How does buy now, pay later make money?

If you have ever wondered why your favorite retailer promotes “pay in 3” so prominently, the answer is simple. Merchants have learned that offering installment options can lift conversion and basket size, which means more sales. BNPL providers position themselves right where that value is created. They take a cut from the merchant, collect selected fees from borrowers, partner with card networks for interchange, and finance the receivables to keep credit flowing. The result looks effortless at checkout, yet behind the scenes it is a very deliberate money machine. Understanding that machine helps you decide when BNPL supports your plan and when it quietly pulls you off track.

Think of BNPL as a checkout layer, a credit product, and a funding business rolled into one. The checkout layer is the button you see online or the QR prompt in a store. The credit product is the short term loan, often interest free for a few weeks or months, sometimes longer and interest bearing. The funding business is where the provider packages thousands of small loans into facilities with banks or investors. Revenue is created at each layer, and costs are managed through risk models, collections processes, and partnerships.

The most visible revenue line is the merchant discount fee. When you choose BNPL, the provider usually charges the retailer a percentage of the transaction, sometimes with a fixed component. That fee is not random. Merchants pay because they expect higher conversion, a larger average order value, and access to younger or credit thin shoppers. Many retailers treat BNPL fees as a marketing spend rather than a pure payment cost, since the provider also drives traffic through in-app discovery and promotions. This is why BNPL buttons sit so close to the buy button. They are not just payment methods. They are sales engines for the merchant, priced accordingly.

Borrower fees contribute as well, though how they appear depends on the product. Short, interest free plans often rely on late fees rather than interest. Longer tenures may have interest, sometimes with promotional periods. There can also be account fees, reschedule fees, and expedited payment fees in some markets. Responsible providers try to cap late fees and design nudges that prevent missed payments, partly because regulators pay close attention and partly because profitable growth requires low loss rates. From a planning perspective, the pattern is clear. The more you extend the term and the more payments you miss, the more the revenue model leans on you rather than the merchant.

Interchange is the quieter stream. BNPL has moved from a pure checkout widget to branded virtual cards and physical cards that let you split purchases anywhere the network is accepted. Each card transaction generates interchange from the merchant’s bank to the BNPL issuer. A share of that interchange lands with the provider, sometimes shared with the card network or issuing partners. Interchange is small on a single transaction, yet it adds up when a provider scales into everyday spend categories like groceries, fuel, and fashion. This is why you see BNPL apps adding card features, tap to pay, and in-store acceptance. It diversifies revenue away from only installment fees and merchant discounts.

Capital markets complete the picture. BNPL companies do not fund every loan purely from their own balance sheet. They arrange warehouse lines with banks, sell receivables forward, or securitize pools of installment loans. Their margin here is a funding spread. They earn more on the receivables than they pay to lenders, after credit losses and servicing costs. As the portfolio seasons and risk models improve, this spread can become a predictable contributor. During tighter credit cycles, funding costs rise and investors demand more protection, which compresses spreads. Providers respond by adjusting merchant pricing, tightening underwriting, or shifting the product mix toward shorter, lower-risk plans. You do not see these moves at checkout, but they influence which offers you receive and which merchants promote BNPL most heavily.

Marketing and placement revenue also exists on the merchant side. Retailers pay for featured placement inside BNPL shopping apps, sponsored listings, and targeted campaigns to provider user bases. A provider that owns an engaged discovery surface can sell attention, not only lending. This looks like retail media inside a payments app. For the merchant it is performance marketing with built-in conversion, since the payment method sits directly behind the ad. For the BNPL provider it is high margin revenue that does not add credit risk, which is valuable when loss rates are front of mind.

Foreign exchange and cross-border fees show up in travel, luxury, and global e-commerce. If the provider processes in one currency and settles in another, spreads and processing fees can contribute. Float income can matter too. When repayments arrive before payouts or when card settlements take a day or two, the provider may hold funds briefly and earn interest in aggregate. None of this changes your installment amount, yet it strengthens the business model.

Data partnerships are often discussed and often misunderstood. Responsible providers focus on aggregated, privacy-safe insights that help merchants plan inventory and campaigns. The economic value here is indirect, either via paid analytics or by reinforcing merchant willingness to pay for placement and higher discount rates. From a personal finance standpoint, it is helpful to remember that your individual profile is primarily fuel for underwriting and fraud prevention, not a product to be sold line by line. Regulation in markets like the UK and Singapore is explicit about how personal data can be used, which keeps the emphasis on lending decisions and compliance.

Costs matter just as much as revenue. BNPL unit economics depend on keeping charge-off rates controlled, fraud low, and customer acquisition cost sensible. This is why providers integrate with major e-commerce platforms and point of sale systems. Every merchant integration can deliver thousands of new users at once, which lowers acquisition cost per active customer. It is also why you see strong behavioral nudges around repayment. Push notifications, calendars, and direct debit reduce missed payments, which keeps loss ratios within targets set by funders. In practical terms, the smoother the repayment journey, the healthier the model.

