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How Does Afterpay Make Money

By November 13, 2022December 2nd, 2022No Comments

Have you ever needed something but the price was just out of your current budget? There are several options for this situation. You can wait for a sale that may never happen. You can save until you have the full purchase price. You could even try to buy the item with a credit card but that means having the credit available, paying the payments, and paying the fees plus the interest fees.

That may not be an option for everyone. Another solution is to use Afterpay. Afterpay funding can allow you to buy the items you need or want now, You will pay in interest-free installments usually over a period of six weeks. You will make four payments of equal amounts and the item will be yours, paid in full.

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What is Afterpay?

Afterpay was launched in 2014 as a way to provide interest-free loans to a wider range of people directly through merchant partners using their websites’ payment gateway. A new addition to Afterpay allows you to use the service for in-store shopping as well.

Most websites that offer Afterpay as a payment method advertise this information on the home page. If not, you may find it listed in the payment options when you checkout.

What percentage does Afterpay take?

Afterpay charges merchants a percentage of every sale. This is one of the ways that the company makes money. These transaction fees plus fees on late payments are the major part of Afterpay’s business model.

The amount of each sale is 4.17% plus a 30-cent flat fee.

How much money does Afterpay make?

Afterpay reported making nearly $400 million in 2020, most of that from merchant fees. Late fees were less than 14% of the total revenue earned during that period. Additionally:

  • Afterpay has more than 55,000 merchants around the world at this time with more being added every year.
  • There are currently 5.6 million active customers in the United States alone.

What’s the difference between Afterpay and Klarna?

Like others that provide buy now pay later options, Afterpay and Klarna have several things in common. Here is where they are alike:

  • Both require a 25% initial payment with the next installment of 25% due in 2 weeks.
  • Neither will charge interest or service fees to the customer.
  • Both have mobile apps that can allow you to shop directly from thousands of retailers.
  • Neither have a set minimum credit score.

There are several differences between Afterpay and Klarna. First, Klarna does a soft credit check before initial approval for payments that are made every 2 weeks. Afterpay does not do this. Klarna does a more thorough credit check for other loan options that are offered. Afterpay only offers one payment option.

On the loans that are made with 25% down and 3 additional payments, there are no interest fees for either company. If you choose one of the longer-term loans through Klarna, there may be interest fees that are charged. These fees are set by the merchants directly and can vary and may be as high as nearly 25% of the item’s value.

Both Afterpay and Klarna do charge a late fee to the customer. Klarna’s late fee is a flat rate of $7. Afterpay’s late fee starts at $10 with an additional $7 fee added if the payment is not made within 7 days. Additional late fees may be added up to a maximum of 25% of the total value or $68 whichever is more.

Klarna has a minimum purchase amount of $10. Neither has a technical maximum amount because that is determined on an individual basis. The Afterpay mobile app will show the full amount that you “might” be preapproved for but this is not a binding amount.

How do Afterpay and Klarna make money?

Both Afterpay and Klarna make money through merchants’ fees and the additional fees that they charge as a credit provider. The bulk of their revenue comes from merchant fees. Klarna’s mobile app is connected to over 200,000 retailers. Afterpay’s mobile app has 85,000.

What happens if you don’t pay Afterpay at all?

If you begin an Afterpay loan but never follow through with the final three payments several things may happen. First, you will continue to rack up late fees up to the maximum late fee as stated in your agreement.

Second, you will not be able to use Afterpay in the future until the late payment fees and all payments are cleared up. Even after making all of the payments, you may not be approved for new charges right away.

You may have your account sent to a third-party collection service. These services may offer different payment arrangements and will likely add additional fees including late fees and service charges. Accounts that are sent to collection agencies may also appear on your credit report making it harder to get certain jobs, rent an apartment, buy a car, or even get insurance.

In some cases, there may be the threat of legal action that could be taken against you.

Final Thoughts

Afterpay makes money by providing a service to customers. This service makes it easier to buy the things that people want or need. Because more customers are a good thing, the retailers will pay the merchant fees that make up the bulk of Afterpay’s revenue.

Although the late payment fees are capped at a maximum of $68, it is better to avoid having to pay them at all. It is important to keep future payments in mind when choosing the buy now pay later option for any purchase. Afterpay does send a reminder that a payment is coming due and will also send a reminder if a payment is late or has been missed by the customer.

Afterpay funding can be the perfect solution for people that may not be able to get traditional credit, especially for bigger items like furniture. You make more affordable payments without the worry of a variable fee interest rate and without the need for a high credit rating.

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