Recently, the Wall Street Journal reported that the card networks Visa and Mastercard plan to raise interchange fees. This is bad news for merchants, who dislike paying these fintechs a cut of every transaction. Many small businesses even ask their customers to pay cash when possible to avoid these fees. But now merchants have another type of payment processing fee to worry about. Buy now, pay later apps also charge merchant fees. And their fees are often higher than the interchange fees charged by the payment networks.
Buy now, pay later apps allow you to split a purchase up into several installment payments. Instead of paying $100 at the register, you can make four convenient weekly payments of $25. You might remember pitches like that from old TV ads. With those “deals”, the total value of the payments was often much more than the retail price of the product because the merchant included interest fees in the payments. But some buy now, pay later apps don’t charge interest on the short-term loans they offer. You might be wondering how they earn money then.
Buy now, pay later apps charge fees to the merchants who offer this payment option. And the fee calculations for these transactions are complex, just like the calculations for the value of interchange fees. Merchants that have high sales volume pay lower fees. Merchants that have riskier customers pay higher fees. A merchant may pay a flat rate on each transaction plus a percentage of the transaction’s value. For example, the merchant fee may be $1.00 plus 1.5 percent of the purchase price.
So it’s hard to calculate an average buy now, pay later merchant fee for each app and a merchant might pay more or less than the average rate. Nevertheless, several web sites have calculated the average fees charged by buy now, pay later apps. Other buy now, pay later apps are provided by publicly traded financial services companies that report their fee income as a percentage of merchants’ turnover.
Klarna charges an average merchant fee of 2.1 percent, reports the Australian Financial Review.
Affirm charges a merchant fee of between 2 and 3 percent according to Productmint.
Bread charges a merchant fee of 3 percent according to the app documentation.
Afterpay reported an average merchant fee of 3.8 percent for the first half of fiscal 2021.
Sezzle reported an average merchant fee of 5.4 percent, but its customer base includes many small businesses that pay higher fees.
QuadPay is another widely used buy now, pay later app but I couldn’t find an average merchant fee for them.
Buy now, pay later fees are lightly regulated in comparison with interchange fees. Governments limit the fees a bank can charge for processing credit card and debit card payments. But regulators do not classify the merchant fees for buy now, pay later apps as interchange fees. So the fintechs that offer this payment method have more control over their pricing.
The industry is highly competitive, though, and a buy now, pay later app could lose business if a competitor offers merchants a lower rate. So it’s not surprising that the buy now, pay later apps don’t usually provide much information about their fee structure to the public. Many fintechs tell merchants that they charge a small fee on each transaction, but won’t explain how they calculate the fee unless a merchant signs up to use the app.
Either way, though, it appears that Klarna charges the lowest merchant fees out of all of the major buy now, pay later apps. Klarna has also criticized the other fintechs in this sector for charging high fees to merchants, which indicates that the bank considers low merchant fees to be one of its competitive advantages. So if you’re a merchant who wants to offer installment payments to your customers but don’t want to pay a large cut of each transaction to a fintech, Klarna may offer the best deal.