The risk engine is the hidden core. Providers score applications in seconds using identity checks, device intelligence, prior repayment behavior, and transaction context. Many set low initial limits and expand gradually as you repay on time. In some markets, providers check external credit bureaus or report usage back to them. If you have ever had one provider approve you and another decline you on the same day, that is not personal. It is a reflection of different risk tolerances, data inputs, and funding costs. During uncertain economic periods, approval rates tighten and tenures shorten. That may look inconvenient, yet it is how the model stays solvent for the long run.

Regulation shapes the path forward. The UK has proposed bringing BNPL under tighter consumer credit rules. Singapore and Hong Kong have issued industry codes and expect affordability checks, fair fee caps, and strong disclosures. These frameworks do not eliminate revenue. They move it toward transparency. Merchant fees remain the anchor. Borrower fees become more predictable and capped. Interchange and media revenue play a larger role. Funding spreads reflect the quality of underwriting rather than aggressive growth. For you as a user, regulation should mean fewer surprises, clearer terms, and easier comparison with credit cards and personal loans.

It helps to place BNPL next to familiar products. Credit cards monetize through interchange, annual fees, and interest on revolving balances. BNPL monetizes through merchant fees that are often higher than card interchange, selective borrower fees, and funding spreads on short dated receivables. Cards reward long, interest bearing balances. BNPL rewards short, on time installment plans that produce volume for merchants and predictable cash flow for funders. That difference explains why BNPL emphasizes small ticket retail and why providers celebrate on time repayment as much as growth.

For households, the planning question is not whether BNPL is good or bad. It is whether the product helps you align spending with cash flow without inflating your lifestyle. A short installment on a necessary purchase can be a cash flow tool when used rarely and repaid automatically. Stacking multiple plans across fashion, gadgets, and subscriptions turns the same tool into a budget leak. The industry makes money either way. Your job is to ensure your plan does not.

A simple way to evaluate any BNPL offer is to follow the money. If the merchant is heavily promoting BNPL, the lift in sales probably pays for the fee, which means the true price of the item already assumes that fee. If the provider is offering longer terms with interest, ask whether a standard card purchase repaid in full would be simpler and cheaper. If you see account fees or late fees that feel out of proportion to the purchase, that signals a model leaning too much on borrower revenue. In those cases you can step back, place the expense in your monthly buckets, and decide if the timing or the item is misaligned.

Cross-border professionals and expats should add one more layer. Some BNPL accounts do not port cleanly across countries, which affects dispute handling, refunds, and customer support. If you relocate, close inactive accounts and keep records of any open plans. If your income currency differs from the purchase currency, monitor exchange spreads or use BNPL only for domestic transactions. This keeps the model’s silent revenue lines, like FX spreads and foreign interchange, from touching your plan unnecessarily.

For parents, the teaching moment is valuable. BNPL makes the cost of a purchase look smaller by dividing it. Sitting with a teenager and showing how those small payments stack across a month turns a marketing benefit into a money lesson. You can use real examples from your own statements, blur the merchant names if you prefer, and discuss how notifications and direct debit are there to protect your plan, not to encourage more buying. Children learn what they see. If they see you space out purchases and cancel unnecessary plans quickly, they learn the healthiest version of BNPL.

From the provider side, the business model will keep evolving. Expect more partnerships with banks that provide cheaper funding in exchange for distribution and data. Expect deeper integration with e-commerce platforms where BNPL becomes the default installment option at the checkout level, not a separate button. Expect more card products that let you split purchases after the fact, which extends interchange revenue and keeps users inside one app. Expect clearer disclosures and credit bureau reporting in regulated markets, which link BNPL choices to your broader credit profile. Every step strengthens the provider’s economics while giving you more information to make aligned choices.

The calm takeaway is straightforward. BNPL makes money by charging merchants for conversion, collecting selected fees from borrowers, earning interchange on card rails, and creating a funding spread on packaged receivables. Marketing placements, FX, and float add helpful layers. The model is sustainable when approvals are prudent and repayments are on time. For your household, the healthiest version is small, planned, and automated, used to match cash flow rather than stretch it. If you keep your focus on the total monthly obligations rather than the charm of a tiny installment, you will feel the convenience without paying for it with future stress.

As with any financial tool, start with your timeline and your budget buckets. If a purchase will outlast the installment plan, and if the payment fits cleanly inside your monthly cushion, BNPL can be a neutral bridge. If you keep reaching for it to make nonessential spending feel comfortable, pause and look at the pattern. The industry has many ways to earn. You only need one reliable way to stay on plan. The smartest plans are not loud. They are consistent, and they make the purchase serve your goals rather than the other way around.