---
title: "Why buy now, pay later never makes money"
url: https://modern-mba.com/case/bnpl
sector: "Finance"
sector_url: https://modern-mba.com/sector/finance
published: 2022-09-19
updated: 2026-09-03
reading_time_minutes: 13
charts: 11
video: https://www.youtube.com/watch?v=R1JaMRpcDrQ
publisher: Modern MBA
license: All rights reserved. Quote with attribution and a link.
---

# Why buy now, pay later never makes money

Affirm, Klarna and Afterpay turned short-term unsecured lending into a checkout button, and four in five Americans have used one. All three lose money. This case study explains why the interest-free Pay in 4 loan they are famous for costs them money by construction, why they keep offering it anyway, who actually funds the loan when you click checkout, and why packaging those loans into securities rhymes uncomfortably with 2008.

## Key figures

- **$127M → $866M** — Affirm's annual operating loss, 2019 to 2022
- **27%** — Of Affirm's 2020 operating expense: losses on interest-free loans
- **80%** — Affirm loans funded by a single New Jersey community bank

## The argument

Buy now, pay later did not invent anything — short-term unsecured lending is centuries old — but it moved that lending from furniture and appliances to everyday impulse purchases, and it replaced applications and manual underwriting with a button. The demand underneath is real. Only 14% of global retail is online, so e-commerce still has runway; younger consumers distrust banks with cause; credit is slow to build, punishing to miss, and gated on a credit history that only time can fix; and retailers facing rising acquisition costs simply want the sale to close.

The problem is the famous product. Pay in 4 splits a purchase into four interest-free installments, so there is no interest to collect — and it is worse than nothing, because BNPL companies do not fund their own loans. A partner bank does, and the BNPL company is bound to buy that loan back within days above its fair value, plus an origination fee. Affirm books it as loss on loan purchase commitment: $73M growing to $246M, and 27% of operating expenses in 2020.

They keep offering it because the portfolio needs it. A book made only of high-interest loans is a book of subprime borrowers, and prime borrowers do not need BNPL, so the interest-free loan is what buys them. That leaves the gap to be closed elsewhere, and the answer has been to package these consumer loans into securities and sell them while keeping the servicing fee. It is the 2008 structure with a $400 sneaker instead of a $400,000 house — and Affirm concedes borrowers default on BNPL before anything else.

## Charts

### Klarna moves ten times the merchandise Affirm does

Retail value of products bought with BNPL. Klarna reached $80B in 2021 against Afterpay's $22B and Affirm's $8B — the same model at wildly different scales.

|  | Klarna | Afterpay | Affirm |
| --- | --- | --- | --- |
| 2019 | $35B | $5B | $3B |
| 2020 | $53B | $11B | $5B |
| 2021 | $80B | $22B | $8B |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-1 · Sources: https://modern-mba.com/case/bnpl#sources

### The land grab is for retailers, not shoppers

Active merchants. Affirm reports none for 2019 and 29,000 by 2021 — then 235,000 in 2022, an eightfold jump in a single year.

|  | Klarna | Afterpay | Affirm |
| --- | --- | --- | --- |
| 2019 | 200,000 | 32,300 |  |
| 2020 | 250,000 | 55,400 | 6,500 |
| 2021 | 400,000 | 98,200 | 29,000 |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-2 · Sources: https://modern-mba.com/case/bnpl#sources

### Ten times the volume earns half again the revenue

Annual revenue in millions. Klarna moved $80B of merchandise to Affirm's $8B in 2021 and booked 49% more revenue for it. Affirm reached $1,349M in 2022.

|  | Klarna | Afterpay | Affirm |
| --- | --- | --- | --- |
| 2019 | $678M | $272M | $264M |
| 2020 | $942M | $519M | $509M |
| 2021 | $1,294M | $925M | $870M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-3 · Sources: https://modern-mba.com/case/bnpl#sources

### Klarna gets paid by the shop, not the shopper

Klarna revenue in millions. Merchant fees run three times interest income, and the late fees everyone worries about are $62M of $1.3B.

|  | Interest income | Merchant fees | Late fees & other |
| --- | --- | --- | --- |
| 2019 | $232M | $438M | $5M |
| 2020 | $251M | $654M | $14M |
| 2021 | $303M | $973M | $62M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-4 · Sources: https://modern-mba.com/case/bnpl#sources

