Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over a set installment plan, typically 4 payments over 6 weeks. BNPL enables shoppers to receive products immediately and pay the full amount later, rather than having to save up to pay the full amount upfront.
BNPL has become an increasingly popular payment method, especially among younger demographics. It offers a way to spread out payments interest-free over a short period. BNPL also does not require a hard credit check, making it more accessible to those with limited credit history.
How BNPL Plans Work
There are a few common BNPL structure models, with slight variations:
4 Interest-Free Payments Over 6 Weeks
This is the most popular BNPL plan structure. When checking out, customers split their purchase amount into 4 equal payments, due every 2 weeks. As long as all payments are made on time, there is no interest or additional charges.
Monthly Installment Plans
Some BNPLfintechs offer biweekly or monthly installment plans over 3-12 months. These longer terms come with interest charges. Monthly plans tend to be used for higher-ticket items, like furniture or electronics.
Split Payment at Checkout
A newer offering is dividing a purchase into 2-3 payments due every 2 weeks or monthly. One payment occurs at checkout, and remaining balance over next 1-2 months.
Pay in 4 Over 6 Months
BNPL providers tailored for apparel and fashion verticals tend to offer 4 installment payments over 24 weeks. This better aligns with seasonal wardrobe refreshes.
Why BNPL is Popular
There are several key reasons why BNPL has rapidly grown in adoption:
Delayed Payment – Deferring payment enables consumers to afford purchases they otherwise may not be able to pay full price for upfront.
Budgeting – By spreading costs into predictable installments, BNPL helps consumers better budget spend.
Convenience – BNPL is integrated into merchant online checkouts, providing a smoother, simpler financing experience.
No credit checks – Approvals based on basic eligibility checks open access to those with limited credit history.
Interest-free – Major BNPL plans don’t charge interest or fees, unlike credit cards.
BNPL Business Model
BNPL providers generate revenue through merchant fees. Brands and retailers pay 2-8% of the transaction amount for the BNPL financing service.
Some BNPL fintechs also make additional revenue through interchange fees, late fees, and partnerships with banks and payment processors. However, merchant fees make up the majority of earnings.
The BNPL business model produces strong unit economics. By offloading repayment risk to merchants in exchange for a small transaction fee, BNPL companies achieve mass scale and profitability.
According to management consulting firm McKinsey & Company, the BNPL sector has gross margins between 80-90%, with an average transaction margin of $8-15.
Major BNPL Companies
While the BNPL industry originated in Australia back in 2014, it has since exploding worldwide. As of 2022, there were over 350 BNPL companies globally across all continents.
Below we overview 5 of the largest and most influential BNPL providers internationally.
Afterpay
Launch: 2014
Locations: North America, Europe, Australia
Key metrics: Over 16 million active customers, nearly 100,000 merchant partners
Afterpay pioneered the adoption of BNPL. Founded in Australia, Afterpay introduced the concept of “Pay in 4” installments over 6 weeks with no interest.
They targeted millennial and Gen Z shoppers looking to buy fashion, beauty, sporting goods, and lifestyle merchandise. Afterpay’s easy sign-up and budget-friendly value prop quickly resonated.
In 2022, Afterpay was acquired by digital payments giant Block (Square), accelerating its growth in the US and integration with sellers.
Affirm
Launch: 2014
Locations: North America
Key metrics: Over 15 million customers, approximately 200,000 affiliated merchants
Affirm provides longer-term installment loans beyond traditional BNPL. They offer biweekly or monthly repayment terms from 3-48 months through partnerships with banks and their lending license.
While Affirm began by focusing solely on ecommerce, they now have point-of-sale support for in-person transactions and even offer a high-yield savings account. Their flexible terms and strong brand partnerships helped them become one of the largest BNPL firms.
Klarna
Launch: 2005
Locations: North America, Europe, Australia
Key metrics: Over 147 million users, 400,000 merchant partners
With roots in financing shopping transactions in Europe, Klarna has taken a leading spot in the global BNPL industry. They continue heavy expansion efforts across geographies and verticals.
Known for their pay later “Smoooth Payments”, Klarna touts superior UX and branding. They also provide loyalty programs, virtual shopping tools, and influential social commerce options.
Sezzle
Launch: 2017
Locations: North America, India
Key metrics: Over 7 million customers, ~75,000 merchant partners
Sezzle appeals to younger, budget-conscious consumers thanks to requiring just 25% down. They focus on markets underserved by credit cards and operate across various consumer sectors.
