Buy now, pay later grows because it lifts checkout conversion for merchants, who pay a discount fee for the privilege, not because shoppers seek out debt. Providers earn most revenue from that merchant fee, consumer interest is secondary, and profitability stays hard because underwriting and funding costs eat the fee. Regulatory scrutiny centres on affordability checks and credit reporting.
What is actually driving BNPL growth?
The simplest explanation is also the correct one: BNPL at checkout raises the share of browsers who complete a purchase. Splitting a price into four interest-free instalments lowers the psychological size of the decision without lowering the price, and merchants that add the option consistently see fewer abandoned carts, particularly on higher-ticket items where a single full-price charge gives a shopper a reason to pause and reconsider.
Consumer preference reinforces this from the other side. Interest-free instalments compare well against a revolving card balance that accrues interest indefinitely, and a growing share of shoppers, especially those without an established credit history, treat BNPL as the more legible option: a fixed number of payments, a fixed end date, no compounding. Neither force alone would explain the growth. It is the alignment of a merchant incentive with a consumer preference that made BNPL spread across categories as fast as it did, from apparel and electronics into travel, healthcare and even grocery in some markets.
That spread also explains why BNPL adoption looks uneven across merchant categories. Retailers selling considered, higher-ticket items see the largest conversion lift because the instalment structure does the most psychological work exactly where a single upfront charge would otherwise cause hesitation. Categories with lower average order values see a smaller effect, which is one reason BNPL rollout has followed ticket size more closely than it has followed any particular demographic.
- 01
Separate the two stories
Treat checkout conversion and consumer credit risk as distinct questions with distinct evidence.
- 02
Trace the fee
Identify who collects the merchant discount fee and how it compares to card interchange.
- 03
Check the funding structure
Look at how the provider funds the merchant payout against how it collects from the consumer.
- 04
Read the regulatory posture
Check whether the market treats BNPL as credit for affordability and reporting purposes.
How do BNPL providers actually make money?
The dominant revenue line is the merchant discount fee, a percentage of each transaction that the retailer pays the provider, usually higher than a standard card interchange rate. Merchants accept this because the fee is priced against the conversion and average order value it buys, not against what it costs to move the money, which puts BNPL pricing closer to a marketing expense than a payment processing cost. That framing matters for how merchants budget it, since it usually sits with the marketing or ecommerce team rather than treasury.
Consumer-side revenue exists but is secondary for most providers: late fees on missed instalments, and interest on longer-term financing products that some providers layered on top of the original pay-in-four model. This is worth understanding in its own right, alongside how merchant acquiring and card fees are structured, because the two revenue models look similar from the outside but are priced against different risks. A provider that leans too hard on late fees also undermines the interest-free pitch that won merchant adoption in the first place, so the healthiest providers keep that line small deliberately.
A smaller but growing revenue source is data and referral income: providers with a large consumer app sit on repeat purchase behaviour across many merchants at once, and some have started monetising that position through in-app shopping discovery rather than the checkout fee alone. This is still marginal against the merchant fee for most providers, but it is the part of the business model most likely to expand as instalment features get commoditised by card networks.
Is buy now, pay later actually profitable?
Profitability is the industry's persistent problem, and it sits in the gap between the merchant fee collected and the cost of running the credit book. Every approved transaction is short-term unsecured lending, which means a provider is underwriting credit risk in the seconds between checkout click and confirmation, at a volume and speed that leaves little room for the kind of manual review a traditional lender would apply.
Two costs eat the merchant fee from either side: funding costs, since the provider typically pays out the merchant immediately and collects from the consumer over weeks, and credit losses, since a meaningful share of pay-in-four users will miss at least one instalment. When funding costs rise, as they did when interest rates moved up broadly, the spread between what a provider earns on the fee and what it pays to fund the receivable compresses fast. Pure-play BNPL providers, who lack a broader banking or card business to absorb this, have felt that compression most directly, which is a large part of why the sector consolidated toward larger financial institutions.
| Merchant view | Consumer view | |
|---|---|---|
| What BNPL is | A conversion and average-order-value tool | An interest-free alternative to a card balance |
| What it costs | A discount fee per transaction | Nothing, unless an instalment is missed |
| Where the risk sits | Minimal, the provider absorbs default risk | Stacking across providers, invisible to other lenders |
Where does the regulatory risk actually sit?
The core tension is that BNPL was built and marketed as something other than credit, interest-free, no formal application, approved almost instantly, and regulators in most markets are working through whether it should be treated as credit anyway. Three issues recur. First, affordability checks: whether a provider is required to verify a consumer can repay before approving a purchase, the way a traditional credit product would.
Second, credit reporting: whether BNPL instalments are visible to credit bureaus, since invisible debt makes it harder for other lenders to assess a consumer's total exposure, and harder for the consumer to build or damage a credit history through BNPL behaviour. Third, the debt-trap concern that follows from stacking: a consumer can hold several concurrent BNPL plans across different providers with no single lender able to see the total. None of these concerns are about BNPL as a checkout feature. They are about BNPL as an unregulated parallel credit market, which is the frame regulators are converging on.
The practical effect for providers has been a slow convergence toward the compliance standards that traditional short-term lenders already carry: formal affordability assessment, clearer disclosure of what happens on a missed payment, and in some markets a licensing requirement that did not previously apply. None of this removes the merchant conversion benefit that made BNPL attractive in the first place, but it does raise the cost of running the credit book, which feeds directly back into the profitability pressure described above.
What happens to the BNPL market from here?
The near-term direction is consolidation and integration rather than continued proliferation of standalone apps. Card networks and banks have built or bought their own instalment products, which lets them offer the same checkout experience without ceding the merchant fee to a third party, and merchants generally prefer fewer payment options to manage rather than more.
For anyone assessing this market, the useful question is not how large BNPL volume is but who captures the fee and who carries the credit risk once regulation catches up with the underwriting standards banks already apply. Firms studying merchant and consumer payment behaviour in this category, including through Nextyn's payments and fintech research, tend to find that the checkout-conversion story and the credit-risk story have to be read together, because a change in one changes the economics of the other.