Buy Now Pay Later
Buy now, pay later is short-term consumer credit offered at the checkout — typically the purchase split into three or four interest-free instalments over six weeks to three months — with the merchant paying the provider a fee of 2–8% for higher conversion and a larger basket, and the provider bearing the credit risk. Klarna, Afterpay, Affirm and PayPal built the category; losses, funding costs and regulation reshaped it.
- Also known as
- BNPL, Pay in 3, Pay in 4, Instalment payments at checkout
- Used at
- e-commerce checkouts in fashion, electronics, beauty, travel and increasingly in-store and everyday spending through the providers' own apps and cards
- Binding
- consumer-credit regulation, which most BNPL initially escaped through exemptions for short-term interest-free credit — the UK brought BNPL into FCA regulation from 2026, the EU's revised Consumer Credit Directive (2023) covers it from 2026, the US CFPB treated it as card-like in 2024; affordability checks and credit-bureau reporting are the changes
- Typical economics
- merchant fees of 2–8% of the basket (higher than cards) plus late fees where allowed; funding costs on the receivables (which rose sharply in 2022); credit losses of 1–3% of volume at the larger providers, higher at the smaller; a net margin that turned negative for most in 2022–2023
- Typical merchant case
- conversion up 10–30% and average order value up 20–50% on BNPL orders; returns higher; a fee three times a card's
- Parties
- the consumer, the merchant, the BNPL provider, the funders of its receivables (warehouse lines, securitisation, deposits for the bank-licensed providers), the credit bureaus, and the regulators
How buy now, pay later works in practice
A shopper with a €120 basket chooses "Pay in 4" at checkout. The BNPL provider runs a soft credit check in seconds, approves, and pays the merchant the €120 less a 4.5% fee within days; the shopper pays €30 now and €30 every two weeks, by card, with no interest. The merchant got a sale it might have lost and a basket 30% larger than the shopper's card average, for a €5.40 fee; the provider carries €90 of credit for six weeks, funded on a warehouse line, and earns the fee less its funding cost and the losses from shoppers who do not pay the later instalments.
The model's stress points showed in 2022. Funding costs tripled with interest rates, on a product that charges the consumer no interest; credit losses rose as inflation squeezed the young, thin-file customers BNPL served; and regulators, watching a form of credit that skipped affordability checks and bureau reporting, moved to bring it inside the rules. Valuations fell — Klarna from $45.6bn to $6.7bn in a year — and the survivors repriced merchant fees, added late fees where allowed, sought banking licences to fund on deposits, and built the app, the card and the marketplace that turn a checkout button into a consumer relationship.
For fintech M&A, BNPL was the deal of 2021 (Afterpay, Zip's acquisitions, PayPal's Paidy) and the write-down of 2023; the buyers now are banks and card issuers adding instalments to their own products.
Example
A fashion retailer adds a BNPL option. In year one, 28% of orders use it: conversion on the checkout page rises 14%, the average BNPL order is €110 against €78 by card, and returns on BNPL orders run at 32% against 25%. The merchant fee is 4.2% — €1.3m on €31m of BNPL sales, against €430,000 the same sales would have cost by card. The finance team's model: incremental sales of about €9m (orders that would not have happened, or would have been smaller), gross margin €4.5m, less the fee premium of €870,000 and the extra returns' handling cost. Net positive; the retailer keeps it, negotiates the fee to 3.6% at renewal, and declines the provider's request to be the default payment option.
Common mistakes
- Merchants comparing the BNPL fee with the card fee and not with the incremental margin. - Providers underwriting on a soft check and no bureau data, and learning about affordability from the losses. - Funding zero-interest receivables on floating-rate lines with no hedge. - Treating BNPL as a payment method in the contract when it is credit, with credit's regulation arriving. - Buyers of a BNPL provider valuing the merchant network without the loss curve and the funding cost.