How to Play the BNPL (Phantom Debt) Bubble
How Smart Investors Can Hedge Against the Subprime Risks of the Buy Now, Pay Later (BNPL) Boom and Eventual Meltdown.
“Buy now, pay later” may be a consumer convenience, but it's a signal flare for investors. A fast-growing, largely unregulated financial product with ballooning exposure to subprime borrowers? That’s not just a trend. That’s an early warning.
In this Wealth Matters 3.0 deep dive, I’ll unpack the risk signals embedded in the BNPL market’s expansion—and show you how savvy investors can hedge or profit from the inevitable shakeout.
The Rise of the BNPL Beast
The BNPL market is on a tear, driving the late-stage dying breath of our post-Covid consumerism. In 2024, BNPL global volume hit $492.8 billion and is forecasted to reach $560.1 billion by 2025 and $911.8 billion by 2030. But behind that explosive growth lies a troubling reality:
61% of BNPL originations are from subprime and deep subprime borrowers.
Most BNPL loans aren’t reported to credit bureaus—meaning lenders, banks, and even regulators are flying blind.
63% of borrowers take out multiple loans simultaneously, often across different providers.
In short, this is an unregulated credit bubble hiding in plain sight, and the music could stop anytime.
Why the Default Data Is Deceptively Calm
So why hasn’t this BNPL House of Cards collapsed yet?
One reason is auto-payment structures. BNPL companies like Klarna and Affirm often link repayments to debit or checking accounts, reducing missed payments—at least temporarily. But this “pay-first” system masks the real issue: over-leveraging.
BNPL users already carry $453 more in personal loan debt than non-users and $292 more in retail debt. Many have little to no traditional credit history. The risk isn't just in individual defaults—it’s in cascading credit failure across a shadow network of invisible liabilities.
Parallels to 2008's Subprime Mortgage Crisis?
If this is ringing alarm bells, it should. The dynamics—unregulated lending, low visibility, aggressive approval rates—echo the mortgage crisis.
Approval rates jumped from 67% (2020) to 79% (2022)—largely among higher-risk borrowers.
Klarna offloaded $49 billion in UK BNPL loans to Elliott Management to raise liquidity and reduce risk.
That’s not a company preparing for growth. That’s a company prepping for turbulence by offloading its risk while driving more toxic debt issuance to satisfy its venture-backed growth curve.
Investment Risks...and Strategic Opportunities
Several sectors will feel the impact if BNPL growth cools—or worse, collapses. But smart investors can hedge or even benefit by identifying who’s overexposed and who gains from the cleanup.
1. Short the Overexposed BNPL Providers
Companies like Block (SQ), Affirm (AFRM), and Zip Co. (ZIZTF) are deeply reliant on subprime-driven BNPL revenue:
Affirm partners with Amazon and Shopify but is deeply embedded in discretionary retail—high risk in a downturn.
Block’s Afterpay acquisition added a BNPL-heavy portfolio with 61% subprime exposure.
Tactics: Talk to your advisor about using put options, direct shorts, or inverse ETFs like SARK, which targets ARK Innovation Fund holdings, including BNPL exposure.
2. Long the Cleanup Crew: Credit Reporting Firms
BNPL lenders aren’t currently required to report to bureaus—but that’s changing.
The CFPB is pushing for credit bureau integration to close blind spots.
Equifax and Experian are primed to profit from the demand for alternative credit scoring and expanded consumer data.
Why it matters: These firms will gain new data pipelines and revenue streams once reporting becomes mandatory.
3. Retail Realignment: Short Discretionary, Long Defensive
BNPL is oxygen for online shopping. It boosts conversion rates by 20–30%. So when the air gets thin…
Short:
Wayfair (25% of transactions via BNPL)
Peloton (30% of equipment sales BNPL-financed)
Long:
Dollar General and Walmart—retailers that benefit as cash-strapped consumers trade down.
This strategy pairs trade hedges against volatility while positioning for recession-proof resilience.
4. Macro Hedges: VIX, USD/AUD, and Private Credit
VIX Futures or Calls:
As BNPL exposure becomes more visible, expect equity volatility. VIX is your insurance. The VIX, also known as the CBOE Volatility Index, is a real-time market index that measures the expected volatility of the S&P 500 Index over the next 30 days. It is derived from the prices of S&P 500 index options and is often referred to as the "fear index" because it reflects the level of uncertainty or fear in the market. The VIX is calculated using a complex formula that aggregates the weighted prices of multiple S&P 500 options across various strike prices. It is expressed as an annualized percentage and is used by investors to gauge market risk and sentiment and make informed investment decisions.
Here are some key points about the VIX for those not familiar:
Calculation: The VIX is calculated using the prices of S&P 500 index options with near-term expiration dates, typically between 23 and 37 days.
Interpretation: A higher VIX value indicates higher expected volatility and market stress, while a lower value suggests lower volatility and market stability.
Investment Use: Investors use the VIX to hedge against potential market downturns or speculate on volatility changes.
Ranges:
0-15: Very low volatility and optimism.
15-25: Moderate volatility.
25-30: Increasing market turbulence.
30 and over: High volatility with potential extreme swings
USD/AUD Positioning:
Australian firms like Afterpay and Zip Co. are BNPL pioneers. A wave of defaults could tank the AUD. For protection, go long USD/AUD.
Private Credit:
As banks tighten lending, private credit becomes a buyer of last resort. Investors can explore funds that finance small businesses or offer secured asset-backed loans to offset BNPL instability.
Potential Systemic Impact
If BNPL defaults surge from today’s 2% to even 10%—a conservative figure for subprime—up to $56 billion in global BNPL debt could go delinquent.
GDP drag: With a high marginal propensity to consume, the subprime segment disproportionately drives retail sales. Every $1 cut in BNPL access could reduce GDP by $1.50–$2.00.
Consumer confidence collapse: Defaults affect more than balance sheets—they erode spending intent. A 5–7% decline in confidence is not unthinkable.
Is Regulation the Pin That Pops the Bubble?
The CFPB, OCC, and European regulators are all circling.
Mandatory credit reporting would instantly reduce BNPL approval rates, increase default visibility, and shrink originations [4].
Basel III capital rules could force banks that buy BNPL portfolios to raise reserves [27].
Bottom line: regulation won’t kill BNPL. But it will deflate its margins, increase friction, and require massive business model pivots.
Building a Hedged BNPL Portfolio
Here’s a sample $10M portfolio allocation:
Asset/Strategy Weight Purpose Short Affirm & Block -15% Direct subprime BNPL risk Long Experian +10% Regulation tailwind USD/AUD Futures (Long USD) +20% Currency hedge Short XRT ETF -15% Discretionary retail collapse VIX Call Options +5% Volatility insurance Cash 55% Liquidity for event-driven buys
This portfolio isn't just defensive. It’s opportunistic—ready to capitalize on BNPL contagion, regulatory tightening, or distressed sales of BNPL ABS (asset-backed securities) portfolios.
Final Thought: Subprime is a Time Bomb in Fintech Clothing
The BNPL boom is textbook credit expansion built on questionable foundations: easy approvals, limited oversight, and borrowers with thin credit files. Sound familiar?
The illusion of stability—low defaults, high growth—relies on a fragile web of automated payments and credit invisibility. But the moment the macro shifts (unemployment, interest rates, sentiment), that illusion breaks.
Investors don’t need to fear BNPL. But they do need to understand it—and position accordingly.
In a world where phantom debt can balloon to half a trillion dollars without regulators noticing, knowledge isn’t just power. It’s alpha.
Yours in health and wealth
~Chris J Snook