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- [00:01]
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- [00:30]
The Hartford Insurance Narrator
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IBM Representative
a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now a global workforce of 300,000 can use AI to fill their HR questions, resolving 94% of common questions, not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business IBM,
- [01:43]
Bloomberg Audio Studios Announcer
Bloomberg Audio Studios Podcasts, Radio News
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Stacey Vanek Smith
Buy Now Pay later has taken the US Consumer market by storm in recent years, helping people break up payments for everything from computers to clothes burritos.
- [01:59]
JJ McCorvey
There's Affirm, there's Klarna, there's Afterpay, there's Sezzle, there's PayPal.
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Stacey Vanek Smith
JJ McCorvey is a consumer protection reporter at Bloomberg. He's been following the rise of Buy Now Pay later since the mid 2010s and the so called phantom debt that comes with it.
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JJ McCorvey
A lot of those short term Buy Now Pay later loans are not always reported to credit bureaus. So you know, something that analysts were telling us is that greater transparency was needed to kind of get a larger and fuller picture of a consumer's obligations. And I just never considered that there was like this larger machine kind of powering this industry until Renee and I kind of locked brains.
- [02:48]
Stacey Vanek Smith
Renee would be Bloomberg private credit reporter Renee Ismail.
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Renee Ismail
It's very similar to, you know, when you hear the term shadow banking Right.
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Stacey Vanek Smith
Shadow banking, AKA private credit. These are lenders who operate like banks but are less regulated. And now that industry is getting involved with Buy Now Pay later companies.
- [03:08]
Renee Ismail
In terms of the appeal for a private credit manager, these are ways that the private credit manager can get access to a steady predictable stream of short term assets. Right. And for the Buy Now Pay later firm, they love that because essentially they get to move risk off of their books. So the Buy Now Pay later firm will originate the loans, bundle them up, and then sell that on to private credit managers.
- [03:34]
Stacey Vanek Smith
For private credit, it's an exciting place to be. Buy Now Pay later is being used in more and more e commerce sales in the U.S. nearly 8% of total online spending in the first four months of 2026 happened through buy now pay later programs in the U.S. totaling nearly $29 billion. Of course, the success of this partnership hinges on Americans ability to repay these loans. And this is all coming at a time when US Consumers are increasingly under strain.
- [04:05]
JJ McCorvey
We just, we don't know what happens in a downturn, you know. So currently US households have a record $19 trillion in debt right now. According to last month's CPI, inflation outpaced Americans Paych. And you know, there are signs that Buy not Pay later consumers are having some trouble keeping up with the loans.
- [04:33]
Stacey Vanek Smith
I'm Stacey Vanek Smith in for Sarah Holder and David Gura. And this is the big take from Bloomberg News. Today. On the show, two opaque corners of finance come together. What private credit's involvement in Buy Now Pay later means for consumers, why it's raising concerns, and whether some of the risks in this space could spill over into the rest of the economy. When consumer protection reporter JJ McCorvey and private credit reporter Renee Ismail began working together on their private credit meets Buy Now Pay later story, things quickly got a little bit paranormal. So you wrote this story that is very much under the radar in the financial world right now. There are a lot of big stories going on and I feel like this is the convergence of two things we've heard something about. One is private credit, which is often called shadow banking. The other one is Buy Now Pay later, which is sometimes called phantom debt. So essentially you decided to report a story on shadow phantoms. This is how I've come to think of it. These are two kind of esoteric worlds for people who may at least have heard the term but may not be familiar with it. What exactly is Buy Now Pay Later?
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Renee Ismail
So Buy Now Pay later is a flexible payment option that allows shoppers to take bigger ticket purchases and break them down into smaller bite sized payments that could be made over time.
- [06:07]
Stacey Vanek Smith
And as far as I understand it, you don't pay interest. You can just split up the payment. Instead of paying $100, you can just split it up into four payments of $25 spread over six months. And it's not like a credit card where I would end up paying more.
- [06:21]
JJ McCorvey
Some binocular companies offer the option to split your payments from six to eight weeks. And then there's longer term financing, which Affirm was kind of one of the early players in this space. You see Klarna expanding further into longer term purchases. And those usually come with interest.
- [06:44]
Stacey Vanek Smith
How long have these companies been operating?
