Have you ever used a “buy now, pay later” app to grab something you needed? If so, you’ve probably wondered how these platforms actually make their money. One of the biggest names in this space is Afterpay.
As a merchant, you see it as a way to increase sales and offer flexibility but what you might not realise is how much it costs you behind the scenes. Afterpay isn’t free. It charges fees on every transaction, and those charges come straight out of your revenue.
In fact, merchants pay between 4 to 6 percent per transaction when using Afterpay, which is more than double the standard credit card fee.
Source: Quikclicks
I’m going to show you how does Afterpay make money, what it really costs you as a merchant and how it fits into platforms like Shopify. If you’re running an online store, this is the detail you need before adding that “Pay in 4” button.
How Does Afterpay Make Money and Work?
When you offer Afterpay, you’re giving customers a new payment option and also bringing in a financial service that changes how each transaction works for your business.
What “Buy Now, Pay Later” Really Means for Your Business?
Afterpay lets customers split their payment into four equal instalments, paid over six weeks. They get the product straight away, but you still get paid upfront. Afterpay covers the full amount, usually within a day or two.
On the surface, it feels like a win. The customer gets flexibility, you get paid in full and someone else handles the risk. But how does Afterpay make money from this arrangement? But what you don’t see immediately is that Afterpay charges a fee on that transaction and that fee comes directly out of your pocket.
How Does Afterpay Make Money Through Merchant Fees and Late Payments?
Afterpay doesn’t charge interest to shoppers. So how does Afterpay make money? It earns from two main sources:
- Merchant fees: You’re charged a fixed fee plus a percentage of each sale, often between 4% and 6%. That’s higher than most credit card processing fees.
- Late fees from customers: If a customer misses a payment, Afterpay charges them a fee. That income goes to Afterpay and not to you, plus it doesn’t reduce your merchant costs.
So while the customer enjoys flexible payments and you get paid quickly, Afterpay earns from every direction, mainly through your transaction fees.
What Afterpay Charges Merchants?
If you’re thinking about offering Afterpay, this is the part you can’t afford to skip. The fees are real, and they eat into your profit with every order.
Full Breakdown of Afterpay Fees for Merchants
Afterpay charges a flat fee per transaction, plus a commission. Here’s what that usually looks like:
- Fixed fee: $0.30 per transaction
- Commission: Between 4% and 6% of the total order value
The exact commission depends on factors like sales volume, industry and your agreement with Afterpay. Smaller businesses often land on the higher end of the scale.
So if you sell a $100 item, you could pay up to $6.30 just to use Afterpay. That’s before you factor in your other business costs.
How Afterpay Commission Compares to Other Payment Providers?
To put that in perspective, most standard card processing platforms (like Stripe or Square) charge around 1.75% to 2.2% per transaction, plus a small fixed fee.
This means Afterpay often costs double (or more) compared to regular credit card payments. You’re paying for convenience, speed and access to shoppers who want flexibility but it comes at a premium.
Using Afterpay on Shopify: Setup and Costs
Afterpay Shopify integration comes up as a highly beneficial option if you want to boost sales. Before you proceed, I would like to tell you all the relevant information regarding its cost and setup.
Benefits of Afterpay and Shopify Combination
As you already know that Afterpay allows you to buy items now and pay later without going through any credit checks or interests. This flexibility can remove hesitation at checkout and help increase order value. Many Shopify stores see fewer abandoned carts and higher conversion rates after adding Afterpay.
It also helps you reach a customer base that actively looks for stores offering BNPL. The Afterpay logo on your product pages alone can drive more clicks and purchases.
How to Add Afterpay to Shopify: Step-by-Step?
To Add Afterpay to Shopify, you need to follow these steps:
Step 1: Log in to your Shopify admin and go to Settings >> Payments.
Step 2: Under Supported Payment methods, click ‘Add payment methods.’
Step 3: Now, type “Afterpay” in the search bar.
Step 4: It’ll take you to Afterpay’s official website. Enter your merchant ID and secret key.
Step 5: Click the ‘Activate’ button but make sure that the ‘Enable test mode’ checkbox isn’t checked.
Once it’s connected, your Shopify store will automatically show the Afterpay logo and messaging on product and checkout pages.
How Compatible is Afterpay With Other eCommerce Platforms?
After learning all the Afterpay benefits for Shopify stores, you should know that it also works well with other eCommerce platforms like WooCommerce, BigCommerce and Magento. Each one has its own setup process but the merchant fees and core features stay the same.
How Does Afterpay Affects Your Profits?
The Shopify Afterpay combination may work well to boost sales but you must be aware of the fact that the extra sales you make could affect your profits in the long run. To understand this better, read further.
