How Buy Now, Pay Later Apps Earn Their Fees by Adding Value for Merchants

A recent article from Banking Dive provided insightful analysis on the payment processing industry. Merchants complain about the fees that banks charge them for processing credit cards and debit cards on a regular basis. Many stores even encouraged their customers to use cash payments before the pandemic hit. But at the same time, many merchants are adding buy now, pay later apps to the payment options on their websites.

I recently wrote another article about buy now, pay later service fees and this payment method is expensive for merchants. Several of the fintechs charge fees in the 6 percent range, and they often assess higher fees when a merchant is operating a small store that does not make many sales. Buy now, pay later fees can be as much as 400 basis points higher than credit card fees. As with credit card fees, the retail store owners have to pay these fees themselves. Yet there are fewer complaints about the buy now, pay later fees.

This situation indicates that merchants think that the buy now, pay later services add more value than the credit card companies. Credit card companies already help consumers make purchases that they can’t afford right now, so there must be other factors that make retailers willing to pay the high fees. So I looked around to see what benefits buy now, pay later apps provided in comparison with other payment methods.

Merchants Gain Customers Who Avoid Credit Cards

Credit cards often charge interest in the 20 percent range, making them an expensive way to finance purchases. Many financial advisers and wealth managers warn their clients about carrying balances on credit cards and often tell their clients to pass up these financial services entirely. As a result, credit cards have a bad reputation with many consumers.

Buy now, pay later apps don’t have the same stigma as credit cards. Many of them offer zero-percent financing when a purchase is split into four weekly payments. But they provide the same benefit for consumers, at least for short-term purchases, by allowing them to pay their bills off over a short period. So young people actively seek out stores that offer buy now, pay later payments. In Britain, 9.5 million consumers avoid retailers that don’t offer buy now, pay later. Britain has a population of 68.1 million so that means that at least 14 percent of shoppers won’t shop at stores that don’t offer this financing option.

Buy Now, Pay Later Apps Provide a Service Similar to Factoring

An article from Edge Markets explains that buy now, pay later is a form of factoring, which is why these payment services aren’t regulated like other financial services. The buy now, pay later app effectively purchases the merchant’s accounts receivable by paying customers’ bills up front. Then it collects the installment payments from those customers over time and assumes the risk that the customers won’t repay their loans.

Thinking about buy now, pay later in terms of factoring or supply chain finance puts the services that these fintechs provide in a new light. If it makes sense for an auto parts manufacturer to sell its receivables to a bank on a supply chain financing platform, it makes sense for retailers that extend credit to their customers to do the same thing. Retailers don’t have to factor their receivables when shoppers use credit cards, but if they sell products to shoppers who don’t have credit cards, those shoppers may need another source of financing.

Installment Payments Reduce Customer Acquisition Cost

Merchants don’t just have to pay fees to banks when their customers use credit cards. They also have to pay for search engine and social network ads. And marketing costs often make up a much higher percentage of revenue than credit card processing fees, especially for items like fashion and beauty products.

Shoppers who are looking for items like fashion and beauty products are specifically seeking out stores that offer Affirm, Klarna, and other installment payment methods. So when these stores make deals with buy now, pay later apps and promote these payment methods on their websites, they don’t have to spend as much money on marketing and their customer acquisition costs are lower. The fintech apps even help these stores with marketing by posting lists of brands that accept these payment methods on their websites. So buy now, pay later apps reduce customer acquisition cost.


Merchants have several reasons to offer buy now, pay later services on their websites, even though using these services costs more than accepting credit cards. Younger shoppers are often unwilling to apply for credit cards in the first place. Instead, they seek out merchants that offer installment payments. By offering buy now, pay later as a payment option, merchants can avoid the risk of extending credit to consumers directly while attracting consumers who are specifically looking for stores that offer installment payments.

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