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JJ McCorvey
I think I first started hearing about Buy now pay later in like the mid 2010s and you know, then you had competitors kind of popping up over time, people embracing it at a faster rate, especially during the pandemic. I think know a lot of us were at home, you know, looking for ways to spend all this extra money that we had. And you know, ta da, here are more options for you to spread over time.
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Stacey Vanek Smith
America delivered.
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JJ McCorvey
Yes, as it does.
- [07:18]
Stacey Vanek Smith
Okay, so credit cards, I know, I understand how they make money. That's really clear. If I pay $25 out of my hundred, then they charge interest on the rest as I slowly pay it off. Why not pay later? How do they make money? How do these companies actually turn a profit?
- [07:34]
JJ McCorvey
Typically that involves merchant fees. So retailers really love Buy not pay later because it encourages repeat spending and it kind of gives you that extra nudge, you know, when you're, you may have something sitting in your Amazon cart and maybe you don't want all that money to come out of your checking account at once. And so if there's a button that lets you say, you know, break it up into three or four payments across three or four months, even you might be a little more likely to hit that buy button.
- [08:04]
Renee Ismail
You know, from a retailer standpoint, when you give shoppers the breathing room that comes with Buy now pay later services, it's just going to encourage more traffic, right? More people coming into the door at the end of the day.
- [08:18]
JJ McCorvey
The hallmark use of buy now, pay later at least as it started financing these big purchases. And I think over the past couple years, what you've seen is this gradual kind of push into groceries and essentials, as in our story with our subject Verdell Wright, who lost his job last year and is now using Bonai polarity to kind of make ends meet. You know, so he's buying groceries From Aldi. And he's also buying a toothbrush and pre workout supplement and bathroom cleaner on Amazon. And I think our reporting shows that that's not necessarily by accident.
- [08:55]
Stacey Vanek Smith
What do you mean?
- [08:56]
JJ McCorvey
Well, I think if you look at some of the largest deals between private credit and Buy non pay later companies to purchase some of these buy non pay later loans even they say in the press releases.
- [09:11]
Renee Ismail
Right.
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JJ McCorvey
You know, so Klarna makes a deal with the private credit firm Elliott. Right, Renee. And they say this will help us expand our longer term loans to US consumers to meet their accelerating demands. So expansion of Buy now pay later companies into these more essential everyday products I think is kind of pushed via private credit money.
- [09:38]
Stacey Vanek Smith
What is private credit exactly for people who don't know?
- [09:41]
Renee Ismail
Yeah, you could think of private credit as non bank lending. Typically these come from credit managers and they extend usually longer term loans to middle market companies that may not be able to take out loans from banks.
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Stacey Vanek Smith
Why wouldn't they be able to take out a loan from a bank?
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Renee Ismail
For a myriad of reasons. They could be, they could have a riskier credit profile. They may need a more bespoke type of arrangement which banks, because they're heavily regulated, may not be able to meet. Whereas a private credit manager who may have a bit looser regulations as it relates to what they can extend out to companies, they might be able to make it happen.
- [10:21]
Stacey Vanek Smith
So it sort of seems like buy now, pay later, you don't necessarily have to deal with how good your credit score is the way that you might if you get a credit card. So it kind of is a way that people who maybe don't have the best credit score to get credit. And private banking, shadow banking also seems like a way for companies that also might not have the best credit or might be maybe wanting to take out riskier loans for something that is maybe a little riskier. It seems like a way that they can get money. So this seems like two services that are a little bit similar in that way, is that right?
- [10:56]
Renee Ismail
Yeah, definitely. I mean, in terms of the appeal for a private credit manager, you know, take the forward flows. These are ways that the private credit manager can get access to a steady, predictable stream of short term assets, which is sort of outside of the realm of the typical longer term debt that might sit on their books.
- [11:16]
Stacey Vanek Smith
Okay, what is a forward flow? Because this is sort of key to this alliance between shadow banking and phantom debt. It's all about the forward flows. So what does that mean with a forward flow?
- [11:28]
Renee Ismail
As I mentioned, this is something that allows the private credit manager to take on debt that's being originated by the Buy Now Pay later firm. And for the Buy now Pay later firm, they love that because essentially they get to move risk off of their books.
- [11:44]
Stacey Vanek Smith
So is it like lending somebody money before they need it? Kind of is that the forward flow is that they're like, just FYI, we have $1,000 available for loans that you can take as you want.
