How Does Afterpay Make Money? The Afterpay Business Model In A Nutshell

Afterpay is a FinTech company providing as a core service the “buy now pay later” solution. When a consumer purchases a product, Afterpay pays the seller and asks the consumer to pay 25%. The remaining 75% is paid in three, fortnightly installments that are also interest-free. Afterpay, in turn, makes money via merchant and late fees.

Origin Story

Afterpay is an Australian financial technology with an additional presence in the UK, Canada, New Zealand, and the United States.

It was founded in 2015 by Nick Molnar and his former neighbor Anthony Eisen. Molnar was a young entrepreneur who was selling the excess stock from his parents’ jewelry business on eBay. As he worked late into the night packing inventory for shipping, he caught the attention of Eisen and the two quickly became friends.

At some point, they began to discuss the possibility of a company that removed the risk out of a typical retail experience for both the buyer and seller. From there, the idea for Afterpay was born. When a consumer purchases a product, Afterpay pays the seller and asks the consumer to pay 25%. The remaining 75% is paid in three, fortnightly installments that are also interest-free.

After initial success in Australia, Afterpay now has over 11 million users across the world.

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Afterpay revenue generation

In effect, Afterpay lends 75% of the total purchase price to consumers. But it is not a lender or credit provider in the traditional sense and does not generate revenue through interest fees.

Instead, it makes money in different ways.

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Merchant fees

For every transaction facilitated by Afterpay, the merchant must pay the company a fee.

This fee is 30 cents plus a variable fee of anywhere between 4-6% and comprises the bulk of Afterpay revenue. The exact fee is dependent on the value and volume of all transactions. Merchants that sell more or sell higher-priced items are charged a fee at the lower end of the spectrum.

It should be noted that the merchant is free to sell its products without Afterpay. However, Afterpay claims that providing an installment option increases the average order value by as much as 20%. It also increases the buyer conversion rate.

Afterpay also likely charges a merchant fee to mitigate the risk it takes on a customer defaulting on their payments.

Late fees

Late payment fees are also collected by Afterpay when a consumer fails to make a scheduled payment on time.

The initial late fee is $10. A further $7 will be charged if the fortnightly payment remains unpaid for seven days past the initial due date.

Orders below $40 are capped at the single, initial late fee of $10. For orders above $40, the late fee is capped at 25% of the original order value or $68 – whichever is less.

Key takeaways:

Afterpay is an Australian financial technology company with a presence in most developed, western economies. It was founded by entrepreneurs Nick Molnar and Anthony Eisen who imagined a retail industry free of risk for the buyer and seller.
Afterpay is not a lender in the traditional sense and as a result, does not collect interest fees. However, it does charge merchants a fee for facilitating payments on their behalf.
Afterpay also charges consumers a late fee based on the value of the original order and how long each repayment remains unpaid.

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