The business model
BNPL providers earn revenue primarily from merchant fees, not consumer interest — a fundamental difference from credit cards. The pitch to retailers: BNPL increases average order value (customers spend more when payment is deferred), reduces cart abandonment, and attracts younger consumers who avoid credit cards. For major BNPL providers, merchant fees generate the bulk of revenue. Late fees and, increasingly, interest charges on longer-term instalment plans generate supplemental income. The model depends on scale: thin per-transaction margins require enormous volume, which is why BNPL providers have raised billions in funding and burned through capital building market share. Klarna’s valuation fell from $46bn to $6.7bn in 2022 as rising interest rates squeezed its cost of borrowing (it borrows to fund consumer purchases) and tightened the economics of the model.
The consumer risks
BNPL is genuinely useful when used within budget — for cash-flow smoothing on a planned purchase. The risks arise when it enables spending that would otherwise be unaffordable. Because BNPL is easy (no hard credit check at most providers), psychologically frictionless (deferring payment reduces the perceived cost of buying), and ubiquitous at checkout, it can facilitate debt accumulation across multiple providers simultaneously without any individual provider seeing the full picture. In the UK, BNPL was historically unregulated — no affordability checks, no reporting to credit bureaus. The FCA is bringing BNPL into regulation, requiring affordability checks and mandatory credit reporting from 2025 onwards. Until then, consumers must self-regulate.
“BNPL is not a loan that looks like nothing. It is nothing that can become a loan — if you miss a payment, you may face penalties, interest charges, and a credit score impact you did not anticipate when you clicked ‘Pay later.’”
What this means for you
BNPL is fine as a cash-flow tool for planned purchases you would make anyway. Track how many active BNPL agreements you have simultaneously — it is easy to lose count across multiple providers. Always confirm whether a missed payment will trigger interest charges or late fees (it usually does), and whether the provider reports to credit bureaus (increasingly they will). Never use BNPL to purchase items you cannot afford to pay for outright — it is consumer credit, not a discount, and the item’s cost does not change by spreading the payment. The FCA’s incoming regulation will make BNPL more like other credit products, which is good for consumer protection — treat it with the same discipline you would a credit card.