Business Models & Economics of BNPL Explained

Now that we know what BNPL is and who the major players are, let’s understand how these companies actually make money.

This is one of the most important parts of understanding the BNPL business.

How Do BNPL Companies Make Money?

BNPL providers usually earn money from multiple sources. Here are the main ways they generate revenue:

1. Merchant Discount Rate (MDR) / Merchant Fees

When a customer buys using BNPL, the merchant pays a fee to the BNPL provider. This is similar to the fee merchants pay when customers use credit cards. This is often the biggest source of revenue for BNPL companies.

2. Interest from Customers

Some BNPL providers charge interest if the customer chooses longer repayment periods. Even if the short-term plans are interest-free, longer tenures may carry interest charges.

3. Late Payment Fees

If a customer misses a payment or pays after the due date, the BNPL provider charges a late fee or penalty. This can become a significant revenue stream.

4. Subscription or Convenience Fees

Some BNPL services charge a small monthly or yearly subscription fee from users in exchange for a credit limit and other benefits.

A Simple Example of BNPL Economics

Scenario: A customer buys a phone worth ₹30,000 using BNPL.

The BNPL provider pays ₹30,000 to the merchant immediately.
The merchant pays a fee (say 3–5%) to the BNPL provider.
The customer pays back ₹30,000 to the BNPL provider in installments.
If the customer pays late, they pay extra penalty charges.

In this way, the BNPL provider earns from both the merchant and (sometimes) the customer.

Who Bears the Credit Risk?

This is very important to understand:

The BNPL provider (or its NBFC partner) gives credit to the customer.
If the customer fails to repay, the BNPL provider or the NBFC has to bear the loss.
This is why BNPL companies are very careful about who they give credit to and often use data and algorithms to check creditworthiness.

Why Do Merchants Accept BNPL?

Even though merchants have to pay a fee, they accept BNPL because:

It increases sales (customers are more likely to buy if they can pay later).
It attracts customers who may not have full cash or a credit card ready.
It improves customer experience and loyalty.

Key Takeaway

BNPL companies mainly earn money through fees paid by merchants, interest on longer repayment plans, and late payment charges from customers. While they provide convenience to customers, they also take on the risk of customers not repaying the credit.

Note: The economics of BNPL can vary depending on the provider, the type of merchant, and the repayment tenure offered to the customer.