How Does Afterpay Make Money – Afterpay Business Model

Published on October 29th, 2024

Afterpay is a financial technology firm founded in Australia. It is a flexible “buy now, pay later” service provider to customers which allows them the freedom of purchasing something and paying for it at a later date, in installments. Founded in 2014, the company fast-tracked into popularity as an accepted mode of payment among online and offline sellers alike. Indeed, with Afterpay, consumers are now able to shop for many commodities without facing full costs immediately, as they can easily budget their repayments over weeks. This novel buying style is not only great at improving consumer purchasing power but has also modified the current retail environment so that it would be simpler for people to acquire goods that they desire while keeping within budgets.

Brief History of Afterpay

Afterpay was co-founded in 2014 by Nick Molnar and Anthony Eisen in Sydney, Australia. At the time, they saw a growing demand among millennials for payment options beyond traditional ones, so they looked to bridge the gap between the lack of access and resources afforded to this customer segment. They developed a consumer platform that enables people to purchase now and then pay later, interest-free, thus making it easy to control the finances of younger generations.

In a very short time, Afterpay saw its greatest boom and popularity, with its service expanding to over 20 countries across the world, such as the United States and Canada, as well as several European countries. With this kind of international expansion, Afterpay was able to reach millions of users who, for various reasons, appreciate the convenience of their model of payment. It was not until March 2021 that the success of Afterpay caught the attention of another giant US-based financial services company, Square Inc., which acquired the innovative company for around $29 billion. The acquisition only served to strengthen Afterpay’s resources, though it in the same manner legitimized it as the leading company in the rapidly evolving buy-now-pay-later industry to serve as a springboard to future innovations and improvement in consumer financing.

Also Read: Zelle Business Model: How Does Zelle Make Money?

Who Owns Afterpay

Afterpay is a full subsidiary of Square Inc. through which both companies offer new and more enhanced financial services for consumers. The acquisition enabled Afterpay to fully employ the robust resources and expertise in digital payments that Square Inc. houses.

Square Inc. was established in 2009 by the co-founder of Twitter, Jack Dorsey. The company took off with a particular mission: to empower a new generation of individuals and businesses with innovative financial services, focusing on payment processing for small businesses through its popular software platform called Square Register. Since then, Square has expanded its portfolios to include peer-to-peer money transfers through Cash App, as well as the ability to loan small businesses money through Square Capital.

Afterpay: Facts & Statistics

Following, we’ve listed some important facts and statistics regarding Afterpay. Let’s check:

1. Founded

• Afterpay was founded in 2014 in Australia by Nick Molnar and Anthony Eisen.

2. Acquisition by Block Inc.

• In August 2021, Block Inc. (formerly Square), led by Jack Dorsey, acquired Afterpay in a deal valued at $29 billion, marking one of the largest fintech acquisitions.

3. Global Presence

• Afterpay operates in several countries, including:
  • Australia (its founding country)
  • New Zealand
  • The United States
  • Canada
  • United Kingdom (as Clearpay)
  • France
  • Italy
  • Spain
  • Germany

4. User Growth

• Afterpay reached 24 million active customers globally as of December 2023.
• Over 348K+ global retailers accept Afterpay.

5. Demographics

• Gen Z and Millennials are the largest user segments, accounting for over 70% of Afterpay’s users.
• Many younger consumers prefer BNPL services like Afterpay over traditional credit cards due to no interest fees (if payments are made on time) and better budgeting capabilities.

6. Revenue

• In 2023, Afterpay generated around $1.2 billion in revenue, mainly from merchant fees and late fees.

How does Afterpay work?

Afterpay allows consumers to split a purchase into four interest-free payments over six weeks, paid every two weeks.

Afterpay offers easy payment in four installments. The customer pays the first installment at the time of purchase, but the subsequent three will be automatically taken from the given payment method on alternate weeks.

To be an Afterpay consumer, a person must sign up for an account and attach the account to a debit or credit card. A customer can shop at any store that allows Afterpay. Customers have the option of afterpay when given the choice of payment method while checking out.

Retailers pay Afterpay a commission for using the service, which ranges between 3-7% of the transaction.

How Does Afterpay Make Money?

Afterpay gets its major revenue mainly from these two areas: merchant fees and late fees. Payment to a merchant using Afterpay as an accepted payment method costs the merchant between 4 and 6% of every transaction made. Afterpay splits this charge 50/50 with the retailer.

In addition, for each payment due date missed, Afterpay can charge a fee to the customer. These fees are between $10 and $15, depending on the country and currency used, for late payments.

Merchant Fees

Merchant fees are the core source of revenue for Afterpay. It is crucial because the fees enable Afterpay to provide service to the merchants without adding any interest or fee onto the customer’s account, hence making it attractive both to the merchants and to consumers. Afterpay will charge its merchants a percentage of the transaction amount to be able to sustain its operations while making shopping transactions seamless for customers.

