Affirm's adjusted operating margin improved from negative 12 percent to positive 8 percent over the last two years, a figure CEO Max Levchin presented to investors in March 2025 as definitive proof that scale and better risk models had finally fixed BNPL unit economics. The broader market eagerly accepted this soothing narrative. After a brutal period that saw Klarna's valuation collapse from $46 billion to $6.7 billion, Affirm's stock crater 90 percent from its 2021 IPO peak, and Afterpay acquired for a fraction of its peak private valuation, venture capitalists and late-stage growth funds have spent two years peddling the idea that the recent shakeout was merely a healthy correction. The story goes that the survivors learned their lesson, underwriting tightened, and the sector stabilized. And yet, a closer examination of the underlying data reveals that this consensus is entirely built on wishful thinking. The buy-now-pay-later sector is not consolidating into a mature financial services category. It is actively collapsing under the weight of its own structural flaws.
The Consensus Misdiagnosed the Core Problem
The dominant narrative pushed by industry executives and echoed by Goldman Sachs' fintech research team holds that the sector's problems were cyclical rather than structural. Goldman's March 2025 report highlighted that transaction volumes grew 18 percent year-over-year in the United States, suggesting a strong rebound. The clear implication was that the worst of the macroeconomic headwinds had passed, which means the remaining players could finally enjoy a period of rational competition and expanding margins.
This argument fails on three distinct counts. First, it deliberately conflates revenue growth with sustainable per-transaction profitability. When MarketIntel look at Affirm's margin improvement, the underlying mechanism was not a sudden breakthrough in underwriting efficiency, because the company achieved these numbers by slashing marketing spend, which drove customer acquisition costs down by 40 percent. Second, the consensus ignores the fundamental reality that zero-interest installment lending is inherently unprofitable when funded by merchant fees alone, especially in a high-rate environment. Third, the optimistic outlook assumes the consumer credit cycle will remain benign. This directly contradicts the Federal Reserve's own projections, which show delinquency rates on consumer loans rising to 4.2 percent by the end of 2026, up significantly from 2.8 percent in 2023.
Klarna, the sector's other major bellwether, tells a remarkably similar story of financial engineering masking operational decay. The Swedish company reported that its adjusted EBITDA margin improved from negative 5 percent to positive 3 percent in 2024. However, this was only achieved after executing a massive reduction in force that eliminated 1,500 jobs and completely exiting eight international markets. More alarmingly, Klarna's United States operations still lose money on every single transaction. Meanwhile, Afterpay's integration into Block has proven incredibly rocky. Block's latest 10-Q filing shows that Afterpay's gross margins actually declined in 2025, dropping from 38 percent to 35 percent as merchant discounts deepened to maintain volume. These are not the indicators of a sector finding its natural equilibrium. They are the desperate signs of companies propping up their quarterly numbers with accounting maneuvers and aggressive cost cuts.
BNPL Unit Economics Remain Structurally Broken
Four distinct pieces of evidence expose the deep rot beneath the surface of the installment lending market.
First, MarketIntel must examine Affirm's own public disclosures regarding its core revenue engine. The company's fiscal 2025 10-K reveals a terrifying squeeze on its fundamental business model. The take rate, which is the fee merchants pay per transaction, fell to 2.8 percent in the United States, down from 3.2 percent in 2023. At the exact same time, Affirm's funding costs rose to 6.1 percent of receivables, up from 5.3 percent. This creates an inverted margin structure. Affirm is literally paying more to finance its loans in the capital markets than it earns from the merchants it serves. That leaves the company with only one lever to stay afloat: punishing the consumer. Consequently, late fees now account for a staggering 15 percent of Affirm's total revenue, up from just 8 percent in 2022. This is not a scalable financial technology model. It is a traditional subprime debt trap dressed up as a software innovation.