- [11:55]
Renee Ismail
Yeah, I mean, think of it from the buy now pay later firm's perspective. Rather than them waiting for payments to come back in so that they can get capital and extend more loans, they have willing buyers on the private credit side that say, hey, you know, we'll give you that capital. You focus on what you're good at. You focus on extending those loans, on helping everyday consumers make these purch happen.
- [12:16]
Stacey Vanek Smith
As private credit enables Buy Now Pay later firms to take on more loans, more and more transactions are happening at the intersection of these two industries, and both of them involve more risk and less regulation than traditional lending. That has critics concerned. We look at what could happen after the break.
- [12:39]
The Hartford Insurance Narrator
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- [13:35]
Public.com Announcer
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- [13:50]
Karen Moscow
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Nathan Hager
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- [14:19]
Bloomberg Audio Studios Announcer
Not every sale happens at the register. Before AT&T business Wireless checking out customers on our mobile POS systems took too long. Basically a staring contest where everyone loses. It's crazy what people say during an awkward silence. Now transactions are done before the silence takes hold. That means I can focus on the task at hand and make an extra sail or two. Sometimes I do miss the bonding time. Sometimes.
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Nathan Hager
AT&T business Wireless connecting changes everything.
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Stacey Vanek Smith
So private credit, AKA shadow banking, is supercharging buy now, pay later loans, AKA phantom debt. And it's happening at a time when the US consumers responsible for repaying those debts are increasingly under strain. I asked Bloomberg's J.J. mcCorvey and Renee Ismail to unpack the potential risks.
- [15:15]
Renee Ismail
You could think about the problems on several levels. Obviously you have the scale component because the originators know that they have these, you know, billion, $3billion, five billion dollar facilities coming from the private credit managers. They essentially can just kind of extend these loans and that might incentivize them to be more like machines where they
- [15:37]
Stacey Vanek Smith
get a little careless.
- [15:39]
Renee Ismail
Exactly, exactly. And you know, I think a second layer is the cyclicality. Right. Like I mentioned, during the good times, it's very easy for private credit managers to continue doing deals like these. But what happens when conditions get a bit choppier? What happens when private credit may not want to expand on some of these deals? Will they pull back? Will they terminate some of these agreements? And I think at the end of the day, the person who feels that is the person who is shopping for groceries that might not be able to get that flexible payment solution that they are so used to.
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JJ McCorvey
You know, to Renee's point, we just, we don't know what happens in a downturn. Currently, US households have a record $19 trillion in debt right now. According to last month's CPI, inflation outpaced Americans paychecks. And there are signs that buy not pay later consumers are having some trouble keeping up with the loans. And the buy now pay later companies themselves will say, you know, delinquency rates are low. But when you look at certain surveys. For example, a couple Months ago, LendingTree came out with a survey that we covered that said 47% of borrowers had paid late on a buy not pay later loan within the last year, which was up 6 percentage points from last year.
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Stacey Vanek Smith
That's a lot.
- [17:02]
JJ McCorvey
13 percentage points from two years ago. And that more than half of them said they would not be able to make ends meet without the loan. So that just gives you a sense of how much some parts of the consumer economic picture are struggling in the economy, but also how much they have come to rely on buy now, pay later. And so the concern is what happens, you know, will, will that new line of credit dry up for these consumers? Will there be potentially heightened costs and fees associated with the loans, which will compound the strain? So, yeah, I think there's just a lot that we don't know. And the folks we've talked to are kind of just saying we're keeping an eye on this.
- [17:46]
Stacey Vanek Smith
All right, well, I'm gonna say something that may be a little bit at the heart of your story, but that sounds a lot to me like the thing that caused the financial crisis, right? Like a bunch of loans getting, getting packaged together and divided up and sold off. Is that what's going on here?
- [18:04]
Renee Ismail
So I think in terms of the parallel, there are connections. Right. You mentioned the fact that they're originating and then bundling it up and then moving it on to willing buyers, willing investors. That part is definitely similar. I think what's different though is scale, right. When you look at the lead up to 2008, I mean, that was a 10 to $11 trillion mortgage market. The buy now pay leaders base is only about half a trillion. Right. So in terms of, you know, greater spillover effect or contagion in terms of the broader economy, definitely, you know, two different scenarios here.