The customer base of Afterpay has very well been extended via strategic partnerships with major retailers and well-known brands, giving it a reach to a larger audience who want to avail of its services. This growth has not only brought more visibility for Afterpay in the market but also revenue in the form of merchant fees, thus solidifying its position as a leader in the financial technology sector. Continuous innovation and nurturing relationships with multiple kinds of retailers will very well position Afterpay to continue sowing the seeds for further consolidations and success shortly.

Late Payment Fees

As with any other financial service, there is no guarantee of a late payment with respective potential fees for it. Afterpay contacts them in advance to prevent all those fees by sending reminders through email or text messages before actual payments are due. They even provide a one-time grace period for late payment so the customer gets a chance to catch up without a charge for anything extra.

But to help support its customers, Afterpay implemented a hardship policy aiding those in customer distress. This implies that for eligible customers, there might be longer payment plans or cancellation of late fees.

Suggested: Klarna Business Model: How Does Klarna Make Money?

How Does Afterpay Make Money from Merchants and Customers?

Except for the transaction fees charged to the merchants, Afterpay’s main source of revenue is fees. When a store signs up to offer Afterpay as an option, they agree to pay the firm a percentage of each sale made and a flat fee for every transaction. Such a fee is cheap to merchants because it is negated by the sales increase and customer retention credited to having accommodated flexible payment schemes. Afterpay also earns through late fee charges on customers who do not make payments before the deadline set in advance for them. The company, however, ensures the fees are only capped and transparent to contain the financial burden on the consumers and enjoy their trust. Given the nature of Afterpay, which capitalizes on both the transaction fees from retailers, it can sustain its business operations and expand its services.

• Merchant Fees: Afterpay charges merchants a percentage of each sale as well as a small fixed amount for each transaction. Such a fee structure means that merchants could add this option to checkout seamlessly, allowing customers to avail of it while encouraging them to make more purchases.
• Increased Sales to the Merchant: The merchant’s fee is usually recovered through increased volumes of sales, as well as from retaining customers due to giving options in paying. This ability to pay through installments will attract more customers because they feel they are not burdened with large amounts to be paid.
• Late Fees for Customers: Another source of increasing revenue is late fees charged on the company’s customer accounts if one fails to make a payment at the end of the due date. Then again, there are limits attached to prevent overburdening the cost on the user so that while Afterpay can maintain its business model, customers are not burdened by mystery charges that appear out of nowhere. The profitability will thus strike a balance with customer well-being.
• Transparent Practices: Afterpay is transparent in the cost structure they charge to both merchants and customers. This is very much open communication between both parties that practices lead towards trust, and that is something that both parties need to know and understand the cost. Therefore, these types of straightforward practices enable sustainable business practices that are good for all the interested parties and eventually help in building long-term relationships.

4 Ways How AfterPay Makes Money

Afterpay has successfully carved out a profitable niche in the payment industry with its buy-now-pay-later model. Here are four ways that Afterpay generates revenue:

1. Merchant Fees

For each transaction made on its platform, Afterpay collects a charge from the merchant, which the latter pays as an amount the actual percentage may vary, on top of the total amount of the transaction that recovers the various costs arising from the installment payment products offered to consumers.

The buy-now-pay-later model has been proven to elevate sales, which has become a promising source of revenue for Afterpay. For the merchants, they are willing to pay all the fees driven to get increased customer size and volume of sales.

2. Late Fees

Late fees are essential for Afterpay to generate income. If a customer fails to make a payment on time, the customer is charged a late fee, which varies between $10-$15 per missed payment. These fees keep customers on their toes while making timely payments and also give some extra income to Afterpay.

Of course, it is worth noticing that Afterpay has capped these fees to avoid piling an extra economic burden on customers as well as to prevent reckless expenditure.

3. Pay-Per-Click Advertising

Afterpay earns also through pay-per-click advertising on the site. This will charge sellers extra, so their products show up at the top of Afterpay’s list of search results, thus making them much more likely to get purchased.

That would particularly be attractive for smaller businesses or companies competing in relatively competitive industries since it gives them an opportunity to be noticed and marketed to a much larger audience without having to invest in very costly marketing campaigns.

4. Subsidiaries and Partnerships

Another way Afterpay expands its revenue streams is through the acquisition of subsidiaries and partnerships. It acquired a European-based buy-now-pay-later platform called Pagantis. This allows Afterpay to offer its services in other countries and, thereby, achieve a wider market.

They also have many big retailer collaborations, like with Sephora and Target, thus offering them a large customer base and sources of income through partnership agreements.