Second, the deterioration in consumer repayment behavior is accelerating rapidly. Delinquency rates are clustering at dangerous levels across the sector, with Affirm's 30-day rate hitting 5.7 percent in the first quarter of 2026 and Klarna's reaching 6.4 percent, both of which severely underperform traditional credit cards sitting at just 2.5 percent. The core problem is that installment underwriting models rely heavily on thin-file consumers and sparse alternative credit data. These models are now failing spectacularly as subprime borrowers max out their limits across multiple platforms simultaneously. For years, industry executives argued that installment loans were inherently safer than credit cards because the balances were smaller and the duration was shorter. That theory is now collapsing under the weight of empirical reality, proving that smaller, fragmented loans actually default more frequently when issued to cash-strapped consumers.
Third, the value proposition for merchants is rapidly deteriorating. A 2025 survey conducted by PYMNTS.com found that 62 percent of retailers using installment platforms reported lower average order values compared to 2023. The mechanism here is consumer behavior adaptation: shoppers are no longer using these tools to buy larger aspirational items, but are instead splitting everyday low-value purchases into smaller installments. Worse still, 45 percent of surveyed retailers said the presence of installment options actually increased their return rates. Consumers are overbuying because they know they can return items without facing immediate financial consequences or tying up their own liquidity. This dynamic completely erodes the promised lift in conversion rates that historically justified the high merchant fees. The result is a simple economic reality: if enterprise merchants are not making incremental profit, they will refuse to keep paying 3 to 6 percent take rates.
Fourth, the regulatory vise is tightening in ways that directly attack the sector's growth engines. The Consumer Financial Protection Bureau's 2025 rule, which formally requires providers to report all loans to the major credit bureaus, will finally expose the sector's heavy reliance on serial borrowers. MarketIntel already have a preview of how this will play out. Early data from Australia, where similar reporting rules took effect in 2024, shows that users' credit scores dropped an average of 30 points immediately after reporting began. This credit score degradation will make it significantly harder for these firms to underwrite new loans, which in turn will push their funding costs even higher in the securitization markets. The CFPB's rule is not a temporary compliance speed bump. It is a permanent structural headwind that fundamentally alters the risk profile of the entire asset class.
The Embedded Finance Counterargument Fails on the Math
The strongest case for the sector's long-term survival comes from its integration into larger diversified technology platforms. Block's Afterpay, PayPal's Pay in 4, and Apple's Pay Later are all deeply embedded into massive ecosystems with global distribution advantages. The bullish argument suggests that these mega-cap players can easily subsidize their installment lending losses using the massive profits generated from their core payments, hardware, or advertising businesses. This theoretically creates an impenetrable moat that standalone players like Affirm and Klarna simply cannot match.
While this argument has theoretical merit, it is ultimately flawed when exposed to actual performance data. Embedded installment lending only makes strategic sense if it drives highly profitable incremental revenue elsewhere in the parent company's ecosystem. Yet the data shows it does exactly the opposite. PayPal's Pay in 4 transactions grew an impressive 22 percent in 2025, but PayPal's overall corporate take rate actually fell from 1.25 percent to 1.18 percent during the same period. The mechanism is cannibalization: the installment product actively shifted consumers away from PayPal's higher-margin payment volumes. Similarly, Apple Pay Later, which launched with massive fanfare in 2023, has seen its adoption completely stall. According to Apple's internal data, only 8 percent of eligible transactions actually use the feature. The reason is remarkably simple. Consumers do not care about installment payments enough to fundamentally change their established checkout behavior. They will use the feature if it is placed directly in front of them with zero friction, but they will not actively seek it out or switch ecosystems to access it.
On top of that,, the embedded argument completely ignores the brutal capital intensity required to scale a lending operation. Even for deep-pocketed technology giants like Apple, funding $1 billion in receivables at a 6 percent cost of capital requires $60 million a year in pure interest expense. While that figure might look like a rounding error on Apple's income statement, it represents a very real structural drag on operating margins that hardware executives despise. For Block, which funds Afterpay directly from its own corporate balance sheet, the cost is highly material. Afterpay's funding costs ate up a staggering 30 percent of Block's total gross profit in 2025, a massive increase from 20 percent in 2023. Embedded installment lending is not a strategic moat. It is a capital-intensive money pit that degrades the parent company's core financial metrics.