### Afterpay does not charge interest at all

Afterpay revenue in millions. There is no interest line to draw — merchant fees are the business, and late fees add about a tenth on top.

|  | Merchant fees | Late fees & other |
| --- | --- | --- |
| 2019 | $201M | $46M |
| 2020 | $433M | $69M |
| 2021 | $822M | $87M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-5 · Sources: https://modern-mba.com/case/bnpl#sources

### Affirm quietly turned itself into a lender

Affirm's two largest revenue lines, in millions. Interest income passed merchant fees in 2022 — the reverse of how Klarna and Afterpay earn.

|  | Interest income | Merchant fees |
| --- | --- | --- |
| 2019 | $119M | $132M |
| 2020 | $187M | $256M |
| 2021 | $326M | $379M |
| 2022 | $528M | $458M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-6 · Sources: https://modern-mba.com/case/bnpl#sources

### Every input Affirm has grew several times over

Growth from 2019 to 2022. Customers grew fastest at 7×, and customers are what decide how much credit is outstanding at any moment.

|  | Multiples |
| --- | --- |
| Interest income | 4.4× |
| Merchant fees | 3.5× |
| Gross merchandise value | 6.0× |
| Active customers | 7.0× |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-7 · Sources: https://modern-mba.com/case/bnpl#sources

### Klarna, on the same scale, barely moved

Growth from 2019 to 2021, the years Klarna reports, plotted against the axis above. Interest income grew 0.3× where Affirm's grew 4.4×.

|  | Multiples |
| --- | --- |
| Interest income | 0.3× |
| Merchant fees | 1.2× |
| Gross merchandise value | 1.3× |
| Active customers | 0.7× |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-8 · Sources: https://modern-mba.com/case/bnpl#sources

### And none of them make money doing it

Annual operating loss, the three years all three reported. Affirm went on to lose $866M in 2022 by itself, more than double the year before.

|  | Klarna | Afterpay | Affirm |
| --- | --- | --- | --- |
| 2019 | −$98M | −$43M | −$127M |
| 2020 | −$153M | −$27M | −$107M |
| 2021 | −$620M | −$194M | −$383M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-9 · Sources: https://modern-mba.com/case/bnpl#sources

### The interest-free loan is a guaranteed loss

Affirm's annual loss on buying back zero-interest loans from its funding bank at above fair value. This is the cost of its most popular product.

|  | US dollars |
| --- | --- |
| 2019 | −$73M |
| 2020 | −$161M |
| 2021 | −$246M |
| 2022 | −$204M |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-10 · Sources: https://modern-mba.com/case/bnpl#sources

### Which is what being a loan broker costs

Loan repurchase and expected default provisions as a share of Affirm's operating expense. In 2020 those two lines were 44% of everything the company spent.

|  | Loan purchase commitment | Expected loan defaults |
| --- | --- | --- |
| 2019 | 19% | 20% |
| 2020 | 27% | 17% |
| 2021 | 20% | 5% |
| 2022 | 9% | 12% |

Source: Modern MBA, “Why buy now, pay later never makes money”, published September 2022. Chart: https://modern-mba.com/case/bnpl#chart-11 · Sources: https://modern-mba.com/case/bnpl#sources


