Pay Later’s Shifting Fee Structure Means Merchants Push Back, Consumers Pay Up

The pay later revolution has reshaped consumer credit by offering shoppers the allure of instant gratification with the added value of deferred payments. But its business model is quietly shifting, with shoppers footing part of the bill.

When the industry first emerged more than two decades ago, it relied largely on fees that banks and FinTech firms charged to merchants that accepted the payment method. Retailers were willing to suck up those costs because they saw buy now, pay later (BNPL) as a powerful tool to attract new customers and grow sales.

But as BNPL expands, it includes more demographic groups. For example, consumers making more than $100,000 a year love the payment method, especially for splurges but sometimes for everyday essentials or emergency expenses. But on the fee side, merchants are pushing back. The result: Shoppers are now paying some those charges.

A recent deep dive by PYMNTS Intelligence into pay later, which comprises all forms of consumer credit, including the $175 billion U.S. market for BNPL, highlights how the burden of fees is shifting away from retailers and onto shoppers.

Pay later loans are short-term, usually interest-free payment plans that shoppers opt for at the very moment of buying, either in-store or online. Consumers purchase a good or service, take it home or receive it right away, and pay for it in installments, typically “Pay in 3” (chunks) or “Pay in 4” (also installments) over six to eight weeks.

Until recently, retailers willingly paid an interchange fee — similar to that for traditional credit cards — ranging from 1.5% to 7% of a transaction’s value. It was worth it to merchants to be able to tap into a new customer base and gain market share, particularly among younger or cash-strapped shoppers with limited credit histories.

Merchant fees remain a significant component of BNPL transactions. But what’s now dominant is a hybrid model that combines both merchant and consumer revenue streams.

Many direct providers of the payment method, which include Affirm, Klarna, Afterpay, PayPal, Splitit and Sezzle, are generating income directly from users through new charges. One example: interest on longer-term BNPL loans. As BNPL providers expand their offerings beyond short-term installments to cover more expensive purchases over six to 36 months, interest charges, typically ranging from 0% to 30% APR, become a key revenue generator.

That’s not all, as PYMNTS Intelligence’s “How Pay Later Options Are Redefining Consumer Spending — an Expert Look at What’s Next” report shows.

Late payment fees and missed payment penalties are common. While some providers initially emphasized their interest-free models, the reality is that borrowers who fail to make timely payments can face charges, either as fixed amounts or percentages of the missed payment. The consumer’s tab can further snowball if failed payment fees apply to automated payments that are rejected due to insufficient funds.

Beyond these direct charges, some BNPL providers are exploring other ways to monetize their user base. Convenience fees, such as a small percentage (1%-3%) of the BNPL transaction value, are emerging. Additionally, some providers are introducing subscription or premium membership programs — Klarna’s Plus membership is one such example — that offer added perks, like exclusive deals and rewards, for a recurring charge.

The shift to making BNPL consumers pay more comes amid the proliferation of BNPL options jostling for attention at checkout. The leverage started to shift. The business relies on transaction volume to achieve profitability. Heightened competition among BNPL providers for placement at merchant checkouts has led to providers sometimes paying merchants marketing or promotional dollars to feature their options prominently. This necessitates alternative revenue sources to offset these costs.

Hello, consumer-paid fees. At the same time, credit issuers need to know just how risky their customers are. The twin reality has driven BNPL providers to explore and implement more diverse revenue strategies.

For consumers, this evolution means that while the initial allure of interest-free, short-term BNPL remains, they need to be aware of the potential for accumulating fees, particularly if they opt for longer repayment terms or miss scheduled payments.

For merchants, the shifting fees might initially appear beneficial, as it lowers their direct BNPL costs. But retailers must also consider the impact on consumer behavior. If BNPL becomes more expensive for consumers, it could potentially dampen their enthusiasm for this payment method, ultimately affecting sales volumes.

Read more:

How Pay Later Options Are Redefining Consumer Spending — an Expert Look at What’s Next

Beyond Credit Cards: How ‘Pay Later’ Momentum Is Reshaping the Payments Ecosystem

PayPal Teams With Will Ferrell To Promote Updated Pay-Later Program

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