Buyers
The ongoing shakeout is not just a localized story about a few overvalued financial technology startups failing to meet expectations. It represents a massive structural shift that will force institutional investors, enterprise retail buyers, and product development teams to fundamentally rethink how they allocate capital and design checkout experiences over the next decade.
The Short Thesis Remains Highly Lucrative
Affirm and Klarna's publicly traded stocks have rallied roughly 40 percent off their 2025 lows, but sophisticated investors should recognize this as a classic dead-cat bounce. The underlying financial data clearly shows that neither company has fixed its core unit economics, and both remain dangerously dependent on punitive late fees and unsustainable cost cuts just to show positive adjusted EBITDA. The next major leg down in the equity markets will arrive when delinquencies inevitably spike in the fourth quarter of 2026, right as a massive cohort of holiday-season loans go bad simultaneously. Institutional investors should closely monitor Affirm's 30-day delinquency rate. If that metric breaches the 6.5 percent threshold, the stock will almost certainly re-test its 2025 lows of $12 per share, representing a devastating 50 percent drop from current trading levels.
For hedge funds and credit investors, the most asymmetric trade is not simply shorting Affirm's equity. The real opportunity lies in buying credit-default swaps on the sector's securitizations. Consider Affirm's 2025-A asset-backed security deal, which originally priced at a comfortable 220 basis points over Treasuries. That same paper is now trading at 350 basis points. If the underlying loan delinquencies hit 7 percent, that spread will violently widen to 500 basis points, creating an incredibly lucrative short opportunity for credit funds. The credit-default swap market is already signaling what retail equity investors refuse to acknowledge: the fundamental credit risk in this asset class is severely mispriced.
Enterprise Retailers Must Renegotiate Immediately
Chief Financial Officers at major retailers using these platforms must prepare for three severe near-term shocks to their checkout economics. First, merchant fees will inevitably rise as the lenders try to pass on their soaring funding costs. Affirm and Klarna are already quietly testing dynamic pricing models, where the merchant discount rate automatically increases based on the individual consumer's real-time risk profile. A 2025 pilot program conducted with a major electronics retailer showed merchant fees rising to a punishing 7 percent for subprime borrowers, up drastically from the standard 4 percent rate. Second, return rates will continue their upward trajectory. A thorough 2026 study published by Narvar found that installment users return 28 percent of their purchases, compared to just 15 percent for traditional shoppers. Third, the promised conversion lift will steadily decline as consumers grow fatigued with the sheer ubiquity of these payment buttons. A 2025 survey by McKinsey found that 68 percent of consumers now view installment lending as a basic commodity rather than a unique brand differentiator.
Retailers must aggressively renegotiate their vendor contracts right now, well before the next holiday shopping season begins. The strategic goal is not to completely cut ties, because these platforms do still drive some incremental volume, but rather to strictly cap the fees and force the risk back onto the lenders' balance sheets. Target provides the perfect blueprint for this maneuver. The retail giant successfully renegotiated its Affirm partnership in 2025, securing a flat 3 percent fee, down from 4.5 percent, while forcing Affirm to absorb 100 percent of all fraud-related losses. Every other enterprise retailer should immediately follow suit and demand identical terms.
Product Teams Must Pivot to Hybrid Models
For financial technology product teams, the historical lesson is now undeniable: the standalone installment lending product is effectively dead. The future of consumer checkout lies entirely in hybrid models that combine flexible payments with other, more sustainable revenue streams. Two specific approaches are currently working in the market.
First, the integration of installments with traditional credit cards is showing massive promise. Chase's Flex Pay product, launched in 2025, allows existing cardholders to split their purchases into manageable installments for a nominal 1 percent fee. This elegant solution preserves Chase's highly lucrative interchange revenue while offering the exact flexibility consumers demand. Early performance data shows that Flex Pay commands a 3 percent take rate, which is double the margin of standalone competitors.
Second, the combination of installments with high-yield savings accounts is flipping the traditional model on its head. Chime's Save Now, Buy Later feature allows users to automatically set aside money for future purchases in installments, earning 2 percent interest while they wait. Instead of lending money and taking on credit risk, Chime is actively helping its users save. This innovative product currently boasts a massive 12 percent take rate among Chime's 25 million active users.
