How Do BNPL Companies Make Money Through Various Revenue Streams

BNPL companies make money through various revenue streams, and it's not as mysterious as it sounds. They charge interest on outstanding balances, often with high APRs that can range from 20% to 30% or more.

This interest can add up quickly, and customers might not even realize they're being charged such high rates. Some BNPL companies also charge late fees, which can be a significant source of revenue.

Interchange fees are another way BNPL companies generate income. These fees are charged when customers use their BNPL credit to make purchases online or in-store.

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BNPL companies make money from two main avenues: charging customers an interest rate on loans and charging merchants a processing fee.

Customers are charged an interest rate on loans, which can range from 0% to 30% APR, with the average loan size being $750.

Some BNPL companies also make money by charging installment fees, late payment fees, and interest charges.

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A key benefit for merchants is the increased conversion rate, which can be attributed to the BNPL option allowing customers to pay in installments.

BNPL companies charge retailers a small percentage of each sale transacted through their service, which can be comparable to credit card processing fees.

This percentage can range from 2% to 4%, depending on the merchant's expected sales volume, purchase price, and type of goods.

Here's a breakdown of the revenue streams for BNPL companies:

Note: The fees and rates mentioned above are subject to change and may vary depending on the BNPL company and the specific agreement with the merchant.

BNPL companies make money mainly from two avenues. One of the primary ways is through interest charged on the loan amount, which can vary depending on the company and the customer's credit and repayment duration.

Some providers like Lazypay charge an interest of 10-30% on the loan amount, while others like Split in America do not charge any interest rate as long as the installments are paid on time.

Late fees also form a major chunk of the revenues of BNPL organizations, and can be as high as 30% of the total revenue.

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BNPL companies charge vendors a transaction fee of 2-8%, which is higher than the normal credit-card discount rate of 2.9% for e-commerce transactions.

This higher fee is a significant expense for vendors, making it essential for BNPL companies to offer an enticing service that convinces vendors to buy into their offering.

The normal credit-card discount rate is about 1 percent less for transactions made by credit cards in-store.

BNPL companies need to position their service in a way that convinces vendors of its value, which can increase customer traffic and ultimately drive revenue.

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Most third-party BNPL providers do have their soft-credit checks to avoid giving money to people who have a poor record for repaying obligations.

BNPL companies make money from customers mainly through interest charges, which can range from 10-30% on the "loan" amount, depending on the customer's credit and duration of repayment.

Some BNPL providers, like Split in America, don't charge any interest rate as long as the installments are paid in due time.

Late fees can form a major chunk of the revenues of the BNPL organization, as high as 30%, and occur when a customer is charged for not paying the due amount on time.

This is similar to borrowing a book from a library and accumulating fines for not returning it on time.

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BNPL companies make money primarily by charging retailers a small percentage of each sale transacted through their service, which is similar to how credit card companies make processing fees through merchants.

This means that BNPL companies must charge a percentage that is the same or greater than credit card processing fees to avoid taking a loss on each transaction.

Some BNPL companies also make money by charging installment fees, late payment fees, and interest charges.

BNPL companies like Affirm also charge an APR on each purchase, which can range from 0% to 30% depending on the customer's financial and credit status.

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Customers can take home a product even if they don't have enough money to purchase it at that moment, thanks to BNPL options.

In general, BNPL works by entering customers into a contract that obligates them to make payments of both principal and interest in the future, much like a traditional loan.

Here are the key benefits for customers:

BNPL companies also benefit merchants, who see increased conversion and average transaction value, as well as easy integration and no chargeback risk.

For example, merchants adding Affirm to their payment methods experience an 85% annual increase in orders, as well as a 20% increase in purchases from repeat customers.

In the market, BNPL companies compete with traditional credit card companies, online lenders, and even social media platforms.

The BNPL market is expected to reach $4.2 billion by 2027, growing at a CAGR of 23.1%. This is driven by increasing demand for flexible payment options and a shift towards digital payments.

BNPL companies like Klarna and Afterpay have partnered with major retailers to offer their services at checkout, making it a convenient option for customers.

These partnerships allow BNPL companies to tap into existing customer bases and increase their revenue streams.

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BNPL is here to stay, and it's likely to become a more regulated industry. Consolidation has already begun, with companies like Block acquiring Afterpay for $29 billion and Zip buying QuadPay.

Regulation is a growing concern, with the Consumer Financial Protection Bureau expressing worries about BNPL users taking on too much debt and BNPL providers engaging in data harvesting. The Truth in Lending Act only applies to longer-term, interest-bearing BNPL loans, not pay-in-4 loans.

BNPL providers are trying to diversify their customer set, partly by courting older, more affluent consumers. They're also expanding their services, including branching into marketing or shopping assistance and introducing new products like debit cards.

Affirm is expected to experience solid growth in 2021 due to its exclusive deal with Shopify, which will allow all 10,000 merchants on the Shopify network to offer Buy Now, Pay Later (BNPL) services.

This deal is a significant element for growth as it expands Affirm's merchant base, which is crucial for the company's revenue. Almost a third of Affirm's revenues come from its exclusive relationship with Peloton.

In May 2021, Affirm completed the purchase of Returnly, a leader in online return experiences and post-purchase payments, to broaden the services it offers to its merchant partners.

The acquisition is expected to enhance Affirm's offerings and provide a competitive edge in the market.

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BNPL is here to stay, but it's likely to become a more regulated, consolidated industry than it is now. BNPL companies will need to adapt to changing regulations and consumer demands.

Consolidation has already begun, with big players like San Francisco-based Block, formerly known as Square, acquiring Afterpay for $29 billion in 2021. This is a sign of the industry's shift towards larger, more established companies.

The Truth in Lending Act applies to longer-term, interest-bearing BNPL loans, but it doesn't cover pay-in-4 loans because it only applies to loans with more than four installments or those that add finance charges. This lack of regulation has raised concerns about BNPL users taking on too much debt.

BNPL providers are also expanding their services to include marketing and shopping assistance, as well as introducing new products like debit cards. This push into new areas is likely driven by the desire to grow their share of consumer spending.

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To diversify their customer set, BNPL providers are trying to attract older, more affluent consumers. This shift in target market may require BNPL companies to adapt their services and marketing strategies.

BNPL companies may increasingly make interest-bearing loans more of a standard in the industry because they're more profitable. This change could have significant implications for consumers who rely on BNPL services.

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