BNPL Economics
Buy Now Pay Later (BNPL) shifts credit risk from you to the BNPL provider. You get paid upfront. They collect from the customer over time. That service has a cost.
BNPL makes sense for some businesses, not others. The math matters.
How BNPL Works
The Basic Model
- Customer selects BNPL at checkout
- BNPL provider approves customer in real-time
- You receive payment (minus BNPL fee) within 1-3 days
- Customer pays BNPL provider in installments (4 payments, 6 months, etc.)
- BNPL provider bears the credit risk
Who's Who
| Provider | Model | Typical Terms |
|---|---|---|
| Klarna | Pay in 4, financing | 4 payments / 6-36 months |
| Affirm | Financing | 3-36 months, interest varies |
| Afterpay | Pay in 4 | 4 biweekly payments |
| PayPal Pay Later | Pay in 4, Pay Monthly | 4 payments / 6-24 months |
| Shop Pay Installments | Pay in 4, financing | 4 payments / up to 12 months |
Payment Flows
Pay in 4 (Short-term):
Purchase: $100
Customer pays: $25 now, then $25 every 2 weeks
You receive: $100 minus fee (~$4-6)
Timeline: 6 weeks total
Financing (Long-term):
Purchase: $500
Customer pays: ~$45/month for 12 months
You receive: $500 minus fee (~$25-40)
Timeline: 12 months
What BNPL Costs You
Fee Structure
| Fee Type | Typical Range | Notes |
|---|---|---|
| Pay in 4 | 4-6% | Interest-free to customer |
| Financing (0% APR) | 5-8% | You subsidize the interest |
| Financing (interest-bearing) | 3-6% | Customer pays interest |
Compare to card processing: 2.5-3.5%. BNPL is 1-5% more expensive.
Fee Calculation Example
| Scenario | Card | BNPL (Pay in 4) | Difference |
|---|---|---|---|
| $100 sale | $2.90 fee | $5.50 fee | +$2.60 |
| $500 sale | $14.50 fee | $27.50 fee | +$13.00 |
| You receive | $97.10 / $485.50 | $94.50 / $472.50 | Less |
Hidden Costs
| Cost | Description |
|---|---|
| Integration | Development time for checkout integration |
| Reconciliation | Separate BNPL payouts to track |
| Chargebacks | BNPL has its own dispute process |
| Returns | More complex with installment plans |
When BNPL Makes Sense
Good Fit
| Factor | Why BNPL Works |
|---|---|
| High AOV ($100-$1,000) | Installments meaningful, fee % acceptable |
| Impulse purchases | Removes price objection |
| Younger demographic | Gen Z/Millennial preference |
| Fashion/electronics | Discretionary, aspirational |
| Low margin sensitivity | Can absorb 5%+ fees |
Bad Fit
| Factor | Why BNPL Doesn't Work |
|---|---|
| Low AOV (under $50) | Fee % too high relative to margin |
| B2B transactions | Not designed for business buyers |
| Subscription billing | One-time purchase model |
| Thin margins | Can't absorb extra 2-5% |
| Commodity products | Customers won't pay premium |
Decision Framework
Should you add BNPL?
1. Is your AOV > $75?
NO → Probably not worth it
YES → Continue
2. Is your margin > 30%?
NO → Fee impact may be too high
YES → Continue
3. Is your customer demographic under 45?
NO → Lower BNPL adoption
YES → Continue
4. Are competitors offering BNPL?
YES → Consider parity
NO → May not be expected
5. Can you absorb 5%+ fees?
YES → Test it
NO → Skip or pass cost to customer
The Conversion Lift Question
BNPL providers claim 20-30% conversion lifts. Reality is more nuanced.
What Providers Claim
- "20-30% higher conversion"
- "Higher AOV"
- "New customer acquisition"
What Data Shows
| Study Source | Finding |
|---|---|
| Provider case studies | 20-30% lift (cherry-picked) |
| Independent studies | 5-15% lift typical |
| Merchant reports | Highly variable |
How to Measure Lift
Don't trust provider claims. Measure yourself:
- Baseline: Conversion rate before BNPL
- Enable BNPL: Run for 4-8 weeks
- Measure: New conversion rate
- Control for seasonality: Compare to same period last year
- Calculate true lift: After accounting for BNPL fee impact
True ROI calculation:
Revenue Lift = (New Conversion - Old Conversion) × Traffic × AOV
Cost = BNPL Transactions × BNPL Fee Rate
Net Benefit = Revenue Lift - Cost
The Cannibalization Problem
Some BNPL transactions would have happened anyway with cards. You're paying extra for transactions you'd have gotten at lower cost.
Question to ask: "What % of BNPL users would have completed purchase without it?"
Provider Economics
Understanding how BNPL providers make money helps you negotiate.
Revenue Sources
| Source | How It Works |
|---|---|
| Merchant fees | 4-8% per transaction (your cost) |
| Consumer interest | 0-30% APR on longer terms |
| Late fees | $5-25 per missed payment |
| Bank partnerships | Revenue from financing programs |
Provider Profitability
Most BNPL providers have struggled with profitability:
- High customer acquisition costs
- Credit losses on defaulting customers
- Competition drives merchant fees down
- Regulatory scrutiny increasing
Implication: Negotiate. Providers need merchant volume.
