How ‘Buy Now, Pay Later’ Makes Billions From ‘Free’ Loans | WSJ The Economics Of

The $41 Burrito That’s Killing Your Credit Card: How Buy Now, Pay Later Turned “Free” Into Billions

A DoorDash order sits in your cart. Burrito bowl, guacamole, chips. $41. You hesitate.

Then you see it: “Pay in 4 installments of $10.40.” No interest. No credit check. Just click.

You click.

That single moment—repeated millions of times daily—represents one of the most elegant disruptions in consumer finance. Not because it’s revolutionary. But because it makes the ordinary feel irresistible.

Between 2019 and 2024, Buy Now, Pay Later (BNPL) transaction volume multiplied twentyfold. Three companies—Klarna, Afterpay, and Affirm—carved out a $100+ billion industry by doing something credit cards forgot: they made debt feel like a favor.

But here’s the paradox. These companies offer “free” loans and charge you nothing. Yet they’re building empires worth billions. How? And more importantly: is this financial innovation or repackaged risk wearing a friendlier face?

The Birth of Breaking Things Apart

2014. Sydney, Australia. Nick Molnar owned a jewelry store. He watched customers hesitate at checkout, wallets open but uncertain. The price wasn’t wrong. The payment felt wrong—one lump sum, immediate pain.

So he built something: split the cost into four pieces. Pay over six weeks. Zero interest.

“We built it, we tested it, and it became a very significant portion of our sales really quickly,” Molnar recalls.

That jewelry store experiment became Afterpay. The insight was simple but profound: people don’t hate spending. They hate the feeling of losing money all at once.

Traditional credit cards offered a solution but brought baggage—revolving debt, compound interest, minimum payments that felt like quicksand. BNPL stripped away everything except the split. Four payments. Known schedule. Finite end.

It wasn’t about lending money. It was about repackaging how payment felt.

The Invisible Money Machine

Here’s where it gets interesting. You pay nothing for your BNPL loan. Zero interest on that four-part plan. So where’s the money?

The merchant pays.

When you choose Klarna at checkout, the retailer pays up to 5% of your transaction value as a fee. For that $41 burrito bowl, DoorDash might pay $2+ to Klarna. Compare that to credit cards, which charge merchants 2-3%.

Why would retailers accept higher fees? Because BNPL does something credit cards can’t: it converts browsers into buyers at the moment of hesitation.

“The lion’s share of our income, 90-plus percent, is made from the merchant, not the consumer,” Afterpay’s model confirms.

Think about the psychology. A $200 jacket feels expensive. Four payments of $50? That’s Netflix subscription money. Suddenly affordable.

Retailers discovered that BNPL didn’t just enable purchases—it expanded them. Average order values increased. Cart abandonment dropped. The fee wasn’t a cost; it was customer acquisition.

The business model creates a three-way win:
– Customers feel smart (no interest!)
– Merchants sell more (instant conversion)
– BNPL providers profit (from merchants’ gratitude)

But that’s just the foundation. The real empire gets built on what comes next.

From Burritos to Mortgages (Almost)

The original BNPL formula was elegant: $100-$200 purchases, e-commerce, fashion and electronics. Four equal payments. Clean and simple.

Then the industry discovered something: if people will split a $150 sneaker purchase, what else will they split?

Groceries. A 2024 LendingTree survey found 25% of BNPL users applied it to food shopping—up from 14% the year before. Not luxuries. Necessities.

Rent deposits. Dental work. Gas.

The expansion happened on two fronts:

Smaller tickets: That $41 burrito bowl isn’t a considered purchase. It’s dinner. When BNPL moves into everyday transactions, it’s no longer about affordability—it’s about cash flow management.

Larger tickets: Affirm now offers longer-term loans with interest. “About 20% of our business today is 0%, and about 80% has interest on them,” says Affirm’s leadership. These aren’t impulse buys split four ways. These are installment loans that look like traditional credit—just with a friendlier interface.

Then came the physical card. Walking into a store with a Klarna card, you can browse, select, and only then does the “loan” get created and attached to your purchase. No preapproval. No credit limit hanging over you. Just real-time, transaction-specific credit.

“That could more or less double the potential market,” analysts note. Because suddenly BNPL isn’t limited to online checkout buttons. It’s everywhere credit cards are.