Must Read: How Does Venmo Make Money: Venmo Business Model

Afterpay Business Model 

Afterpay’s business model is based on the increasingly popular concept of “buy now, pay later,” which has lately gained a massive following among the younger generation, which is known to prefer flexible modes of payment. The company strategically partners with a diverse cross-section of online and offline retailers to provide streamlined financing options to their customers at checkout.

A buyer, before settling for Afterpay as his or her means of payment, will be asked to pay a certain amount considered small, about 25% of the amount paid for the goods or service, and he or she will then pay the remaining balance on equal installments over a fixed period that may be six weeks. This structure enables consumers to manage their money better since they can hold part of the cost of their purchases without incurring high-interest fees typically linked to traditional credit cards. More importantly, customers can still enjoy the benefits of receiving their items immediately while enjoying the flexibility of staggered payments. This new approach, other than being good at the goals of increasing customer satisfaction, also stirs up higher spending and repeat sales among retailers, hence causing growth in the retail sector.

Afterpay Revenue Streams

Afterpay generates revenue through various sources, including merchant fees, late fees, foreign exchange fees, and interest income. Merchant fees are the primary source of revenue for Afterpay and account for approximately 80% of its total income. These fees are charged to retailers for using Afterpay’s services and typically range from 3-7% of the transaction value.

Merchants: 

Afterpay partners with various retailers, including fashion, beauty, home goods, and travel brands. These retailers pay Afterpay a percentage of the transaction value as a fee for using its services. In return, Afterpay provides merchants with access to its large customer base and helps increase their sales by offering customers an interest-free payment option.

Late Payments:  

Afterpay also generates revenue from late fees charged to customers who fail to make their payments on time. These fees are capped at $10 per installment and account for a small percentage of the company’s overall revenue.

Foreign Subsidiaries:  

Afterpay’s presence is not limited to Australia and the US. The company also operates in Canada, New Zealand, and the UK through its foreign subsidiaries. These subsidiaries generate revenue by charging merchants transaction fees similar to those in Australia and the US.

Afterpay Cost Structure

Afterpay’s current operating model includes two significant aspects within its cost structure:

Merchant Fee:

The first component of this cost structure is the merchant fee, which is set at a flat rate of 30 cents. Every business and retailer using Afterpay is required to pay this amount.

Merchant Commission:

In addition to the merchant fee, a commission is charged on each successful transaction made by a retailer. This commission can range from 4% to 6% of the item’s value, depending on the specifics of the transaction.

Afterpay Customer Segments

Afterpay’s customer base primarily consists of digitally-savvy millennials and Gen Z consumers who value convenience and flexibility in their shopping experience. However, the company also caters to older demographics who may not have access to traditional credit options or prefer not to use them.

Merchants and Retailers:  

Besides customers, Afterpay is a vital partner for its merchants and retailers. The company’s payment platform provides these businesses with access to millions of potential customers, which can drive sales and increase customer loyalty.

Consumers:

Afterpay’s payment solution appeals to consumers because it allows them to purchase items without immediately paying the full price. This flexible payment option is especially attractive for budget-conscious shoppers who may need access to credit cards or prefer to avoid interest payments.

Also Read: 10 Best Apps Like Afterpay

Top Competitors of Afterpay 

Afterpay is not the only company in the buy-now-pay-later market. Some of its main competitors include Klarna, Affirm, and Sezzle. These companies offer similar services and are also expanding into international markets. While Afterpay currently has a significant share of the market, it will continue to face competition from these and other emerging players.

Sezzle:

Sezzle is a US-based buy-now-pay-later company that offers interest-free installment plans for online and in-store purchases. Similar to Afterpay, customers can make purchases and pay them off in four equal installments over six weeks. Sezzle has a strong presence in the US market, but it has also expanded into Canada and India.

Klarna:

Klarna is a Swedish buy-now-pay-later company that operates in over 17 countries, including the US, UK, Germany, and Australia. Klarna works with over 200,000 retailers worldwide and offers a variety of payment options, including traditional financing options like loans and credit cards.

Affirm: 

Affirm is an American financial technology company that offers installment loans for online purchases. Customers can choose to pay for their purchases over three, six, or 12 months with Affirm. The company also partners with various retailers and allows customers to make purchases directly through its app.

SWOT Analysis of Afterpay

Strengths

• User-Friendly Interface: Afterpay comes with an incredibly simple and intuitive interface that lets users navigate with ease and effectively control their payment plans.
• Interest-Free Payment Option: One of the attractions offered by Afterpay is its interest-free structure, which will enable customers to buy now and pay later without any additional burden on their financial pocket.
• Extensive Network of Merchants: With an extensive network of partnered merchants, customers will have a wide range of diverse products and services to choose from.
• Customer trust and loyalty: Through the adoption of buyer protection schemes in addition to responsible lending practices.
• A market leader in buy-now-pay-later: Afterpay has become a brand that is often seen favorably by consumers, as well as retailers.
• Global Expansion and Growth: Successful expansion into various global markets has enhanced its global outreach and growth.