As a public company since 2020, Sezzle is one of the more transparent BNPL providers. They posted 2021 revenue of nearly $300 million. Sezzle concentrates merchant acquisition to sustain hypergrowth.
Zip
Launch: 2013
Locations: North America, Europe, Australia
Key metrics: Over 9 million customers, tens of thousands of merchant partners
Headquartered in Australia, Zip Co or “Zip” takes an ecosystem approach to payments and financing. Beyond core BNPL with 4 interest-free installments, they offer Tap & Zip accounts, business capital loans, and more.
Zip expanded aggressively via acquisitions across Australia, UK, Europe, UAE, Canada, Mexico, and the US. Publicly-trade Zip states they have facilitated over $11 billion in total credit.
How BNPL Companies Make Money
As outlined earlier, BNPL providers predominantly generate revenue through merchant transaction fees. However, there are some other income streams buoying earnings growth as well.
Merchant Fees
Merchants that integrate BNPL checkout options pay anywhere between 2-8% of the order amount per transaction. Many BNPL fintechs offer tiered pricing based on seller volume and vertical.
These fees enable BNPL platforms to avoid charging consumers interest or late payments. Instead, retailers take on the credit liability in exchange for higher conversion rates and order values.
On average, merchants see 20-30% sales lifts from offering BNPL. Given most BNPL companies do not outlay capital for each transaction, merchant fees convert to high margins.
Interchange Fees
For BNPL firms with attached debit or credit cards, additional revenue comes from interchange fees from payment networks.
Interchange fees are charges paid by the merchant’s bank to the card-issuing bank per transaction. These typically range from 1-3% of purchase volume.
Affirm, Zip, and other BNPL providers take a portion of interchange as added earnings.
Late Fees
If a customer misses an installment payment, BNPL companies collect late payment penalties. These extra charges help offset delinquent accounts.
Late fees vary but tend to be $7-10 for each missed installment. With repayment in 4 payments being most common, total late fees can surpass $25+ per order.
However, most BNPL platforms emphasize keeping late fees low or try to avoid them altogether to maintain positive brand perception.
White Label Partnerships
Some BNPL apps generate revenue by licensing their software to enterprise brands. Retailers can private label BNPL services within their own checkout flows and product offerings.
These white label or “Powered by” platforms gain scale quicker through distribution partnerships while earning SaaS-like partnership fees.
Point-of-Sale Finance Fees
With BNPL now embedded directly at offline registers, merchant partners similar pay transaction rates for in-person BNPL financing too.
Affirm, Klarna, and providers with POS presence can access increased transaction share as in-store retail continues rebounding. POS unlock bigger ticket use cases as well.
Risks and Downsides of BNPL
Although rising in popularity, BNPL does not come without controversies. Critics argue potential harms of normalizing spending beyond means. There are also real risks for consumers managing payments.
Overspending Budgets
A common critique of BNPL is facilitating overspending. Knowingly financing discretionary purchases could negatively impact personal financial health if taken too far.
While younger generations exhibit caution using credit, BNPL enables accumulating debt across multiple platforms simultaneously.
Without sufficient disposable income, take-home earnings can be outpaced by BNPL installments and late fees. Financial counselors caution proper assessment of affordability before using BNPL.
Hidden Fees
Consumer advocacy groups push for regulation given BNPL platforms are essentially unlicensed lenders. Without financing guardrails, predatory lending practices could emerge.
If late fees build up, BNPL expenses become less transparent, dragging down otherwise marketed “interest-free” plans.
Credit Reporting
Currently, BNPL repayment history does not directly appear on credit reports. This helps those with thin or poor credit access BNPL.
However, with Affirm, Klarna, and other major BNPL apps now running hard credit checks and providing 6-12 month terms, credit bureau visibility could increase. Missed installments may eventually impact credit scoring models.
Debt Accumulation
As consumers adopt multiple BNPL plans across retailers and apps simultaneously, overlapping installment burdens could snowball unmanageably.
Juggling debt across decentralized BNPL accounts makes tracking and budgeting challenging. Without oversight, short-term BNPL plans stretch beyond means.
Key Takeaways on Buy Now, Pay Later Financing
- BNPL allows online and offline shoppers to split purchases into equal installments, delaying full payment
- Leading providers include Afterpay, Affirm, Klarna, Sezzle, Zip, and more
- Consumers enjoy BNPL benefits like interest-free terms, predictable payments, and accessibility
- Merchants pay small transaction fees in exchange for sales lifts from offering BNPL
- Industry expected to keep rapidly evolving across fintech and global ecommerce