From digital novelty to ubiquitous payment method—in less than a decade.

The Exclusive Partnership Wars

March 2025: Klarna announces an exclusive deal with Walmart through its fintech arm, OnePay. That one word—”exclusive”—signals where this industry is heading.

BNPL companies aren’t just competing for customers. They’re fighting for merchant territory. Lock in Amazon, and you control billions in transaction volume. Lose Amazon to a competitor, and you’re out.

“It’s extremely important for the BNPL providers, particularly the specialist BNPL providers, to have those direct relationships with the merchants,” industry watchers observe.

But there’s nuance here. Unlike credit card networks (Visa, Mastercard) that work almost everywhere, BNPL providers need merchants to integrate their specific technology. It’s not a universal standard—yet.

This creates two dynamics:

Strategic value in exclusivity: If you’re the only BNPL option at Walmart, you capture 100% of the conversion lift.

Fragmentation risk: Customers with Klarna can’t use it at an Afterpay-exclusive merchant. Friction returns.

The winning strategy? “There’s a lot of white space,” says industry insiders. “There are more unclaimed merchants than existing ones.” Translation: it’s still a land grab, not a zero-sum fight. Yet.

But watch what happens when the white space fills. Then it becomes chess—and the merchants become the most powerful pieces on the board.

The $10 Question: Are We Helping or Hurting?

Here’s where the story gets uncomfortable.

A January Consumer Financial Protection Bureau study found that more than two-thirds of BNPL loans went to borrowers with lower credit scores. People who might not qualify for traditional credit cards.

BNPL providers push back: “Afterpay actually over-indexes in the middle and upper income bracket. You are seeing really, really strong consumers using the product.”

Both can be true. And that’s the tension.

The optimistic case: BNPL democratizes access. Young people without credit history can build purchasing power. The four-payment structure creates accountability—default on one, and your account gets disabled immediately. Unlike credit cards that let you revolve debt indefinitely.

The skeptical case: Splitting a $41 burrito bowl into payments isn’t financial empowerment. It’s liquidity crisis disguised as convenience. When groceries become something you finance, the problem isn’t the payment method—it’s the underlying economic fragility.

LendingTree found that 41% of BNPL users paid late in the past year, up from 34% the year before.

Klarna reported a 17% increase in consumer credit losses in Q1 2025. The company attributed this to issuing “significantly more loans,” which naturally increases dollar losses. By Q2, repayment rates had improved.

But here’s the structural question: What happens when your next customer is always slightly riskier than your current ones?

Fast growth in consumer credit follows a pattern. You start with the prime borrowers—people who’d get approved anywhere. Then, to maintain growth, you move downmarket. Each expansion layer includes more people on the edge of financial stress.

“Whenever you look at consumer credit, that next customer is always gonna be a little more risky than the customers you’ve got on your books,” experts warn.

BNPL providers have a built-in defense mechanism: they disable accounts after one late payment. Credit cards don’t. But that protection only works if the business model tolerates saying “no.” As growth becomes the priority, underwriting can loosen.

The industry insists it’s different. “We underwrite every transaction and make an honest assessment at the point of sale,” Affirm emphasizes. Not a blanket credit limit—a per-purchase decision.

The real test comes during economic downturns. Credit cards have decades of recession data. BNPL doesn’t. We’re about to find out if “different” means “better” or just “untested.”

The Regulator’s Dilemma: Credit Card or Something New?

In 2024, the Consumer Financial Protection Bureau issued a ruling: BNPL should be regulated like credit cards. Same rules, same oversight, same consumer protections.

Then the Trump administration and DOGE initiatives effectively gutted the CFPB’s enforcement power. The rule exists but won’t be prioritized.

This creates a philosophical and practical split:

BNPL companies argue they’re fundamentally different:
– No revolving debt
– No compound interest
– Immediate account suspension on late payment
– Transaction-by-transaction underwriting

“In a regulatory framework that respects those components of the product and builds the framework around something that is very different to traditional forms of credit is one that we’re being really hard at work on,” says Afterpay.

Consumer advocates see credit in disguise:
– Debt is debt, regardless of how it’s packaged
– Lower credit score borrowers deserve the same protections
– Transparent disclosure and dispute resolution should be universal

The credit reporting question crystallizes the debate. In June, FICO announced it would add BNPL loans to credit reports. Affirm had already started reporting to TransUnion.

