Buy Now, Pay Later Business Model: How BNPL Companies Make Money

Buy Now, Pay Later Business Model: How BNPL Companies Make MoneyBuy now, pay later (BNPL) is transforming the entire payments landscape. BNPL platforms like Afterpay, Klarna and Paidy have become unicorns seemingly overnight. There’s a lot to love about BNPL. 

Consumers get access to much better financing options such as 0% interest over flexible installment loans and don’t require a credit check. They’re also fantastic for middle-ticket items such as appliances, furniture and electronics, which typically wouldn’t be eligible for bank financing. If one were to spread the cost over credit card payments, they could face interest fees of up to 25%. 

Merchants have likewise embraced BNPL as it leads to increased average order volume and can help boost traffic to be digital and physical stores (thanks to the rise of BNPL cards). 

People often ask, though, is “How do companies make money from BNPL?” To some, BNPL platforms offers can seem a little too good to be true, especially if they offer 0% interest. However, there is a reason why BNPL is projected to grow at 13.3% CAGR over the next few years to reach $680B in transaction volume by 2025. Here’s what you need to know. 

Merchant fees drive a major percentage of BNPL revenue

Every time you use a credit or debit card, the merchant pays a fee to the issuer. These tend to range between 2-3% of a transaction and may also include a flat fee of around $0.30. For example, if you purchase a $100 item using a credit card, the merchant will pay $2.30. 

BNPL fees, however, are much higher. They typically range between 2-8% and may also include a flat transaction fee. So that same $100 purchase could cost the merchant up to $8.30. 

This naturally can make people even more confused about why merchants would opt for BNPL solutions. Why wouldn’t they only accept cash or bank transfers? That is because, despite these higher fees, merchants who adopt BNPL see their average order value increase by around 45%. That’s not a bad trade-off! 

We should also note that BNPL providers do make some money from consumers. For example, Affirm does charge 10-30% interest on installments if the consumer opts for a longer repayment period. Likewise, some, such as Afterpay, do have late fees. Both of these typically aren’t a major portion of revenue, but it is something that providers should, and consumers alike should consider. 

How will BNPL providers make money in the future? 

More entrants are jumping on the BNPL bandwagon. Moreover, incumbent financial institutions hampered in the past by regulation are starting to offer similar services to the BNPL model. With the competition heating up, BNPL providers will need to consider how to continue growth, especially if there is downward pressure on merchant fees. 

The future of BNPL will largely be shaped in a few key ways. First, BNPL providers will need to offer more top-of-funnel activities for merchants. If a merchant has the option between a platform that can drive more traffic despite higher fees versus another, the choice will be obvious. 

We’re already beginning to see this. Paidy, for example, leverages its built-in audience to drive traffic to featured retailers. They’re going further to offer personalized recommendations based on user interests, seasonal promotions and additional sales drivers. 

This is especially true as research from this BNPL infographic shows that BNPL usage skews across income and background. Moreover, BNPL is incredibly popular among younger users who tend to prefer digital payments and e-wallets to credit cards. 

In this vein, harnessing data in various ways will be the linchpin of continued BNPL growth. In a traditional transaction, there are little retailers, advertisers, and other businesses can learn. Cash tells you almost nothing. Credit cards can give information on the amount spent, location and time, but not much else. 

BNPL offers a much richer array of data. For example, if a person shops through a BNPL portal, we can see how long they may have been considering a purchase. The exact items they purchased, from what retailer, time of day, whether there was a promotion, their geolocation and more. Having access to this goldmine of data is where BNPL providers have the opportunity to continue accelerating their growth, evolve and maybe even displace credit and debit cards as the king of payments. 

Buy now, pay later: a revolution in payments 

Buy now, pay later providers have exploded onto the scene offering a wide array of benefits for customers and merchants. Despite rising competition and increasing regulation, they can continue their meteoric growth with the right combination of data-driven strategy, focusing on customer experience and leveraging data to its fullest potential. 

In short, the BNPL revolution has just begun. How will you make the most out of it to fuel growth in the 2020s and beyond? 

At Star, we help companies accelerate product innovation by harnessing cutting-edge technologies and design-driven approaches to co-create breakthrough products. With our industry expertise, cross-functional teams and global scale, we can support you in building innovative FinTech services at every stage of your product journey from ideation through launch. Now’s the moment to capitalize on BNPL and other emerging digital finance solutions and technologies. See how with Star.