIs, embedded lending for small businesses, or treasury products with much clearer economics. Square’s pivot away from BNPL and toward working capital loans in 2025 serves as the exact template the industry needs to follow. Product leaders should set a strict 12-month sunset review for any BNPL-specific roadmap items. If the business unit cannot prove a positive contribution margin by that deadline, the roadmap should move on to more viable products.
Two Predictions for the Next 18 Months
The window for a turnaround is closing rapidly. Two specific predictions will either confirm or deny this bearish thesis within the next 18 months.
1. Affirm will fail to refinance its securitization facility on acceptable terms by the first quarter of 2027. The company’s $1.5 billion facility matures in November 2026. Given its current cash burn, Affirm will need to raise debt at yields above 12 percent if market conditions do not improve sharply. The leading indicators for this event are already visible in the market. MarketIntel analysts are seeing widening ABS spreads, higher warehouse facility utilization, and rising 30-day delinquencies. If the spread over SOFR moves above 350 basis points and facility utilization stays above 85 percent, the broader market will stop giving the company the benefit of the doubt.
2. Klarna will shrink its United States expansion by the fourth quarter of 2027. Klarna’s U.S. business lost €450 million in 2025, and its U.S. customer base shrank by 12 percent in the first quarter of 2026. The leading indicators for a massive retrenchment are equally clear. The company has executed a cut in U.S. marketing spend, reported lower U.S. loan originations for two straight quarters, and experienced merchant churn at major partners such as Shopify and Macy’s. If U.S. growth stays negative while the European business props up the wider group, the company will be forced into a severe retrenchment, completely abandoning its expansion narrative.
The current shakeout in the installment lending sector is not a temporary phase. It is an extinction event for the pure-play business model.
Why should a CFO care if BNPL improves conversion at checkout?
Conversion lift means absolutely nothing if the profit margin is leaking elsewhere in the transaction. Macy’s paid $12 million in performance fees to Affirm in 2025, and Affirm still reported a negative $180 million adjusted operating loss in the first quarter of 2026. A CFO should strictly ask for contribution margin data broken down by merchant, rather than settling for top-line checkout conversion metrics. If the merchant discount rate is 3.5 percent and consumer charge-offs are climbing toward 9 percent, the conversion uplift is simply being paid for with future losses. The right near-term action for any finance chief is to renegotiate pricing on the very next renewal cycle and demand cohort-level profitability data before agreeing to expand transaction volume.
Why would regulators keep squeezing BNPL if consumers say they like it?
Consumer preference does not erase systemic credit risk. The CFPB’s 2025 cap on late fees at $8 per missed payment cost Affirm $90 million in annualized revenue, which clearly shows how quickly regulators can hit the financial model’s weakest point. On top of that, the New York Fed found that 43 percent of BNPL users were already carrying credit card balances, which proves that these products often sit directly on top of existing consumer debt. Regulators look at this data and see a high-risk lending product that is deceptively marketed as a simple convenience. That framing practically invites aggressive scrutiny. The near-term action from regulators will include stricter disclosure requirements, standardized credit reporting mandates, and strict limits on fee stacking.
Why would investors stay in BNPL if the economics are this poor?
They should not stay invested, unless their specific thesis is that the business can be sold to a larger incumbent before the operational losses compound further. BlackRock cut its Affirm stake by 70 percent in the first quarter of 2026, and Tiger Global fully exited Klarna in 2025. Those moves matter deeply because they show that sophisticated, institutional holders are already adjusting their portfolios to reflect the broken unit economics. A diversified company like Block can absorb Afterpay’s losses because it has other massive profit pools to draw from. A pure-play BNPL name cannot survive that math. Investors should closely watch securitization spreads, quarterly cash burn, and charge-off trends. If those three metrics move in the wrong direction together, the equity story for standalone installment lenders will be finished before the year ends.
The profit mirage is fading in full view, and the underlying numbers leave no room for optimism.
Related MarketIntel briefing: read BNPL Unit Economics: Why the Profitability Mirage Is Fooling Institutional Investors Again for a connected view on this market signal.
Source context: readers can compare this market signal with broader data from S&P Global.