The common thread between these two successful models is obvious. Both approaches drastically reduce the provider's reliance on shrinking merchant fees and politically toxic late charges. Product teams across the industry should immediately kill their standalone installment features and reallocate engineering resources to these hybrid approaches. The key trigger to watch moving forward is Affirm's revenue mix. If Affirm's late-fee revenue exceeds 20 percent of its total revenue in 2026, it will serve as the final undeniable confirmation that the standalone model is permanently unsustainable.
Two Massive Failures Will Hit Before 2027
Based on the current trajectory of funding costs and consumer defaults, two distinct market events will inevitably occur before the end of 2026.
First, Affirm will be forced to either raise highly dilutive equity at a 50 percent discount to its current valuation or submit to an acquisition. The primary catalyst for this event will be the company's fourth-quarter 2026 earnings report, when delinquencies are projected to breach the critical 6.5 percent threshold and funding costs will likely rise by another 50 basis points. If Affirm cannot successfully raise fresh capital, its access to the securitization markets will completely dry up, forcing the board into a humiliating fire sale. The most logical potential buyers include PayPal, which desperately needs to build a defensive moat around its checkout button, or a massive private equity firm looking to roll up distressed financial technology assets at a steep discount.
Second, Klarna will be forced to completely exit the United States market. The Swedish company's American operations lost a staggering $250 million in 2025 alone, meaning its profitable European margins are actively subsidizing its disastrous American expansion. Klarna's board of directors will soon face a binary choice: double down on the highly competitive United States market and risk burning through the company's remaining cash reserves, or execute a strategic retreat to Europe and focus entirely on core profitability. The smart institutional money is heavily betting on a retreat. The specific trigger for this event will be Klarna's third-quarter 2026 earnings release, when its United States EBITDA margin is projected to fall below negative 10 percent.
The shakeout in this sector is far from over. It is merely entering its final, most destructive act.
Isn't this just a feature rather than a standalone business?
Yes, and that is exactly why the financial math is collapsing. Standalone providers rely entirely on merchant fees, which are rapidly shrinking due to enterprise pushback, and late fees, which are becoming politically toxic. Embedded features only work if they drive highly profitable incremental revenue elsewhere in the ecosystem, which the hard data shows they do not. Apple Pay Later's dismal 8 percent adoption rate conclusively proves that consumers do not care enough about the feature to change their underlying payment behavior. Treating this lending mechanism as a feature simply accelerates the race to the bottom for margins.
What about the growth potential in emerging markets where credit cards are rare?
The promise of emerging markets is a complete mirage for this specific business model. Klarna's highly publicized exit from Latin America in 2024 proved that the underlying economics are actually much worse in high-inflation, low-trust markets. In Brazil, Klarna's default rates hit a catastrophic 12 percent, and the local merchant fees were nowhere near high enough to cover the exorbitant funding costs. Meanwhile, sophisticated local players like Nubank are successfully offering traditional credit cards with rich rewards, completely undercutting the core value proposition of installment loans. The only verifiable success stories in emerging markets are tied directly to massive super-apps like Grab, which can afford to subsidize their lending losses using the massive profits generated from their core ride-hailing and delivery monopolies.
Could impending regulation save the sector by forcing consolidation?
No, regulation will only accelerate the sector's inevitable decline. The Consumer Financial Protection Bureau's 2025 rule requiring mandatory credit bureau reporting will ruthlessly expose the sector's heavy reliance on subprime serial borrowers, making it exponentially harder for these algorithms to underwrite profitably. Meanwhile, the European Union's strict 2026 cap on late fees, which is set at a maximum of 0.5 percent of the total loan amount, will completely eliminate a critical revenue stream that these companies desperately need to survive. Affirm's late-fee revenue already plummeted 15 percent in the European Union immediately after the cap took effect. Regulation is not a protective lifeline for these companies. It is a tightening noose that will choke off their remaining paths to profitability.
Related MarketIntel briefing: read The BNPL Sector Is Still Broken: Why the Shakeout Is Just Beginning for a connected view on this market signal.
Source context: readers can compare this market signal with broader data from S&P Global.