## Takeaways

1. **BNPL is an old product with a new interface.** It is a short-term unsecured personal loan, the kind Americans have used since the 1800s for furniture and sewing machines. What changed is scope and friction: it now covers impulse and splurge purchases, and the historically opaque process of application and manual underwriting has become **a few taps at checkout**.
2. **Adoption was extraordinarily fast.** BNPL was **$97 billion, or 2%**, of the **$4.6 trillion** spent on global e-commerce in 2020. By 2021 Affirm, Klarna and Afterpay together claimed over **173 million** active users, and **four in five Americans** have used BNPL — on clothing, groceries, gifts and cleaning supplies.
3. **Three trends made it inevitable.** E-commerce still has room, since only **14%** of global retail is online. Millennials have passed boomers as the largest adult generation and **over 70%** of them and zoomers prefer to shop online. And customer acquisition keeps getting more expensive, pushing retailers toward discounts that damage the brand.
4. **The credit system it displaced really is hostile.** Card interest at around **19%** compounds **daily**, a missed payment costs **$40**, and a request to raise your limit triggers a hard inquiry that lowers your score. Length of credit history is a function of time, so a young borrower can do nothing but wait. Globally, consumers paid **$121 billion** in credit card interest in 2019, and Americans owed close to **$1 trillion** in card debt by August 2022.
5. **Retailers love it because they carry none of the risk.** The retailer is paid **in full, immediately**, at the moment of checkout. Whether the loan is interest-free or twelve months, and whether the customer repays or vanishes, is entirely the BNPL company's problem.
6. **Which turned retailer exclusivity into an arms race.** Retailers partner with one provider at a time: Affirm has **Amazon, Peloton and Walmart**; Klarna has **Lululemon, H&M, Nike, Wayfair, Saks and Sephora**; Afterpay has **Nordstrom, Adidas, Gap, Tory Burch and Bed Bath & Beyond**. Klarna leads with over **400,000** merchants, Affirm has **235,000**, Afterpay **98,000**.
7. **The three are the same company in different jurisdictions.** Identical messaging, identical products, identical claims about proprietary underwriting and low default rates. All funnel users into an app for push-notification retention, all tie identity to a **phone number** rather than an email, and all offer savings accounts.
8. **Scale differs enormously, though.** In 2021 Klarna's users bought over **$80B** of merchandise against Afterpay's **$22B** and Affirm's **$8B**. Klarna operates in **45 countries** with **145 million** customers; Afterpay in **9** with 16 million; Affirm only in the **US and Canada** with 7 million. Everyone chases America anyway — it is **25% of global retail**.
9. **The market has already repriced them.** Afterpay was bought by **Square for $29B** at the peak in late 2021. Klarna scrapped a **$50B** IPO and raised instead at **$7B** — an **80% drop** from $45B a year earlier. Affirm is the last standalone public one, which is why its filings are the clearest window into the model.
10. **Two streams carry the business.** Merchant fees, a commission of **2 to 5%** per sale negotiated per retailer, and interest income. Together they are about **85%** of Affirm's revenue. Interest grew from **$120M to $530M** and merchant fees from **$132M to over $450M** across four years, while users and volume both rose **sevenfold**.
11. **The commission is higher when the loan is interest-free** — Affirm takes a bigger cut precisely where it earns no interest. Against the **1-3%** retailers already pay a card processor, a few more points feels fair for a sale that would not otherwise have closed.
12. **Afterpay proves the model's shape by refusing half of it.** It offers only interest-free loans, so it charges higher merchant commission at **4-6%** and leans on penalties. Merchant fees are **82%** of revenue, near **90%** in 2021, quadrupling from **$200M to $800M**. Late fees are **13%** of revenue, doubling from **$46M to $90M**.
13. **And every one of them loses money.** Affirm has lost over **a billion dollars in four years**, from **$127M in 2019 to $866M in 2022**. Klarna lost **$620M** and Afterpay **$194M** in 2021.
14. **The reason is who actually funds the loan.** When you click checkout you are submitting a loan application; the BNPL algorithm underwrites it, but a partner bank issues and funds it. Roughly **80% of Affirm's 2022 loans came from Cross River Bank**, a New Jersey community bank. Klarna's US loans come from **WebBank** in Utah; Afterpay's from **National Australia Bank** and others.
15. **Then the BNPL company must buy that loan back — above what it is worth.** The bank does no underwriting and wants no exposure, so within days the loan is repurchased at face value plus an **origination fee**. On interest-free loans that price exceeds fair market value, which is a guaranteed loss on the most popular product. Affirm names it **loss on loan purchase commitment**: **$73M in 2019 rising to $246M in 2021**, and in 2020 it was **27% of operating expenses** on its own.
16. **They keep selling the loss-making loan to buy respectable borrowers.** A portfolio of only high-interest loans is a portfolio of **subprime** borrowers, and prime borrowers — who have credit already — will not take one. Interest-free loans are the bait that balances the book. Two fixes are underway: **savings accounts**, so deposits fund loans directly (Affirm self-funded **20%** of loans in 2022 and cut the loss by **$40M**), and **packaging loans into securities** while keeping the servicing fee, now **15% of Affirm's revenue** at over **$250M**. That last one is the 2008 structure at a smaller denomination.

## Common questions

### Is buy now pay later profitable?

Not for anyone yet. Affirm has lost over a billion dollars in four years, from $127 million in 2019 to $866 million in 2022. Klarna lost $620 million and Afterpay $194 million in 2021. The core reason is that the most popular product — an interest-free split into four payments — earns no interest and actually costs money, because the company buys the loan back from its funding bank at above fair market value plus an origination fee.