What Afterpay Fees Mean for Your Profit Margins?
When thinking about how Afterpay makes money, keep in mind that they charge a flat fee and a commission on each transaction, which directly impacts your profit margin. While you get paid upfront, the fees (4% to 6%) reduce how much you actually keep. So, if you’re selling a $100 product, you could lose anywhere from $4.30 to $6.30 of that to fees. Additionally, if your business has thin margins, be prepared to face those add-up costs!
Higher Sales vs Higher Costs: Is It Worth It?
On one hand, Afterpay can lead to more sales. Your customers are more likely to purchase an item from your store when they know they can pay later in instalments. The problem is, those higher sales come at a price that you have to pay as Afterpay fees.
If your sales skyrocket, you don’t have to worry, as they’ll simply outweigh the fees. However, if you’re running a business with tight margins, those extra fees might start to add up quickly, and it’s something you need to track closely. All-in-all, Afterpay could be worth it for you if your product sale is high, your margins are not tight and you have a loyal customer base that keeps on returning. It’s not just about getting more sales as it’s about making sure those sales still bring in a decent profit.
Case Study: Real Examples of How Afterpay Affects Online Stores
Take a look at some real examples that underscore how does Afterpay make money by increasing sales and order values while giving businesses access to a broader customer base.
1. Webjet: Enhanced Customer Loyalty and Incremental Sales
Webjet is an online travel agency that added Afterpay to its web interface in 2021. Soon they found out that Afterpay drove more transactions and even improved customer loyalty and lifetime value. The flexibility of Afterpay allowed customers to seize time-sensitive travel deals, contributing to increased sales. (Source: Afterpay)
2. Strand Bags: Boosted Sales and Customer Acquisition
Strand Bags is a luggage and bag retailer that added Afterpay and found out that one in five customers chose Afterpay as their payment method. Notably, Afterpay customers had a higher average order value compared to those using other payment gateways. Additionally, campaigns like Afterpay Day led to an 18% increase in sales, helping Strand Bags reach new customers and enhance customer loyalty. (Source: Afterpay)
3. Ikea: Increased Sales During Promotional Periods
Let me give you an example of collective shop owners. Australian fashion retailers, when they started integrating Afterpay during major sales events like Black Friday and Cyber Monday, found an extreme increase in transactions. For instance, Ikea’s partnership with Afterpay led to over 3,800 transactions during these periods, demonstrating strong consumer interest and engagement. (Source: Australian)
Pros and Cons of Offering Afterpay
Here are some pros and cons of offering Afterpay:
| Pros | Cons |
| Afterpay can increase sales as customers are more likely to make a purchase when they can pay in installments. | Afterpay charges higher fees (4%-6%) compared to standard payment gateways. |
| The average order value tends to increase, as customers often spend more when using Afterpay. | High-fee items or low-margin products may result in reduced profits. |
| Afterpay is popular among younger consumers, attracting a demographic that prefers flexible payments. | You rely on a third-party platform for payment processing, which may pose risks if there are operational issues. |
| Afterpay’s customer base can help introduce your brand to new shoppers. | There is a risk that customers may abandon the brand or experience issues if they encounter late payment fees. |
| Offering Afterpay can improve customer loyalty by providing flexible payment options that encourage repeat business. | Some customers may feel uneasy about using third-party payment methods, which could impact trust in your brand. |
Frequently Asked Questions About Afterpay for Merchants
Does Afterpay affect my credit score as a merchant?
No, Afterpay does not affect your credit score as a merchant. As a business owner, you’re paid upfront, and Afterpay handles the payments with the customers. Your involvement is solely in paying the fees for the service.
Can I offer Afterpay for Shopify for free?
No, there are fees associated with integrating Afterpay, which are typically a fixed transaction fee plus a percentage of the order value. However, many merchants find that the benefits, such as higher sales and average order value, outweigh the fees.
Can I refund customers who paid with Afterpay?
Yes, you can issue refunds to customers who paid through Afterpay. The process is similar to other payment methods, and Afterpay will reverse the payment installments accordingly. Refunds can impact your fees, as Afterpay typically charges for the original transaction.
How Does Afterpay Make Money? – Final Answer
Afterpay earns by charging merchants a transaction fee, typically ranging from 4% to 6%, and also collects late payment fees from customers. This enables them to provide flexible payment options for customers while generating revenue through these fees. For merchants, the key is balancing the benefits of higher sales with the costs of these fees.
If you’re looking to boost your online store, integrating Afterpay can be a smart move. At PrintVideoWeb, we specialise in Shopify Website Design Services and can help you create a swift, user-friendly store that integrates perfectly with Afterpay and other payment methods.