- [18:38]
JJ McCorvey
And I would add that, you know, the buy now pay later companies would say these loans are very different. Right? They're, they're short term purchases. It's not over, you know, multiple years. It's usually, you know, like the average purchase is anywhere from $100 to $300 versus 300,000 dol. And so there's a predictability that private credit investors see safety in. These are people with established repayment histories. Even if every few months they miss a payment, at least that's something you can plan for and expect. It's a different ball game, but skeptics see a lot of similarities and in the practice of what's happening with forward flow and what led up to the crisis.
- [19:32]
Stacey Vanek Smith
For sure, there's a lot we don't know about these worlds. How does that play into the possible risk here?
- [19:40]
Renee Ismail
Yeah, I mean, I think as it relates to forward flows, for example, there are typically a lot of guardrails that they can work into these, you know, really large deals. But these are private deals at the end of the day. So we don't even get to see into these structural protections that might be baked into the forward flows. But you like to think that managers and originators sort of work together to set these forward flows up in a way that protects both the originator extending the loans and also the funding partner, in this case private credit managers.
- [20:13]
Stacey Vanek Smith
That's a lot of faith though, that people are being responsible, which historically speaking is a little hit or miss.
- [20:22]
Renee Ismail
Yeah, I mean, when, when we spoke to managers, they were, they were very adamant about the strength of these protections that they, that put into these forward flows. I mean, some of the ones that come to mind, oftentimes before they even ink these partnerships, they'll have eligibility criteria where they will say we will agree to purchase only loans that fit under a predetermined credit profile. And also, you know, sometimes they can even co invest, right. Like they can bring another asset manager to come in and, and, and invest with them in the buy now, pay later loans or personal loans or auto loans or student loans or whatever it is. And what that does is it shares the risk, but it also shares the due diligence process.
- [21:05]
Stacey Vanek Smith
What are some of the warning signs that you will both be watching for? Like what are some red flags that if you saw them you would start to worry about the shadow phantoms?
- [21:16]
Renee Ismail
I think from my world, I would say, you know, how managers are, you know, handling all the concerns that you've probably seen in the headlines, how they're handling investors that want to pull money out. You know, how AI could disrupt certain business models that they might be exposed to. And even though a lot of these consumer type plays are really only a small part of their portfolios, the health of the space is going to be something to watch.
- [21:48]
Stacey Vanek Smith
I don't know if it's a warning sign or something that it started out as a service for couches and laptops and is now funding like burritos. Do you see that as a warning sign at all?
- [22:01]
Renee Ismail
Well, yes and no. I mean, I think it is staggering when you see a statistic like 1 in 4 BNPL users use the product for groceries. That's according to a survey last year. But you know, when you talk to the credit managers, they might, you know, sort of come back and say, well, it's really no different from using a credit card.
- [22:23]
Bank of America Announcer
Right.
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Stacey Vanek Smith
I buy groceries on my credit card all the time and it's not because I couldn't afford it.
- [22:27]
Renee Ismail
Exactly.
- [22:27]
JJ McCorvey
I think another important piece of context to this entire conversation is the fact that this presidential administration has been very quick to dismantle certain consumer protections. There's the Consumer Financial Protection Bureau, which, you know, previously had oversight of the binocular space. And under the Biden administration, the CFPB issued an interpretive rule to try to make binapilator companies beholden to the same rules as credit card companies when it comes to interest disclosures, formalized practices for disputes and repayments, and things like that. And we saw when the Trump administration took over, they revoked that. So and according to our recent report by our investigations team, you know, we see just how friendly to industry the CFPB has now become. And so if the agency that, you know was primarily watching this has telegraphed that maybe it's not so concerned with with watching it, you know that closely, who is going to sound the alarm if things start to break down?
- [23:55]
Stacey Vanek Smith
This is the Big Take from Bloomberg News. I'm Stacey Vanek Smith in for Sarah Holder and David Gura. To get more from the Big Take and unlimited access to all of bloomberg.com, subscribe to to date@bloomberg.com podcastoffer if you liked this episode, make sure to follow and review the Big Take wherever you listen to podcasts. It helps people find the show and thank you for listening. We'll be back tomorrow.
- [24:25]
Bloomberg Sustainable Business Summit Announcer
The Bloomberg Sustainable Business Summit Returns to Singapore on July 22. Our 5th annual Asia Pacific Summit will expand explore how business and finance leaders are shaping the next phase of globalization by strengthening resilience and driving a multi speed energy transition across Asia's diverse markets. Join us for solutions driven discussions and networking opportunities. Thank you to our Summit advisor, Bangkok Bank. Learn more at BloombergLive.com SBS-Singapore.