Weakness

• Risk of Overindebtedness: Afterpay’s interest-free payment structure can lead to customers taking on more debt than they can handle, potentially putting them at risk for financial difficulties.
• Limited Maximum Purchase Amount: Customers are limited in the amount they can spend through Afterpay, which may not be ideal for larger purchases.
• Reliance on Partnering Merchants: The success of Afterpay is closely tied to its partnering merchants, and any issues with these retailers could negatively impact the company.

Opportunities

• Expanding into New Markets: Afterpay has already expanded into international markets, but there is potential for further growth in untapped regions.
• Partnering with High-End Retailers: By partnering with high-end retailers, Afterpay can tap into a new customer demographic and potentially increase its average purchase amount.
• Introducing New Services: There is room for Afterpay to expand its services beyond buy-now-pay-later, such as offering financial planning tools or loyalty programs.

Threats

• Competition in the Market: As Afterpay’s popularity grows, so does the competition from other buy-now-pay-later companies.
• Changing Consumer Preferences: With changing consumer preferences and trends, there is a risk that Afterpay’s business model may become less appealing over time.
• Regulatory Changes: The buy-now-pay-later market is currently unregulated, but this could change in the future and potentially impact Afterpay’s operations.

Also Check: Top 9 Instant Cash Advance Apps Like Cleo

How Much Does It Cost to Build A BNPL App Like Afterpay?

Building a Buy Now, Pay Later (BNPL) app like Afterpay involves various costs depending on multiple factors such as development complexity, platform choices, and required features. On average, the cost to develop a basic BNPL app can range from $50,000 to $150,000. This estimate covers crucial aspects including design, development, testing, and deployment. An app with advanced features and a scalable architecture may cost upwards of $250,000. Additionally, the integration of security measures to protect user data could increase expenses. Ongoing costs for maintenance, updates, and customer support should also be considered and could add another $20,000 to $50,000 annually. Businesses should engage with experienced developers and carefully plan their budget to build a competitive BNPL app.

• Basic Development Cost: $50,000 to $150,000 for design, development, testing, and deployment.
• Advanced Features: Upwards of $250,000 for scalable architecture and additional functionalities.
• Security Integration: Additional cost for implementing security measures to protect user data.
• Ongoing Maintenance: Estimated $20,000 to $50,000 annually for maintenance, updates, and customer support.
• Developer Expertise: Engage with experienced developers for accurate budgeting and competitive app development.
• Budget Planning: Careful financial planning is essential to manage costs effectively.

How can iTechnolabs help you build an Afterpay like the BNPL App?

At iTechnolabs, we have a team of skilled and experienced mobile app developers who specialize in building innovative and user-friendly mobile apps. Our extensive experience in developing fintech solutions makes us the perfect partner for creating a BNPL app like Afterpay. We understand the complexities involved in building such an app and can provide accurate cost estimates based on your specific requirements.

Our team follows a rigorous development process, ensuring that every aspect of the app is carefully designed and tested to deliver a seamless user experience. We also prioritize security measures to protect user data, providing peace of mind for both businesses and their customers.

• Expert Consultation: Offer personalized consultation to understand your unique business needs and tailor the app development accordingly.
• Customized Solutions: Design and develop a BNPL app that reflects your brand identity and meets your specific functional requirements.
• Scalable Architecture: Build a flexible and scalable app architecture that can handle increased user demands as your business grows.
• Security Focus: Implement robust security features to safeguard sensitive user data and comply with industry standards.
• User-Centric Design: Create an intuitive and engaging user interface to ensure a seamless and satisfying user experience.
• Cost-Effective Development: Provide a competitive and transparent pricing model to help manage development costs efficiently.
• Continuous Support: Offer ongoing maintenance and support services to ensure your app remains up-to-date with the latest technology trends.
• Compliance Assurance: Ensure the BNPL app complies with relevant financial regulations and industry best practices.

Conclusion:

By utilizing our comprehensive services, we can expertly guide you through the intricate process of building a successful business model similar to Afterpay. Our approach includes in-depth market research that identifies emerging trends and consumer behaviors, ensuring your business stays ahead of the competition. We emphasize a robust business strategy tailored to your unique needs, which lays the foundation for long-term success.  Our technical implementation services ensure that your technology stack supports your business goals, while our risk management strategies are designed to mitigate potential pitfalls and safeguard your investment. Our marketing and branding services also focus on creating a strong and recognizable brand presence that resonates with your target audience.