### How does Affirm make money?

Five ways: merchant fees, a commission of roughly 2 to 5% of each sale negotiated with the retailer; interest income on loans that carry it; virtual card fees, where Affirm takes part of the card processing fee at retailers not formally on its platform; loan sales, packaging loans and selling them to investors; and servicing income, a fee for continuing to administer and collect on loans it has sold. Merchant fees and interest together make up about 85% of revenue. Uniquely among the big three, Affirm charges no late fees at all.

### Who actually funds a buy now pay later loan?

A partner bank, not the BNPL company. When you check out, your order doubles as a loan application: the BNPL company's algorithm underwrites and approves it, but the money is issued by a bank it works with. Around 80% of Affirm's 2022 loans were funded by Cross River Bank, a New Jersey community bank; Klarna's US loans come from WebBank in Utah, and Afterpay uses National Australia Bank among others. Within days the BNPL company is contractually bound to purchase that loan back, which is where its economics break.

### Why do BNPL companies offer interest-free loans if they lose money on them?

To keep prime borrowers in the loan book. A portfolio made only of high-interest loans is a portfolio of subprime borrowers, which looks high-return on paper and is fragile in a downturn. Borrowers with good credit already have access to cheaper credit and will not take an expensive loan, so the interest-free Pay in 4 is what attracts them. It is a deliberate loss — Affirm books it as loss on loan purchase commitment, which grew from $73 million in 2019 to $246 million in 2021 and reached 27% of operating expenses in 2020.

### Is buy now pay later like the 2008 crisis?

The ingredients rhyme rather than match. 2008 combined cheap credit, spending beyond means, overextended subprime borrowers and loose lending standards, and BNPL has versions of all four. The scale is very different — billions of consumer loans against trillions in subprime mortgages — but the direction is uncomfortable: BNPL companies now package consumer loans into securities and sell them to investors while keeping the servicing fee, which is 15% of Affirm's revenue. Affirm itself acknowledges that in a downturn borrowers default on short-term unsecured loans before their mortgages or credit cards.

### What is Pay in 4?

The standard BNPL product: the cost of a purchase split into four equal, interest-free payments due every two weeks, with the goods shipped immediately. If you pay each installment on time you pay exactly what you would have paid on a card, spread over six weeks instead of one day. Longer plans, up to 36 months, do carry interest, and the rate reflects how the company's underwriting scores you. The important detail is that Pay in 4 is both the most popular product and the one the companies lose money on.

### Does buy now pay later hurt your credit?

It can. These are real loans with real consequences: miss a payment and Klarna and Afterpay charge late fees, the debt can go to collections, and your credit score can fall — Afterpay's late fees alone were $90 million in 2021, 13% of its revenue. Affirm is the exception among the big three in charging no late fees. The subtler risk is behavioural: because the same purchase is presented as a small recurring number rather than its full price, and because loans from multiple providers can be stacked, it is unusually easy to commit more than you would on a single card.

## Discussion

- BNPL companies lose money on the product customers like most, and offer it to attract borrowers who do not need them. How long can a business subsidise its own respectability?
- The retailer is paid in full at checkout and carries no default risk. Does that make BNPL a payment method or a wholesale credit transfer with better branding?
- 80% of Affirm's loans were funded by one community bank. What is the systemic exposure if that relationship changes?
- Affirm charges simple interest and would likely be profitable on compound. Is consumer-friendly pricing a strategy or a subsidy with an expiry date?
- China put Ant Financial's lending under state control; the US is waiting to see what happens. Which regulator will look right in ten years?

## Sources

Revenue by stream, gross merchandise volume, active customer and merchant counts, operating losses and loss on loan purchase commitment from Affirm Holdings annual reports and 10-K filings, 2019 through 2022, and from Klarna Bank AB and Afterpay annual reports through 2021; loan origination bank relationships as disclosed by each company; global e-commerce and credit card interest figures from published industry data; acquisition and funding round terms as announced

---

From [Modern MBA](https://modern-mba.com/). Read this case in full at [https://modern-mba.com/case/bnpl](https://modern-mba.com/case/bnpl), or watch the episode at https://www.youtube.com/watch?v=R1JaMRpcDrQ.