Negotiating BNPL Rates
Leverage Points
| Factor | Your Leverage |
|---|---|
| High volume | More transactions = better rates |
| Low returns | Less risk for provider |
| High approval rates | Your customers are creditworthy |
| Exclusive offering | Single provider gets all volume |
| Marketing commitment | Promote their brand |
What to Negotiate
| Term | Negotiable? | Starting Point |
|---|---|---|
| Fee % | Yes | Ask for 0.5-1% reduction |
| Settlement timing | Sometimes | Faster = better |
| Marketing support | Yes | Co-op funds, promotion |
| Integration support | Yes | Development assistance |
| Chargeback handling | Sometimes | Provider absorbs more |
Sample Negotiation Script
"We're evaluating BNPL providers. Our current volume is $X/month with Y% average ticket. We expect Z% of transactions to use BNPL. What's your best rate for this volume, and how does it improve as we scale?"
Chargebacks and Disputes
BNPL disputes work differently than card chargebacks.
BNPL Dispute Process
| Stage | What Happens |
|---|---|
| Customer complaint | To BNPL provider |
| Provider decision | Provider makes initial call |
| Merchant notification | You're informed |
| Evidence submission | Similar to card disputes |
| Resolution | Provider decides |
Key Differences from Cards
| Factor | Cards | BNPL |
|---|---|---|
| Dispute window | 120 days | Varies (often shorter) |
| Ratio impact | Visa/MC ratios | Separate BNPL ratio |
| Fee structure | Chargeback fee | Varies by provider |
| Network rules | Strict | Provider-specific |
BNPL Fraud Risk
| Risk | Notes |
|---|---|
| Friendly fraud | Customer disputes after receiving goods |
| Identity fraud | Fraudster uses stolen identity |
| Return fraud | Return goods, keep installment |
Your exposure: Usually limited. Provider takes credit risk. But disputes still cost time.
Returns and Refunds
Returns with BNPL are more complex than card refunds.
How BNPL Returns Work
| Scenario | Process |
|---|---|
| Full return before payment complete | Provider cancels remaining payments, refunds paid amount |
| Partial return | Provider adjusts payment schedule |
| Return after all payments | Standard refund to customer |
Operational Complexity
| Challenge | Impact |
|---|---|
| Timing mismatch | Return processed before/during installments |
| Partial returns | Complicated payment adjustments |
| Reconciliation | Matching refunds to original BNPL transactions |
| Customer confusion | "Why am I still being charged?" |
Best Practices
- Train support staff on BNPL refund process
- Set clear return policy for BNPL purchases
- Process refunds quickly to minimize customer confusion
- Track BNPL refund rates separately
Regulatory Considerations
BNPL is under increasing regulatory scrutiny.
Current Landscape
| Jurisdiction | Status |
|---|---|
| US (Federal) | CFPB investigating, no specific rules yet |
| US (States) | Some states treating as credit |
| UK | FCA regulation coming |
| Australia | ASIC oversight, new regulations |
| EU | Consumer Credit Directive updates |
What This Means for Merchants
- Disclosure requirements may increase
- Marketing restrictions possible
- Compliance burden could shift partly to merchants
- Fee caps possible (like interchange caps)
Risk Mitigation
- Don't make BNPL the only option
- Ensure clear disclosure of BNPL terms
- Monitor regulatory developments
- Have contingency if provider exits market
Integration Considerations
Implementation Options
| Approach | Complexity | Control |
|---|---|---|
| Shopify/platform native | Low | Low |
| Hosted widget | Medium | Medium |
| API integration | High | High |
What to Evaluate
| Factor | Questions |
|---|---|
| Checkout flow | Does it add friction? |
| Mobile experience | How does it look on mobile? |
| Approval rates | What % of customers get approved? |
| Settlement timing | When do you receive funds? |
| Reporting | Can you reconcile easily? |
Scale Callout
| Volume | BNPL Approach |
|---|---|
| Under $100k/mo | Skip BNPL unless competitors require it. Fee impact too high. |
| $100k-$500k/mo | Test one provider. Measure lift carefully. |
| $500k-$2M/mo | Negotiate rates. Consider multiple providers. |
| Over $2M/mo | Custom integration. Negotiate aggressively. Measure by SKU/category. |
Where This Breaks
-
Assuming conversion lift is free. The extra 2-5% fee eats into any conversion benefit. Measure net ROI, not gross lift.
-
Low-AOV businesses. $30 average ticket with 5% BNPL fee = $1.50 extra cost. If margin is $5, that's 30% of profit gone.
-
Returns-heavy categories. Fashion with 20% return rate + BNPL complexity = operational nightmare.
Related Pages
- Checkout Conversion - Optimizing checkout
- Digital Wallets - Other payment methods
- Interchange Fundamentals - Understanding payment costs