Private credit, often dubbed "shadow banking," and Buy Now, Pay Later (BNPL) companies, which offer what critics call "phantom debt," are significantly overlapping. Investment heavyweights like Blue Owl Capital Inc. and KKR & Co. are involved in these forward-flow agreements, channeling billions into the BNPL sector. This convergence is drawing scrutiny from credit rating agencies, former regulatory chiefs, and consumer finance watchdogs due to mounting signs of stress among U.S. consumers.
The growing link between these two opaque financial sectors is particularly concerning because both expanded rapidly during a low-interest-rate environment and operate with less regulatory oversight than traditional financial institutions. Private credit funds have limited disclosure requirements, while BNPL loans often fall outside standard credit reporting infrastructures. This lack of transparency means that potential losses from consumer defaults could ripple through private credit portfolios without clear public visibility, making it difficult for regulators to track or contain the damage.
Moody’s Ratings and other organizations are evaluating the risks posed by this intersection, especially if a recession or significant credit event impacts consumers. The worry is that problems in one sector could quickly spread to the other. Analysts note that a rise in unemployment or a contraction in consumer spending would severely test the quality of BNPL loan books backing private credit structures, a scenario with limited historical precedent. Such a downturn could reveal that this "alternative" investment sector is more closely tied to consumer credit cycles than investors might anticipate.
Adding to the concern is the changing regulatory landscape surrounding BNPL. There are efforts, including from the White House, to influence the Consumer Financial Protection Bureau's (CFPB) attempts to regulate the BNPL industry. Former CFPB Director Rohit Chopra highlighted the risk, drawing parallels to the mortgage crisis where lenders' expectations of repayment broke down. These investments into BNPL loans signify a shift for private credit, an industry historically focused on corporate borrowing, exposing private credit fund investors to potential losses from a surge in BNPL delinquencies with minimal public insight into the extent of that exposure.
Consumers, even high-income earners (those making at least $150,000 annually), are increasingly using BNPL for essential purchases, with a Pymnts.com report indicating that 20% of high-income consumers used BNPL by March 2026, compared to 10% of lower-income consumers. This suggests BNPL is becoming a tool for managing cash flow for a broader segment of the population, including those who are otherwise affluent but may be struggling with high costs for necessities.
