Buy now, pay later companies make money five ways: fees charged to merchants on every sale, interest on longer repayment plans, late fees when customers miss payments, gains from selling the loans to investors, and the value of the transaction data they collect. The pay-in-four plans most shoppers see are free to the customer, but the retailer is paying, and the provider is often routing that same shopper toward a longer, interest-bearing loan where the real margin lives. In the most recent year with comprehensive federal data, BNPL lenders originated more than 335 million loans totaling $45.2 billion, with an average loan size of just $135.1Consumer Financial Protection Bureau. BNPL Market Report 2025
Merchant Fees on Every Sale
Every time a shopper picks a BNPL option at checkout, the merchant pays the provider a cut of the sale. This merchant discount rate typically runs from about 2% to 8% of the transaction value, and some providers add a flat per-transaction fee on top. That is higher than the roughly 2% to 3% merchants pay on standard credit card processing.
The mechanics are simple. The BNPL company pays the merchant the purchase price upfront, minus the fee. Buy a $200 jacket through a provider charging the retailer 5%, and the merchant receives $190 right away. The BNPL company then collects the full $200 from the shopper in installments over the following weeks. The $10 spread is the revenue.
Retailers accept the premium because the pitch comes down to two numbers: conversion rate and average order value. Shoppers who would have abandoned a cart at a $400 total are more likely to complete the purchase when it reads as four payments of $100, and they tend to add items they would have skipped. The BNPL provider absorbs the credit risk and does the collecting, which is work the merchant would otherwise have to price in. For providers that stick to short-term, interest-free plans, merchant fees are the majority of revenue.
Interest on Longer Loans
The standard pay-in-four plan carries no interest, but BNPL providers also offer longer repayment terms for bigger purchases, and those loans do. Terms can stretch from a few months to 24 months or more, with APRs that sometimes reach 36%, higher than the average credit card.
Interest has quietly become a dominant revenue stream. Affirm’s quarterly report for the period ending December 2025 shows the shift clearly: $494 million from interest income versus $328 million from merchant network fees. Interest came to 3.6% of the total dollar volume of goods sold through the platform, while merchant fees were 2.4%.2Affirm. FY Q2 2026 Earnings Supplement The popular story that BNPL is “free for consumers” and companies survive on merchant fees alone is outdated. The pay-in-four product gets shoppers in the door; the interest-bearing products behind it do a growing share of the earning.
Late Fees
Most BNPL providers charge a fee when a scheduled payment is missed.3Consumer Financial Protection Bureau. Do Buy Now, Pay Later (BNPL) Loans Have Fees? On short-term pay-in-four plans, late fees have historically averaged around $7 per missed payment.4Consumer Financial Protection Bureau. Buy Now, Pay Later – Market Trends and Consumer Impacts On a $135 loan, $7 is a meaningful share of the purchase, and it compounds for borrowers juggling multiple plans. Longer-term loans with higher balances can carry steeper penalties, with some providers charging $30 or more for a single missed payment. Late fees do two jobs for the provider at once: they generate direct revenue, and they push borrowers to pay on time, which cuts credit losses.
Selling Loans to Investors
BNPL providers have to pay merchants upfront on every sale, and they can’t wait weeks or months for consumers to repay before writing the next round of loans. To keep the cash moving, many providers sell their loans to institutional investors. In 2023, PayPal began selling its European BNPL loans to the global investment firm KKR on a weekly basis. KKR then securitizes the receivables, packaging them into investment products.5KKR. Asset-Based Finance in Action: A Buy Now, Pay Later Loan
The scale is substantial. Affirm booked $185 million in gains on loan sales in the quarter ending December 2025, roughly 1.3% of goods sold through the platform and about 16% of total revenue.2Affirm. FY Q2 2026 Earnings Supplement Each sale turns future consumer payments into immediate cash the company can lend out again.
Consumer Data
BNPL companies collect detailed information on every transaction: what was bought, where, when, and how reliably the shopper repays. That data has two internal uses, both of which translate into money. First, it sharpens underwriting, so the provider approves the right borrowers at the right limits and holds down defaults. Second, it powers targeted marketing. Providers build profiles from purchase history and use them to promote specific products and brands through their apps and partner retailers. The CFPB has noted that BNPL lenders use the data they gather “to deploy models, product features, and marketing campaigns to increase the likelihood of incremental sales.”6Consumer Financial Protection Bureau. Buy Now, Pay Later: Market Trends and Consumer Impacts As competition pushes merchant discount rates down, data monetization is poised to carry more weight in the revenue mix.7Consumer Financial Protection Bureau. Consumer Financial Protection Bureau Opens Inquiry Into Buy Now Pay Later Credit
Why Profits Are Still Hard to Come By
Despite billions in revenue, many of the largest BNPL companies have struggled to post consistent profits. Klarna reported a full-year net loss of $273 million in 2025 even as revenue grew. Losses like that are common in the sector.
The arithmetic is tight. Merchant discount rates of 2% to 8% have to cover credit losses from borrowers who never pay, customer acquisition, fraud, and the cost of funding the loans. On short-term, interest-free products, the margin is thin to begin with. CFPB analysis found borrowers defaulted on about 2% of BNPL loans on average between 2019 and 2022, with default rates reaching 4.1% among consumers with no credit score.8Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt On an average $135 loan, a small default rate can wipe out the merchant fee entirely. That pressure is a large part of why the industry has leaned harder into longer-term interest-bearing loans, banking products, and loan sales. The free pay-in-four plan is the acquisition tool. The money sits a layer deeper.
What That Means for Consumer Protections
Because the pay-in-four product usually involves four or fewer installments and no finance charge, it has traditionally sat outside the core Truth in Lending Act rules that govern credit cards. In May 2024, the CFPB issued an interpretive rule declaring that BNPL providers with digital user accounts qualify as “card issuers” under Regulation Z, which would have required them to investigate billing disputes, pause collection while investigating, cap consumer liability for unauthorized charges, and credit refunds on returns.9Consumer Financial Protection Bureau. Truth in Lending (Regulation Z) – Use of Digital User Accounts to Access Buy Now, Pay Later Loans The CFPB withdrew that interpretive rule on May 12, 2025, stating it “should not be enforced or otherwise relied upon” while a broader review of agency guidance proceeds.10Federal Register. Interpretive Rules, Policy Statements, and Advisory Opinions – Withdrawal Without that rule, short-term BNPL products remain largely outside credit card protections such as the right to dispute a charge with a mandatory 30-day investigation or the $50 cap on liability for unauthorized transactions.11Office of the Law Revision Counsel. 15 US Code 1643 – Liability of Holder of Credit Card Individual providers may offer similar protections voluntarily; they are not uniformly required to.
State rules fill in unevenly. Not all states require BNPL lenders to hold consumer loan licenses, because many state licensing regimes target small-dollar, high-interest loans that don’t match an interest-free pay-in-four product.12Bloomberg Law. Banking, Comparison Table – Buy Now, Pay Later and State Loan Licensing Whether a state treats BNPL as a loan or a payment service determines which rules apply. For longer-term, interest-bearing BNPL loans, state usury caps become relevant, and providers moving into that territory often obtain state lending licenses on their own.