Buy Now, Pay Later Costs: How Merchant Fees Shape Consumer Prices

An advocacy organization said United States shoppers are paying more because merchants fold the added expense of buy now, pay later transactions into prices, and it urged stricter oversight of the payment market.

The group’s Monday analysis argued that as installment checkout options expand into additional retail categories, they influence broader consumer pricing. Protect Borrowers, founded in 2018 as the Student Borrower Protection Center by former Consumer Financial Protection Bureau officials, focuses on consumer debt policy and litigation.

Industry Pushback and Commentary

The report contended that seller fees tied to installment checkout ultimately surface as higher prices for all Americans, whether they use the service or not, and warned those costs could rise as adoption deepens and the payment method becomes more embedded.

Trade associations representing installment-plan providers rejected that conclusion.

Phil Goldfeder, chief executive of the American Fintech Council, said in an emailed statement that there is no evidence showing merchant fees are pushed to consumers; he said installment offers increase choice and access to affordable credit while boosting economic activity for retailers.

A spokesperson for the Financial Technology Association said the paper lacks quantitative and qualitative support for the claim that merchants transfer fees to customers, calling the assertion an opinion rather than a proven fact.

The American Fintech Council and the Financial Technology Association represent multiple installment-plan providers, including Affirm Holdings, Block, and Klarna Group. Spokespeople for Affirm and Klarna declined to comment on the report.

How Installment Payment Plans Have Evolved and Their Costs

Initially centered on no‑interest, four‑installment plans, buy now, pay later has increasingly shifted toward longer, interest‑bearing credit products.

Protect Borrowers lacks transaction‑level data on goods sold with installment financing at checkout, Executive Director Mike Pierce said.

He said early observations point to rising costs and broader use of higher‑priced financing, adding that moving purchases once made with cash into credit channels is nudging sticker prices higher across the economy.

Pierce, a former Consumer Financial Protection Bureau deputy assistant director, added that using installment financing for everyday needs, such as groceries, likely raises retailers’ operating expenses.

Because many merchants run on thin margins, he said, it would not be surprising if they sought to recover transaction fees by building them into prices.

Market Scale and Comparisons

A Federal Reserve Board of Governors report released last month estimated that six major providers extended about $157 billion in buy now, pay later credit in the United States last year, with pay‑in‑four accounting for roughly half.

The Fed also cited substantial growth since 2019, noting that pay‑in‑four volume has climbed about 80% since the Consumer Financial Protection Bureau’s 2023 review.

For comparison, credit card payment volume across the four largest networks reached $6.5 trillion last year, according to the Nilson Report.

Merchant Relationships and Fees

Providers generally either integrate directly into a retailer’s checkout or secure a listing on the provider’s app or website; the marketplace‑style placement carries additional fees for the installment provider, the report noted.

Some charges run about three times a typical credit card transaction and roughly ten times a debit purchase, the report said. For context, credit card processing commonly falls in the low single digits as a percentage of the sale, while installment checkouts are often priced higher; typical merchant fee ranges are commonly discussed in the mid-single digits, and can vary by retailer size, product category, and the specific plan offered.

Higher average order values.Full payment upfront from provider.

• Higher average order values.
• Full payment upfront from provider.

In practice, providers’ pricing is not uniform: merchants may see standard rates around the mid-single digits for common plans, while higher rates can apply for higher-risk categories, longer-term financing, or marketplace-style placement that effectively functions as paid customer acquisition.

A 3% merchant fee in payment processing means the payment provider withholds 3 cents for every $1 of the transaction amount as a processing charge. It is typically calculated as a percentage of the purchase price (and, depending on the setup, may be combined with a flat per-transaction charge) and is deducted from the amount the merchant receives in settlement.

Beyond the headline percentage, merchants may face additional, less visible costs from offering installment checkout, including integration and maintenance work, added customer service handling, higher return volumes and refund processing, reconciliation complexity, fraud and chargeback exposure (including disputes tied to the underlying card rails when virtual cards are used), settlement timing differences that affect cash flow, and marketing or placement fees tied to appearing in a provider’s marketplace.

Merchants’ ability to pass these costs through as a separate line-item can be limited. Many providers’ contracts and checkout rules discourage or prohibit a distinct surcharge for using the installment option, and when the transaction is routed through card rails (such as single-use virtual cards), merchants may also be constrained by broader payment acceptance rules. More commonly, merchants recoup higher acceptance costs through overall pricing, promotions, or selective offering by product and channel rather than charging an explicit add-on at the register.

Merchants tend to accept higher payment costs when the option delivers incremental customers or larger baskets; when it does not, the same fee becomes a direct margin haircut that is hard to justify.

Policy Proposals and Merchant Perspective

The report called for tighter federal rules, including a buy now, pay later borrower bill of rights to cap certain fees and interest rates, more rigorous underwriting, and limits on marketing practices.

Doug Kantor, an executive committee member of the Merchants Payments Coalition, said:

Raises merchant cost structures.Offers meaningful business benefits.Small share of total United States payments volume.

• Raises merchant cost structures.
• Offers meaningful business benefits.
• Small share of total United States payments volume.

He added that the fees are significant, and individual businesses must weigh those expenses against the value of offering the option. In practice, that evaluation often comes down to tracking metrics such as conversion lift, changes in average order value, incremental gross profit on financed orders, changes in return rates, customer acquisition costs tied to marketplace placement, and any operational overhead added to support the payment method.

One way merchants calculate the true cost and value is to total the direct and indirect costs, then compare them to incremental profit. A simple approach is: (1) estimate financed sales volume and apply the provider fee rate (plus any per-transaction charges) to get direct acceptance cost; (2) add estimated operational costs such as integration, service, disputes, and returns; (3) estimate the incremental gross profit created by the option using changes in conversion and average order value; and (4) compare incremental gross profit to total costs to see whether the program is net-positive versus a baseline payment mix.

Profitability also depends on gross margin. As a rule of thumb, if a merchant’s gross margin percentage is at or below the installment fee rate, the fee alone can wipe out most of the gross profit on those orders; if gross margin is comfortably above the fee rate, the merchant can still come out ahead if the option meaningfully increases incremental sales. For example, a 6% merchant fee requires more than 6% gross margin on affected sales just to stay above break-even before considering returns, service, and other overhead.

Whether fees fall over time is uncertain. Competitive pressure and scale can push pricing down for large merchants and low-risk categories, but broader adoption, higher-risk underwriting, marketplace marketing costs, and product shifts toward longer-term, interest-bearing plans can keep effective merchant pricing elevated for some segments.

Merchants cite benefits such as increased conversion, larger basket sizes, and upfront payment from the provider, while pointing to risks that include higher acceptance fees, potential increases in returns, added operational burden, and greater complexity in managing disputes and customer expectations.