Buy now, pay later companies make money five ways: fees charged to merchants at checkout, interest on longer repayment plans, late fees when customers miss a payment, gains from selling loans to institutional investors, and the value of the transaction data they collect. The mix varies by provider. Short-term, interest-free plans lean on merchant fees; providers that offer longer terms increasingly earn more from interest than from anything else. In the most recent year with comprehensive federal data, BNPL lenders originated over 335 million loans totaling $45.2 billion, with an average loan size of just $135.1Consumer Financial Protection Bureau. BNPL Market Report 2025
Merchant Fees Are the Foundation
Every time you use a BNPL service at checkout, the retailer pays the provider a cut of the sale. This merchant discount rate typically runs from about 2% to 8% of the transaction, and some providers add a flat per-transaction fee on top. That’s notably higher than the 2% to 3% merchants pay for standard credit card processing.
The mechanics are simple. The BNPL company pays the merchant the purchase price upfront, minus the discount fee. Buy a $200 jacket through a provider charging the retailer 5%, and the merchant receives $190 immediately. The BNPL company then collects the full $200 from you in installments over the following weeks. That $10 spread is the fee revenue.
For providers focused only on short-term, interest-free plans, merchant fees make up the majority of income. For companies offering longer terms, they’re one piece of a bigger picture.
Interest on Longer Repayment Plans
Pay-in-four is interest-free, but BNPL providers also offer longer plans for bigger purchases, and those carry interest. These loans stretch from a few months to 24 months or more, with APRs that sometimes reach 36%, higher than the average credit card.
Interest has quietly become a dominant revenue stream. Affirm’s earnings report for the quarter ending December 2025 shows the shift plainly: the company earned $494 million from interest income versus $328 million from merchant network fees. Interest represented 3.6% of the total dollar volume of goods sold on the platform, while merchant fees came in at 2.4%.2Affirm. FY Q2 2026 Earnings Supplement
The popular framing that BNPL is “free for consumers” and providers survive on merchant fees is increasingly outdated. As the industry matures, interest-bearing products are a bigger share of the business.
Late Fees
Most BNPL providers charge a fee when you miss a scheduled payment.3Consumer Financial Protection Bureau. Do Buy Now, Pay Later (BNPL) Loans Have Fees? On short-term pay-in-four plans, these late fees have historically averaged around $7 per missed payment.4Consumer Financial Protection Bureau. Buy Now, Pay Later – Market Trends and Consumer Impacts That sounds small, but on an average loan of $135, $7 is a meaningful percentage of the purchase price, and it compounds if you’re juggling multiple BNPL loans at once.
Longer-term BNPL loans with higher balances can carry steeper penalties. Some providers charge $30 or more for a single missed payment on these extended plans. Late fees do double duty for BNPL companies: they generate revenue and they create a financial incentive for on-time repayment, which reduces credit losses.
Selling Loans to Investors
BNPL companies need cash on hand to pay merchants upfront for every purchase, and they can’t always wait weeks or months for consumers to repay. To keep the pipeline flowing, many providers sell their loans to institutional investors. In 2023, PayPal began selling its European BNPL loans to KKR, the global investment firm, and set up a process to continue selling loans on a weekly basis. KKR then securitizes those assets, bundling the consumer receivables into investment products.5KKR. Asset-Based Finance in Action: A Buy Now, Pay Later Loan
Affirm’s earnings show how significant loan sales have become. In the quarter ending December 2025, Affirm booked $185 million in gains from selling loans, about 1.3% of total goods sold through its platform and roughly 16% of total revenue.2Affirm. FY Q2 2026 Earnings Supplement Loan sales convert future consumer payments into immediate cash, which the company can then use to fund the next round of lending.
Data as a Revenue Driver
BNPL companies collect detailed information about every transaction: what you bought, where, when, and how reliably you repay. That data is a valuable asset. Providers use it internally to refine their underwriting, deciding who gets approved and at what limit. Better underwriting reduces defaults, which directly improves profitability.
The data also powers targeted marketing. BNPL companies build consumer profiles based on purchasing habits and use those profiles to promote specific products or brands through their apps and partner merchants. The CFPB has flagged the practice, noting that BNPL lenders use collected data “to deploy models, product features, and marketing campaigns to increase the likelihood of incremental sales.”6Consumer Financial Protection Bureau. Buy Now, Pay Later: Market Trends and Consumer Impacts As competition pushes merchant discount fees lower over time, data monetization could become a larger piece of the revenue mix.7Consumer Financial Protection Bureau. Consumer Financial Protection Bureau Opens Inquiry Into Buy Now Pay Later Credit
Why Merchants Accept the Higher Fee
Retailers wouldn’t tolerate discount rates above credit card processing fees without a clear return. The pitch from BNPL providers comes down to two numbers: conversion rate and average order value. Merchants that add BNPL at checkout report higher completion rates among shoppers who would otherwise abandon their carts. A $400 purchase feels more manageable when framed as four payments of $100.
BNPL also tends to increase the size of each order. When the upfront cost shrinks, consumers add items they would have skipped. For merchants operating on thin margins, even a modest lift in average order value can justify the higher fee. The BNPL provider effectively acts as a sales financing partner, absorbing the credit risk and collecting the debt so the merchant doesn’t have to.
Why Revenue Doesn’t Always Mean Profit
There’s a tension at the center of the BNPL model: despite billions in revenue, many of the largest players have struggled to turn a consistent profit. Klarna, one of the industry’s biggest names, reported a full-year net loss of $273 million in 2025 even as its revenue surged. Losses like that aren’t unusual in the sector.
The math is tight. Merchant discount rates of 2% to 8% sound healthy, but the money has to cover credit losses, customer acquisition, fraud, and the cost of funding the loans in the first place. On short-term, interest-free products, the margin is razor-thin. A CFPB analysis of BNPL lenders found that between 2019 and 2022, borrowers defaulted on about 2% of loans on average, with default rates climbing to 4.1% among consumers with no credit score.8Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt When the average loan is $135, even a small default rate can erase the merchant fee profit.
Default risk is heightened by debt stacking. Because each BNPL provider approves loans independently, and because these loans have historically been invisible to credit bureaus, a consumer can carry multiple active plans across providers without any single one knowing about the others. CFPB research found that roughly 63% of BNPL borrowers had multiple simultaneous loans at some point during 2022, and a third were borrowing from more than one provider.9Consumer Financial Protection Bureau. CFPB Research Reveals Heavy Buy Now, Pay Later Use Among Borrowers With High Credit Balances and Multiple Pay-in-Four Loans When those borrowers overextend, defaults climb and providers absorb the losses.
This is why the industry has been shifting toward longer-term, interest-bearing products, banking features, and loan sales. Pay-in-four gets consumers through the door. The real margin often comes from moving them into products that generate interest income.