Buy Now, Pay Later companies make money primarily by charging retailers a fee on every installment purchase, then layering additional revenue on top: interest on longer-term loans, late fees from borrowers who miss payments, paid subscriptions, referral commissions from in-app shopping, data services sold to merchants, and sales of loan portfolios to investors. So how does Buy Now, Pay Later make money in practice? The short answer is that the shopper is rarely the main customer. The retailer is.
Merchant Fees Do Most of the Work
Every time a shopper splits a purchase into installments at checkout, the retailer pays the BNPL provider a commission of roughly 5% to 8% of the transaction. That’s about double or triple what credit card networks charge, which typically runs 2% to 3%.1Board of Governors of the Federal Reserve System. Buy Now, Pay Later Beyond Pay in 4, A Comprehensive Product Overview Retailers agree to that premium because offering installments at checkout tends to increase order size and reduce cart abandonment.
The mechanics are straightforward. When a customer chooses a BNPL plan, the provider pays the merchant the full purchase price, minus commission, within a few business days. From that moment the retailer is out of the deal entirely and the provider owns the debt, absorbing any losses if the shopper stops paying.2Office of the Comptroller of the Currency. Retail Lending: Risk Management of Buy Now, Pay Later Lending That transfer of credit risk is what justifies the higher percentage.3Federal Reserve Bank of Kansas City. The Rise of Buy Now, Pay Later: Bank and Payment Network Perspectives and Regulatory Considerations
High-volume retailers can negotiate lower rates, but even a discounted percentage across millions of transactions builds a large revenue base. This is why the classic “pay in four” plan can stay free for the shopper. The merchant is already subsidizing it.
Interest on Longer-Term Installment Plans
The four-payment plans that put BNPL on the map generally carry no interest. Once purchase amounts grow and terms stretch to six months, a year, or several years, the product starts to look like a conventional loan and the provider starts to earn interest.
Affirm, for example, charges anywhere from 0% to 36% APR depending on the borrower’s creditworthiness and any promotional terms the merchant is offering.4Affirm. How to Use Affirm for Flexible Buy Now Pay Later Payment Plans Interest accrues on the declining principal balance. A $2,500 purchase financed at 36% APR over 24 months generates more than $1,000 in interest income for the lender. Spread across a large loan portfolio, even moderate rates produce a substantial revenue stream that sits on top of the merchant fee the provider already collected at the point of sale.
The Consumer Financial Protection Bureau issued an interpretive rule in 2024 classifying BNPL providers with digital user accounts as “card issuers” under Regulation Z, the federal rule implementing the Truth in Lending Act.5Consumer Financial Protection Bureau. Use of Digital User Accounts to Access Buy Now, Pay Later Loans That pulls the longer-term product closer to credit card regulation, but it doesn’t change the underlying revenue math.
Late Fees and Penalty Charges
Late fees are a smaller but real slice of the pie, and they vary sharply by provider. Across the industry, late fees and similar charges contributed over 13% of total revenue in 2021, and roughly 11% of BNPL consumers were charged one.6Affirm. The Affirm Difference: Building a New Kind of Payments Network
The approach differs from company to company. Affirm markets itself on charging no late fees at all. Klarna is at the other end: it collected $472 million in fees during 2024, about 17% of its total revenue, from a combination of late-payment penalties, charges for rescheduling a due date, and administrative fees for issuing one-time cards. Some providers cap late fees at a percentage of the original order value. Others charge flat dollar amounts that stack with each missed payment.
Providers that advertise as “fee-free” aren’t necessarily walking away from this revenue entirely. Some restrict platform access or lower spending limits after a missed payment instead of charging directly, which protects long-term user value even if it forgoes short-term penalty income. The CFPB notes that most BNPL lenders charge late fees in some form and encourages consumers to read each lender’s terms before signing up.7Consumer Financial Protection Bureau. Do Buy Now, Pay Later (BNPL) Loans Have Fees?
Paid Subscriptions and Memberships
A newer revenue line is paid memberships. Klarna launched a tiered subscription model in the U.S. with four levels: Core at $4.99 per month, Plus at $9.99, Premium at $19.99, and Max at $44.99.8Klarna. Klarna Launches Premium and Max Memberships in the U.S. Higher tiers bundle exclusive discounts, purchase protection, and other perks the company values at $3,000 to $5,000 annually.
Subscription revenue is attractive because it’s predictable. A monthly payment arrives whether or not the user makes a purchase that month, unlike merchant fees, which depend on transaction volume, or late fees, which depend on borrower behavior. It also deepens the customer relationship and makes users less likely to switch providers at checkout.
In-App Referrals and Shopping Placements
BNPL apps have quietly turned into shopping platforms. Open one and you’ll see curated partner brands, featured deals, and exclusive discounts. That placement isn’t free. Providers earn referral commissions when a user clicks through and completes a purchase at a partner store, separate from the transaction fee the retailer pays at checkout. Two revenue events, one purchase.
For retailers, this is customer acquisition through a channel that reaches shoppers who are already in a buying mindset with pre-approved credit. For the provider, it’s a way to capture value before the purchase decision is even made, not just at the checkout screen.
Data Analytics Sold to Merchants
Every installment plan generates data: what consumers buy, when, how much, and whether they pay on time. Providers package those insights into analytics services that merchants pay for alongside the core payment product.9Bank for International Settlements. Buy Now, Pay Later: A Cross-Country Analysis A retailer might use that data to see which products convert best on installment plans, which customer segments perform best, or when to time promotions.
The CFPB has flagged what it calls “data harvesting” by BNPL lenders, noting that providers use consumer data to build models, design features, and run marketing campaigns aimed at increasing additional sales.10Consumer Financial Protection Bureau. Buy Now, Pay Later: Market Trends and Consumer Impacts A platform that knows what 20 million shoppers bought last quarter has something valuable to sell beyond installments.
Selling Loan Portfolios to Investors
BNPL providers don’t always hold the loans they originate. Some sell their portfolios to institutional investors, freeing up capital to fund new lending. PayPal sold its European “Pay Later” loan book to KKR’s asset-based finance team in 2023 and set up an ongoing arrangement to keep selling new loans. KKR then securitizes those assets into investment products.11KKR. Asset-Based Finance in Action: A Buy Now, Pay Later Loan Portfolio PayPal keeps originating loans and managing customer relationships while the credit risk moves off its books.
The move does two things at once. It generates immediate cash from the sale that can be redeployed into new originations, and it reduces the balance sheet risk of holding millions of small unsecured consumer loans. Securitization is becoming a larger part of the financial architecture behind BNPL as the market grows.
Why the Model Works Despite Defaults
The revenue story only makes sense against the risk. BNPL borrowers defaulted on about 2% of loans on average between 2019 and 2022, with the 2022 figure at 1.9%.12Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt That’s low by unsecured lending standards, but it climbs for younger borrowers and those with thin or no credit history. Borrowers with no credit score defaulted at 4.1%, and occasional users with no credit score defaulted at rates above 6%.
The merchant fee is the cushion. A provider collecting 5% to 8% on every transaction can absorb meaningful default losses before profit is threatened. Stack interest income from longer-term plans, late fees from a slice of borrowers, subscription revenue, referral commissions, analytics services, and portfolio sales on top, and the model works with room to spare. The providers most exposed are the ones chasing growth by loosening underwriting, especially in subprime lending where default rates run highest.