But Klarna and Afterpay refused—until they’re assured customers won’t be unfairly penalized. Their concern: credit scoring models were built for revolving credit behavior. Applying those standards to fixed, short-term installments might hurt consumers who use BNPL responsibly.

Klarna welcomed FICO’s ambition but called for modernized scoring. Afterpay (owned by Block) went further: “Credit reporting, scoring, and interpretation still largely operate under legacy frameworks.” They want a separate framework for BNPL.

Translation: We’re playing a different game, so don’t judge us by the old rulebook.

But here’s the pragmatic reality: if BNPL walks like credit, talks like credit, and enables purchases people couldn’t otherwise afford… regulators will eventually treat it like credit.

The question isn’t if regulation catches up. It’s what form it takes—and whether BNPL companies shape that framework or have it imposed on them.

The Credit Card Obituary (Written Too Soon?)

“We really believe the credit card industry is going the way of the VHS tape.”

Bold claim. But is it true?

The bull case for BNPL replacing credit cards:
– Younger consumers distrust revolving debt
– Transparent pricing beats hidden interest
– Mobile-first checkout beats plastic cards
– Merchant-funded model better aligns incentives

The reality check:
– Credit cards offer rewards, fraud protection, universal acceptance
– BNPL requires merchant-by-merchant integration
– Long-term installment BNPL with interest is a credit card—just rebranded
– Economic downturns test risk management that credit cards have refined over decades

Even BNPL executives hedge: “I don’t think that BNPL will replace credit cards. I think it’s gonna replace credit cards for certain people and may replace credit cards for many people for certain types of transactions.”

That’s the nuance. BNPL isn’t killing credit cards wholesale. It’s unbundling them—taking specific use cases where the traditional model feels wrong and offering something that feels right.

For a $150 online fashion purchase? BNPL wins. Clean, clear, no ongoing relationship.

For business travel expenses, rental car insurance, or emergency $5,000 medical bills? Credit cards still dominate.

The future probably isn’t replacement. It’s coexistence—and eventual convergence. Credit card companies are already launching BNPL-style products. Apple Pay Later. Chase’s “My Chase Plan.” BNPL companies are issuing physical cards and longer-term loans.

The lines blur. Which raises the question: when BNPL starts offering everything credit cards do, won’t they just become credit cards?

Three Lessons for Builders

1. Reframe the transaction, not just the product.

Afterpay didn’t invent installment loans. They reframed how payment feels. Four known pieces instead of one looming sum. The product was psychology, not finance.

Your version: What transaction in your industry feels emotionally wrong, even when rationally fair? Can you restructure the experience to match how customers actually think?

2. The best arbitrage is merchant economics.

BNPL providers identified a gap: merchants would pay more for higher conversion, but credit cards optimized for their own revenue, not retailer outcomes. BNPL aligned the incentive—merchant success is BNPL success.

Your version: Where does your industry’s pricing punish the wrong party? Can you shift who pays to better align value capture with value creation?

3. Growth reveals character—especially in credit.

Expanding downmarket in financial services is the oldest trap in banking. The first customers are safe bets. The marginal ones are where risk hides. BNPL’s test isn’t 2019-2024 growth. It’s 2025-2030 risk management.

Your version: If your business model depends on adding more customers, what happens when you run out of the easy, safe ones? Have you stress-tested growth against quality?

—

The story of BNPL isn’t finished. It’s not the death of credit cards. It’s not financial liberation. It’s not predatory debt.

It’s all of those—depending on who’s using it, how, and why.

One side sees innovation: flexible payment, aligned incentives, transparent pricing. The other sees repackaged risk: debt dressed in friendly clothes, targeting those who can least afford it.

Maybe the answer is both. Maybe that’s the point.

The $41 burrito bowl is just dinner. Until it’s four payments. Then it’s a business model.

Which version of the story you believe depends on one question: Do you trust consumers to manage four installments better than they managed one credit card payment? Or do you think the split just made the math easier to ignore?

—

I’m a business builder who loves creating something from nothing and sees management as a holistic art. I hunt for success patterns and failure lessons in the business world. If you’re curious about more, follow me for the next case study.