How Does Afterpay Make Money?

Afterpay has become a popular “buy now, pay later” (BNPL) service that allows consumers to purchase items and pay for them in four interest-free installments over time. With millions of users and partnerships with thousands of retailers, Afterpay has revolutionized the way people shop. But have you ever wondered how Afterpay makes money if they don’t charge interest on payments? In this article, we’ll explore the key ways Afterpay generates revenue.

1. Merchant Fees

The primary way Afterpay makes money is through merchant fees. When a consumer uses Afterpay to make a purchase, the retailer pays Afterpay a percentage of the transaction amount in exchange for offering the BNPL service to their customers. This fee is typically 4-6% of the total purchase value.

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  • Why merchants pay fees: Merchants are willing to pay these fees because offering Afterpay as a payment option can attract more customers, increase average order values, and reduce cart abandonment rates.
  • Increased sales for retailers: Retailers often see an increase in overall sales when offering Afterpay, as consumers are more likely to complete their purchases when they can spread the payments over time without paying interest.

Revenue potential: With millions of transactions processed each year, Afterpay generates substantial revenue from merchant fees alone.

2. Late Fees

Although Afterpay advertises interest-free installments, they do charge late fees if a customer fails to make a payment on time. Afterpay gives users the flexibility to split payments into four installments, but if a payment is missed or delayed, a late fee is applied.

  • How late fees work: If a payment is not made on time, Afterpay typically charges a late fee ranging from $8 to $10, depending on the region. However, the total late fees are capped at 25% of the order value or a set maximum (e.g., $68 in the U.S.).
  • Why late fees exist: These fees serve as both an incentive for customers to make their payments on time and a way for Afterpay to recover some revenue from late or missed payments.

Revenue potential: While Afterpay’s business model focuses on keeping its service free for customers who pay on time, late fees still contribute a significant portion of its revenue.

3. Interchange Fees (Afterpay Card)

In addition to its core BNPL service, Afterpay also generates revenue through interchange fees. In 2020, Afterpay introduced a virtual Afterpay Card for users to make in-store purchases. This card, linked to the customer’s Afterpay account, allows users to pay for in-store purchases in installments, just like they would for online shopping.

  • How it works: When customers use the Afterpay Card in-store, Afterpay earns a small interchange fee from the card network (such as Visa or Mastercard) for processing the transaction.
  • Why interchange fees matter: While interchange fees are typically smaller than merchant fees, they provide an additional revenue stream for Afterpay as more customers use the card for in-store shopping.

Revenue potential: As more users adopt the Afterpay Card for in-store purchases, interchange fees will continue to grow as a supplementary revenue source.

4. Partnerships and Promotions

Afterpay also generates revenue through promotions and partnerships with retailers. Retailers can pay Afterpay to feature their stores more prominently on the platform, giving them better visibility to consumers who are browsing for deals and shopping opportunities.

  • Sponsored placements: Afterpay offers paid advertising opportunities to retailers, such as featured spots on the app or website, which increases exposure and drives more traffic to the retailer’s online or physical store.
  • Collaborations with brands: Afterpay often partners with well-known brands for special promotions, offering exclusive discounts or payment terms to attract more customers.

Revenue potential: Retailers are willing to invest in paid placements and promotions because it increases their visibility on the platform, potentially boosting sales and customer engagement.

5. International Expansion

Afterpay continues to grow its revenue through international expansion. Initially founded in Australia, Afterpay has expanded its services to countries like the United States, Canada, the United Kingdom, and New Zealand, with plans for further growth in other regions.

  • How expansion helps: By entering new markets, Afterpay can tap into a broader consumer base, leading to more transactions and higher overall revenue.
  • Global partnerships: Afterpay partners with local and global retailers in each market, ensuring its BNPL service is widely available to customers wherever they shop.

Revenue potential: International expansion enables Afterpay to grow its user base, increase transaction volumes, and, ultimately, generate more revenue from merchant fees and other services.

6. Acquisitions and Business Synergies

In August 2021, Square (now Block, Inc.) acquired Afterpay in a deal worth approximately $29 billion. This acquisition creates new opportunities for Afterpay to integrate with Square’s existing payment processing services, as well as Square’s point-of-sale systems used by millions of businesses worldwide.

  • How the acquisition adds value: Afterpay’s integration with Square allows it to reach more merchants and expand its footprint in the retail and e-commerce sectors. Square can also leverage Afterpay’s BNPL services for its own customers, creating more synergies between the two companies.
  • Growth through innovation: Afterpay continues to innovate its platform, introducing new services and expanding its product offerings, further solidifying its role as a leader in the BNPL industry.

Revenue potential: The acquisition by Square gives Afterpay access to more merchants and consumers, potentially increasing its revenue streams through business synergies and expanded services.

Conclusion

Afterpay makes money primarily through merchant fees, which retailers pay to offer the BNPL service to their customers. In addition, Afterpay generates revenue from late fees, interchange fees from its virtual card, and paid promotions with retailers. As the company continues to expand globally and integrate with new partners like Square, Afterpay’s business model remains a strong force in the growing “buy now, pay later” market.

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