What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) services have surged in popularity over recent years, revolutionizing the e-commerce landscape. This payment method provides consumers with the flexibility to make purchases and pay for them in installments, while merchants benefit from increased sales and higher average order values. This article explores how BNPL works, the key stakeholders involved, and the diverse revenue streams that sustain BNPL companies.

In fact, the MEA buy now pay later market generated a revenue of USD 648.4 million in 2023, with $15.67 billion in value expected in the Middle East alone for 2024 — projected to grow to USD 255.43 billion by 2034, at a CAGR of 32.20%.

How BNPL Works

At its core, BNPL is a straightforward concept. Here's how the process typically functions:

1. A customer makes a purchase at a participating retailer.

2. Instead of paying the full amount upfront, they choose the BNPL option at checkout.

3. The customer makes a small down payment (usually 25% of the total purchase).

4. The remaining balance is divided into several interest-free installments, typically over 4-6 weeks.

5. Payments are automatically deducted from the customer's linked payment method.

Popular buy now pay later online stores and even buy now pay later flights providers allow shoppers to easily break up costs for both physical goods and travel bookings—expanding BNPL’s reach across sectors.

For example, a $100 purchase could be split into four payments of $25 spread across six weeks. This structure distinguishes BNPL from traditional credit cards by offering short-term, interest-free financing, making it especially appealing to younger consumers wary of credit card debt.

Difference Between BNPL and Credit Cards

While both BNPL and credit cards provide financing options, they differ significantly in terms of structure and cost:

Eligibility Criteria and Credit Checks

BNPL services are known for their accessibility. Most providers conduct only a soft credit check, which does not affect a consumer's credit score. Some buy now pay later guaranteed approval options are emerging, especially for lower-value purchases, which attract consumers who prefer easy, fast checkout experiences. This makes BNPL attractive to those with limited or poor credit histories. Typical eligibility criteria include:

• Minimum age requirement (usually 18 years old)

• Valid identification and address

• A working debit or credit card

• Some providers may impose minimum purchase amounts

Key Stakeholders in BNPL

The BNPL ecosystem comprises several key players, each with distinct roles and interests:

Consumers: BNPL offers an affordable and accessible way to manage expenses through interest-free financing. However, responsible use is crucial to avoid accumulating unmanageable debt. Recent data shows that more than 50% of consumers in the Middle East, North Africa, and Pakistan will use BNPL in 2022, underlining strong demand across emerging markets.

Merchants: BNPL can drive significant business growth by increasing:

• Conversion rates

• Average order values (AOV)

• Access to new customer segments

BNPL Service Providers: Companies like Affirm, Afterpay, and Klarna facilitate the BNPL process, assuming credit risk and managing payment infrastructure.

Financial Institutions: Many BNPL providers partner with banks or other financial entities to secure the capital required for funding consumer loans.

How BNPL Companies Make Money

Despite offering interest-free financing to consumers, BNPL companies maintain robust revenue models through multiple channels:

Primary Revenue Streams

1. Merchant Fees: BNPL providers charge merchants transaction fees ranging from 2% to 8%—significantly higher than standard credit card processing fees. Merchants accept these fees in exchange for increased sales and customer reach.

2. Late Payment Fees: Consumers who miss installment payments incur late fees. For example, Afterpay charges an initial $10 late fee, which can escalate if the payment remains overdue.

3. Flat Transaction Fees: Some BNPL providers charge a small, fixed fee for each transaction, adding a reliable income stream.

4. Busted Loans: In cases of non-payment, some providers convert outstanding balances into traditional interest-bearing installment loans, generating additional revenue.

Additional Revenue Streams

1. Merchant Commissions: BNPL providers often earn commissions through exclusive partnerships with specific merchants, driving customer traffic and sharing in the resulting revenue.

2. Interchange Fees: When customers use BNPL-branded cards for purchases, providers collect interchange fees similar to credit card networks.

3. Partnerships with Financial Institutions: Revenue-sharing agreements with banks and other financial partners provide an additional layer of profitability.

Benefits and Risks of BNPL

Benefits:

1. Interest-Free Financing: Consumers can spread out payments without incurring interest charges.

2. Increased Conversion and AOV: Merchants often see higher sales and larger order sizes when offering BNPL.

3. Expanded Customer Base: BNPL attracts consumers who may not qualify for traditional credit cards.

4. Improved Customer Experience: BNPL integrates seamlessly into online and in-store checkout processes, enhancing the buying journey.

Risks:

1. Credit Score Impact: Missed payments can be reported to credit bureaus, potentially damaging credit scores.

2. Return Complications: Returning items purchased with BNPL can involve complex refund processes.

3. Overspending Risk: BNPL's convenience may encourage consumers to overspend, leading to debt accumulation.

4. Limited Rewards: Unlike credit cards, most BNPL programs do not offer cashback or other reward incentives.

Ensuring Financial Viability and Sustainability

For long-term success, BNPL providers must balance consumer accessibility with robust risk management. Key strategies include:

1. Risk Management and Underwriting: Leveraging advanced algorithms, BNPL providers assess creditworthiness in real time, evaluating alternative data sources beyond traditional credit scores.

2. Customer Acquisition and Retention: Sustainable growth relies on:

• Targeted marketing campaigns

• User incentives to encourage repeat use

• A seamless, user-friendly payment experience

3. Continuous Monitoring and Adaptation: The BNPL industry must evolve in response to regulatory developments and shifting consumer behaviors.

The Future of BNPL

As BNPL matures, several trends are shaping its trajectory:

• Regulatory Scrutiny: Increased oversight is anticipated as BNPL becomes a mainstream financial service.

• Market Consolidation: Larger players may acquire smaller providers to strengthen market positions.

• Bank Partnerships: More traditional banks are expected to enter the BNPL space via direct offerings or collaborations.

• Sector Expansion: BNPL is likely to extend into areas like healthcare, travel, and education.

In markets like the UAE, where BNPL penetration has already overtaken credit cards by roughly 10 percentage points, hitting 31% adoption, BNPL’s trajectory remains strong—especially as demand for buy now pay later UAE services continues to rise across industries.

Unlocking the Power of BNPL with MoneyHash

BNPL has fundamentally reshaped consumer finance and e-commerce. While offering consumers flexible, interest-free financing and providing merchants with increased sales, the model's sustainability depends on diversified revenue streams and careful risk management.

Managing BNPL complexities—such as integrating multiple providers, handling refunds, and optimizing customer payment flows—can be challenging for businesses. MoneyHash simplifies this by offering a unified payment orchestration platform that seamlessly integrates with leading BNPL providers. Our solution empowers merchants to deliver flexible payment options while ensuring smooth operations and better financial control.

As the Middle East BNPL market continues to evolve toward its projected USD 255.43 billion future, merchants like yourself must be ready to adapt. Book a call with MoneyHash today and discover how we can help you streamline payment processes and drive business growth in this booming space.