Buy Now Pay Later makes money primarily by charging merchants a fee on each transaction and collecting late payment fees from customers. Most BNPL companies earn 2% to 8% of every sale from retailers who want higher conversions and larger cart sizes. Some providers also generate revenue through interest on longer-term plans, interchange fees from virtual cards, and partnerships with banks. In simple terms, merchants pay for access to more sales, while customers may pay fees if they miss payments.
Buy Now Pay Later, or BNPL, has reshaped online and offline shopping across the US, UK, Canada, Australia, and India. From fashion websites to electronics stores, shoppers can split payments into smaller installments. But if customers often pay 0% interest, how does buy now pay later make money? This guide breaks down every revenue stream, shows real numbers, and explains why merchants are willing to pay high fees for this model.
Latest Update
- Major BNPL providers are expanding into physical stores using QR-based checkout and digital wallets. This shift is increasing transaction volume and merchant fee income.
- Regulators in the US and UK are tightening consumer protection rules. Companies are responding by improving credit checks and adjusting late fee structures.
- BNPL firms are partnering with large banks to reduce funding costs. Lower capital costs improve margins even if merchant fees remain competitive.
- New subscription models are emerging where merchants pay fixed monthly fees instead of only per-transaction commissions. This diversifies revenue sources.
What Is the Basic Business Model of Buy Now Pay Later?
The core BNPL model is simple. The provider pays the merchant upfront and collects installments from the customer over time. In return, the merchant pays a percentage fee on each transaction. This fee is usually higher than traditional card processing fees because BNPL increases sales and average order value.
Here is how the process works step by step:
- Customer selects BNPL at checkout.
- BNPL provider approves the transaction within seconds.
- Merchant receives full payment minus the service fee.
- Customer repays the BNPL provider in installments.
Most short-term plans offer 4 installments over 6 weeks at 0% interest. The provider earns mainly from merchant fees and occasionally from late charges. This structure shifts risk from the merchant to the BNPL company, which uses data analytics to manage credit exposure.
How Do Merchant Fees Drive BNPL Profits?
Merchant fees are the largest revenue source for most BNPL companies. Retailers typically pay between 2% and 8% of the transaction value. For high-growth e-commerce brands, this fee is worth paying because BNPL increases conversion rates by up to 20% and boosts cart size.
Traditional credit card fees usually range from 1.5% to 3%. So why would merchants pay more?
- Higher sales volume
- Improved customer retention
- Larger average order value
- Access to younger customers
Example Calculation
| Item Price | Merchant Fee 5% | Amount Merchant Receives | BNPL Gross Revenue |
| $200 | $10 | $190 | $10 |
| $500 | $25 | $475 | $25 |
If a BNPL company processes $1 billion in annual transactions at an average 5% merchant fee, it earns $50 million before funding and operational costs.
Do Late Fees and Interest Charges Add Significant Revenue?
Late fees and interest contribute additional income, but they are usually a smaller portion compared to merchant fees. Many BNPL companies promote 0% interest plans. However, missed payments often trigger fixed late charges or capped penalties.
Common fee structures include:
- $7 to $10 per missed installment
- Maximum cap per order
- Interest on longer-term financing plans
For higher value purchases like electronics or travel bookings, some providers offer 6 to 24 month plans with interest rates ranging from 10% to 30% APR. These longer plans resemble traditional consumer loans and can significantly increase revenue.
In countries like India, where customers are price sensitive, BNPL companies often limit late penalties and rely more heavily on merchant partnerships.
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How Do Funding Costs Affect BNPL Profit Margins?
BNPL companies must fund purchases upfront, so their cost of capital directly impacts profitability. They borrow money from banks, issue bonds, or use warehouse credit lines to finance transactions.
Here is a simplified cost breakdown:
| Revenue Source | Typical Percentage |
| Merchant Fee | 2% to 8% |
| Funding Cost | 1% to 4% |
| Credit Losses | 1% to 3% |
| Operating Cost | 1% to 2% |
If merchant fee revenue exceeds funding and default costs, the company remains profitable. Rising interest rates increase funding costs, which can pressure margins.
How Does BNPL Compare With Credit Cards in Making Money?
BNPL and credit cards earn money differently, even though both offer short term financing. Credit card issuers depend heavily on interest from revolving balances. BNPL relies more on merchant commissions.
| Feature | BNPL | Credit Card |
| Main Revenue | Merchant fees | Interest and interchange |
| Customer Interest | Often 0% short term | 15% to 30% APR |
| Approval Process | Instant soft check | Full credit check |
| Late Fees | Capped and smaller | Higher penalties |
Credit cards generate long-term interest income, while BNPL focuses on transaction driven growth and merchant partnerships.
Is Data and Cross Selling Another Revenue Stream?
Yes, data is becoming a valuable asset in the BNPL ecosystem. Providers analyze shopping behavior to offer targeted promotions, personalized deals, and financial products.
Revenue opportunities include:
- Sponsored product placements inside BNPL apps
- Referral fees from partner brands
- Financial services like debit cards and savings accounts
Some BNPL apps now function like shopping marketplaces. Merchants pay for visibility inside these platforms, creating advertising revenue similar to ecommerce giants.
Are BNPL Companies Profitable?
Profitability varies widely. Rapid growth often comes with high marketing and funding costs. Some global BNPL companies have reported losses during expansion phases, while others achieve profitability through disciplined risk control.
Key factors influencing profits:
- Default rates
- Funding costs
- Merchant fee percentage
- Customer acquisition cost
In stable economic conditions, default rates remain manageable. During downturns, missed payments increase, which can reduce margins significantly.
Key Takeaways
- BNPL makes most of its money from merchant fees between 2% and 8%.
- Late fees and interest add secondary income.
- Funding costs and credit losses determine net profitability.
- Merchants pay higher fees for increased sales and customer reach.
- Data and advertising are emerging revenue streams.
Frequently Asked Questions
1. How does buy now pay later make money if it charges 0% interest?
BNPL earns mainly from merchant fees. Retailers pay a percentage of each sale because BNPL increases conversion rates and average order size.
2. Do customers always pay late fees?
No. Customers only pay late fees if they miss scheduled payments. Many providers cap or limit penalties.
3. Is BNPL more expensive than credit cards?
For merchants, yes because fees are higher. For customers, short term BNPL can be cheaper if payments are made on time.
4. What happens if customers default?
The BNPL provider absorbs the loss. High default rates reduce company profits.
5. Do BNPL companies charge interest?
Short-term plans are often 0% interest. Longer financing plans may include APR charges.
6. Why do merchants accept high BNPL fees?
BNPL increases sales volume, average order value, and customer acquisition.
7. Is BNPL regulated?
Yes. Many countries are introducing stricter consumer protection rules and credit assessments.
Conclusion
So, how does buy now pay later make money? The answer lies in merchant fees, controlled risk management, and strategic funding. While customers enjoy 0% installment plans, retailers pay a premium for higher conversion rates and larger cart sizes. Additional income from late fees, interest on long term plans, and advertising strengthens the model. As regulation evolves and funding costs fluctuate, BNPL companies must balance growth with profitability. For merchants, the model offers measurable sales benefits. For consumers, it provides flexible payment options when used responsibly.