Understanding the Impact of BNPL Fees on Ecommerce Margins and Profitability

Key Takeaways for Ecommerce Brands:

1. BNPL's popularity is set to grow dramatically, with global users expected to increase from 380 million in 2024 to 670 million by 2028, driven largely by younger consumers.
2. While BNPL services significantly boost business performance (9% increase in purchase probability and 10% larger basket sizes), they come with substantial transaction fees.
3. For ecommerce businesses, BNPL fees represent a significant variable cost alongside COGS and shipping expenses. With industry net profit margins averaging around 7%, careful tracking and management of these fees is essential for maintaining profitability while offering payment flexibility to customers.

Most folks will probably not bother to read an email from a payment service provider about an update in the company's policy terms. DTC brand operators don't have that luxury. In early December, they woke up to an email from PayPal, announcing a significant increase in fees for merchants using its digital payment services. 

The most notable increase is in the rate PayPal charges sellers to offer its buy now, pay later (BNPL) service to their customers: from 3.49% of the transaction plus 49 cents to 4.99% per transaction plus 49 cents. The announcement, needless to say, was not met with enthusiasm. As one merchant put it, “Looks like my already stretched thin margins are about to get even thinner.”

Even with the increase, PayPal's fees are still lower than those of other prominent BNPL players. For example, Afterpay, an Australian provider owned by Block, Inc., charges 6% per transaction plus 30 cents. Swedish BNPL company Klarna, an official partner of eBay, gets 5.99% of the transaction plus 30 cents.

‍BNPL's Rising Tide: Consumer Adoption and Revenue Impact

Buy now, pay later services allow consumers to pay for goods in installments, typically interest-free. In recent years, as inflation surged globally, BNPL has exploded in popularity – and the trend is only expected to intensify. According to a recent study by Juniper Research, there were 380 million BNPL users across the globe in 2024, and that number will increase by 107% (to 670 million) by 2028.

The proliferation of BNPL is a positive development for DTC brands. Research conducted by Imperial College Business School – based on real-world transaction data provided by a major US retailer – found that BNPL options increase the number of purchases and the average amount spent per purchase among adopters. Key findings include:

• On average, after introducing a BNPL option, purchase probability increases by about 9%.

• When customers purchase via a BNPL plan, basket sizes are about 10% larger. 

• BNPL options boost spending over time; the increases in purchases and amounts spent per purchase lasted the entire 26 weeks of the study.

What has made BNPL such a disruptive ecommerce financial product? “Our research shows that paying through BNPL helps people feel less financially constrained compared to lump sum payment – both upfront and delayed,” said Dr Stijn Maesen, Assistant Professor of Marketing at Imperial College Business School. “This is important as, regardless of how much actual disposable income someone has, it is their perceived financial constraints that dictate their spending.”

This is especially true among younger generations. Research by LexisNexis Risk Solutions revealed that 53% of BNPL users are 35 years old or younger. These users are drawn by the flexibility of BNPL plans, which often don't require a strong credit history, and crave instant gratification – resulting in widespread adoption of installment payment options to finance everyday purchases.

Breaking Down the Numbers: BNPL Fees in Your Variable Cost Mix

The benefits of installment payments justify the ongoing transaction fees that retailers must pay BNPL providers. However, it's crucial to remember that these fees are part of your brand's variable costs and affect business profitability. Unlike fixed costs – expenses that remain constant regardless of sales volume – variable costs fluctuate based on how much you sell and, most importantly, impact your financial management in more ways than one. 

The main variable costs for ecommerce brands are: 

• Cost of goods sold (COGS) – the cost of getting a product ready for sale, such as the price of purchasing or manufacturing the product, packaging costs, and shipping-in/freight-in costs to deliver products to your warehouse. 

• Shipping and fulfillment costs – the cost of shipping the product to your customer. This cost varies depending on carrier, product weight, and how quickly it is delivered. In ecommerce accounting, this is usually the largest expense after COGS. 

• Merchant fees – also known as transaction fees or payment processor fees, merchant fees are charged by credit cards and other payment service providers – such as PayPal, Afterpay, and Klarna – for processing transactions. These fees usually include a fixed percent fee and a fixed amount, both charged per transaction. 

All these costs play a role in brands' pricing strategy. Determining your selling price starts with calculating your gross margin, which tells you how much money you walk away with from each sale – after considering the costs of making and selling the product. The formula for calculating your gross margin is:

‍(Revenue – COGS)/ Revenue x 100

The next step is calculating your net profit margin. Also known as “your bottom line,” net profit margin considers not only COGS but also operating expenses - like rent, labor, and utilities - plus taxes, interest, and other expenses, providing a true indicator of business profitability. The formula for calculating your net profit margin is:

‍(Revenue – all costs)/ Revenue x 100

According to New York University's Stern School of Business, a good gross profit margin for online retail is about 41%, and the net profit margin in ecommerce is approximately 7%. Of course, this can vary significantly based on many factors. As a rule of thumb, an average net profit margin of 10% is considered sustainable, while 20% is high and 5% is a bit low.

For ecommerce brands navigating the BNPL landscape, accurate financial tracking has never been more crucial. As transaction fees continue to evolve, maintaining visibility into your variable costs is essential for protecting ecommerce profit margins. Modern ecommerce accounting software can help track these transaction fees, analyze their impact on your margins, and make data-driven decisions about payment options that balance growth opportunities with profitability.