How Does Afterpay Make Money? Business Model Explained!

Customers can buy products from Afterpay’s partners in advance and pay them in four installments later without any additional cost or interest. Their service is known as “Buy Now, Pay Later.”.

Afterpay has developed a strong presence in both the Australian and international markets in just 5 years. A growing number of customers are taking advantage of its interest-free payment option, which allows them to buy first and pay later. The “Buy Now, Pay Later” (BNPL) industry has been revolutionized by Afterpay, with a market capitalization of $30+ billion.

A key to Afterpay’s success lies in its in-depth understanding of the many ways it delivers value, operates, and generates revenue. We’ll talk about how it makes money in this article.

What does Afterpay do?

A buy now pay later (BNPL) company headquartered in Sydney, Australia, Afterpay was founded in 2014. In addition to APR-free POS loans, the company offers guaranteed approval and no credit checks. It is a credit card alternative.

With its flagship BNPL service, Afterpay has built its business.

In essence, Afterpay rewards customers for using its payment plan at its partner stores. A business makes money through affiliate commissions in this commission-based model of affiliate marketing.

Affirm, the company behind the POS concept, has a novel approach. The average APR of the company is 18%, based on the credit scores of its users. Afterpay, however, does not use credit scores and does not apply interest to purchases, so it can be used by a much broader audience.

How does Afterpay work?

Afterpay partners with hundreds of online retailers including ASOS, Pandora, The RealReal, Lululemon, Forever 21, and others.

From the customer’s perspective, Afterpay is pretty straightforward: you choose Afterpay as your preferred payment method when you check out at the online store.

You will then be able to pay for your items in four interest-free installments. As long as the payment is made on time, Afterpay does not charge any interest or additional fees.

Afterpay blocks your ability to make additional purchases if you’re late with a payment. You may also be charged late fees, depending on your country of residence.

When consumers use Afterpay, they can order items free of charge and test them out first. Those who do not like them can simply return them to the retailer.

Australia, Canada, New Zealand, the United States, and the United Kingdom offer Afterpay. Other countries, such as Germany, may follow shortly.

In addition to its website, Afterpay’s mobile phone applications are available for Android and iOS.

How does Afterpay Make Money?

Fees charged to merchants for purchases made through the Afterpay service and late fees charged to customers are how Afterpay makes money. It is a simple, but controversial, business model.

Merchant fees

Unlike credit cards, Afterpay does not charge its customers interest or additional fees. A percentage fee is charged to its merchant network for each sale processed through the Afterpay network. The fee typically ranges from 4% to 6% of the transaction value, plus $0.30 flat-rate.

Merchants can also pay transaction fees according to a sliding scale. If a merchant uses Afterpay more often, the fee will decrease. As of now, Afterpay has nearly 75,000 retailers on its network, making it one of the most widely used services worldwide. Users can borrow money from major brands for free.

Afterpay handles the underwriting of POS loans, so merchants don’t have to worry about default. They pay the merchant immediately and assume the risk of the customer repayment. So for the merchant, this is a good deal, since Afterpay claims that merchants who offer its facility can increase annual sales by as much as 20%.

Afterpay earns the majority of its income from merchant fees rather than late fees.

Late payment fees

Less than 10% of Afterpay’s earnings come from late fees on loans paid by its customers. An invoice is sent to the customer when they assume the loan with their next installment due date. Afterpay deducts the agreed amount from the nominated credit card or debit card on the specified date.

As long as the new payment date is before the nominated payment date, Afterpay allows the customer to reschedule the loan payment one free time. The late fee for an Afterpay payment is $10 if you don’t change the payment date.

A week later, the company tries again to bill. They charge a further $7 late fee if they can’t retrieve the payment. The outstanding amount will be rolled over to the next payment if the payment is not completed. They will charge another $7 if the next payment doesn’t go through. Orders below $40 will be charged a $10 late fee. Late fees are capped at 25% of the total order value for orders over that amount.

The company makes the majority of its earnings through late fees, which are often alleged to be predatory lending tactics. 

According to consumer groups, Afterpay creates excessive risk for consumers by offering its services regardless of financial circumstances, resulting in financial stress and excessive debt. Some groups have sued Afterpay for its lending practices.

Following extensive scrutiny, Afterpay changed its business model. In the present day, Afterpay earns less revenue from late fees, instead relying on its merchant fee model.

Afterpay’s Competitors

As an interest-free POS loan provider, Afterpay has plenty of competition from other companies in the same space. Since 2015, prominent tech companies have been entering the market in order to become involved with BNPL business models.

Affirm, Sezzle, and Klarna are among the top competitors of Afterpay, along with PayPal offering BNPL services. Learn more about how Affirm makes money.

Future Growth

It now aims to expand its operations to Asia after breaking into the European and US markets. BNPL will acquire EmpatKali, an Asia-based subsidiary of the company, according to official reports.

Over the years, Afterpay has partnered with over 48,000 merchants, integrated with multiple ecommerce platforms, and acquired an international customer base. Afterpay is obviously determined to expand its market and leave a lasting impact on the BNPL industry worldwide.

In the first five years of its operation, Afterpay has become a household name in many countries. I wonder where it will be in the next 5 or 10 years.

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