It sounds sort of like how a credit card works, with the buyer receiving the product before the credit provider receives the payment. But there's a key difference – whereas nearly all credit providers charge late fees or interest for missed payments, many BNPL services don't. That wouldn't be a problem if users always paid on time. But according to a new report from Credit Karma, nearly 40% of Americans using BNPL services say they've fallen behind on payments at least once. With nearly 14% of Americans planning on using BNPL services for their holiday shopping in 2021, that means BNPL companies could be stuck holding a massive bag.

BNPL is as popular as it's ever been. Per the Credit Karma report, over 40% of Americans, many of them young people, say they've used a BNPL service. It's hot in the business world too – last month Square acquired Afterpay in a $29 billion deal and Amazon partnered with Affirm to offer BNPL at checkout for its own marketplace.

While two of the country's four largest BNPL services, Klarna and Afterpay, do charge users for late payments, they're losing customers to the other two, Affirm (NASDAQ:AFRM) and PayPal's (NASDAQ:PYPL) Pay in 4, which don't. According to a recent DealAid study, more than 85% of consumers plan on using Affirm or Pay in 4 this holiday season, compared to around 70% who plan to use Klarna or Afterpay.

It would seem that the no-fees model is the way BNPL is headed. After Afterpay made headlines when it inked deals with 13 major retailers – including Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) – in June, PayPal scrapped late fees on its Pay in 4 services just a few months later, stealing away at least some of the 38% of customers who say they've been late on payments at least once.

Per DealAid, 7% more customers expect to finance their holiday shopping with BNPL than in 2020, and with massive e-tailers like Square (NYSE:SQ) and Amazon getting in on the trend, BNPL companies are facing higher volume than ever before. But Square and Amazon won't be the ones risking revenue losses from the more than one-third of Americans who are behind on their payments. 

As it stands now, Affirm, which is partnered with Amazon, is not yet profitable after its January IPO, and that could be the path for many BNPL startups. Pay in 4 could end up being profitable down the road, owing to PayPal's massive base of dedicated users, but for startups like Splitit or Wisetack that want to get an edge in the space by dropping late fees, the price could be profitability.