Buy now, pay later for merchants: how it works

Buy now, pay later (BNPL) for merchants is point-of-sale financing you offer without lending the money yourself. A third-party lender approves the customer at checkout, pays you for the order minus a merchant fee, and collects the installments. If the customer stops paying, that's the lender's loss, not yours. Returns, disputes and the way you advertise the option are still yours to manage.

We don't offer BNPL, and this guide doesn't name or compare providers or quote their prices. It explains how the model works from the merchant's side, so you can read any lender's agreement with the right questions in mind. Rules and figures cited were checked on October 9, 2026.

How does buy now, pay later work for a merchant?

The customer gets a loan, and you get a sale that's already paid for. Here's the usual sequence when the lender is built into your checkout:

1. The customer picks the BNPL option at your online checkout or at the counter.
2. The lender decides, using its own criteria, whether to approve that customer for that purchase.
3. If approved, the customer agrees to the lender's repayment plan. Plans vary: some split the price into a few payments over several weeks, others run for months, and some charge interest.
4. You complete the sale and ship or hand over the goods.
5. The lender pays you for the order, minus its fee, on the schedule in your agreement.
6. The customer repays the lender. Missed payments, late fees and collections are between the customer and the lender.
7. If the customer returns something, you process the refund through the lender, which adjusts the loan.

That last step is where most of the merchant's ongoing work sits, and we come back to it below.

Direct integration vs single-use virtual card

BNPL reaches your checkout in one of two ways, and the difference changes your fees and your dispute process.

The second route is easy to miss. In its 2022 study of the market, the CFPB noted that a merchant can't distinguish a BNPL single-use card from other card transactions (CFPB). If some of your customers already pay that way, you're already taking BNPL, priced and disputed as ordinary card sales. Our guide to card-not-present transactions covers how those online card sales are priced.

Who carries the credit risk with BNPL?

The lender does. The customer's loan is with the lender, so a customer who stops paying is the lender's problem to collect, not yours. That transfer of risk is a big part of what the merchant fee pays for.

The CFPB's figures show where losses land. In its 2022 report, it traced a drop in lenders' margins from 2020 to 2021 to two causes: lower revenue from merchant discount fees, and higher credit losses (CFPB). The credit losses sat with the lenders.

Risk doesn't vanish from your side, though. The split typically looks like this:

Compare that with an in-house payment plan, where every missed payment is your loss and collecting is your job. With an ordinary credit card, the issuing bank extends the credit, but you still face card chargebacks. BNPL sits somewhere between the two.

How do merchants get paid, and what do BNPL fees cover?

With a direct integration, the lender pays you on a schedule your agreement sets, typically with its fee already taken out. The fee is generally a percentage of the order, and it can vary with the plan the customer picks. It covers the payment itself and the credit risk the lender takes on.

For a sense of scale, the CFPB found that merchant discount fees at the lenders it studied fell from 2.91% of gross merchandise volume in 2020 to 2.49% in 2021 (CFPB). That's an old figure across a handful of lenders, not a price anyone will quote you today. Get every plan's fee in writing, along with any setup, monthly or minimum-volume charges and what happens to the fee when you refund an order.

Then work out whether the fee earns its keep. Suppose BNPL orders cost you 3 percentage points more than card orders, a made-up gap you should replace with your own quotes. A furniture retailer in Louisville finds that $50,000 a month of sales its customers would have put on cards anyway has moved to BNPL. That shift costs $1,500 a month. If the store's margin on a new sale, after all payment costs, is 35%, it needs about $4,286 a month in sales that wouldn't have happened without BNPL just to break even.

That's the real question to answer with your own numbers: how many orders does BNPL add, and how many card orders does it simply replace?

How do returns and disputes work with BNPL?

Returns start with you, and disputes can end with you. In the CFPB's 2022 study, all five lenders it looked at told borrowers to contact the merchant first. If the merchant wouldn't authorize a refund, the borrower could file a dispute with the lender, which would investigate, assign responsibility to one party and possibly issue a refund or credit (CFPB).

Returns aren't rare, either. The same report found that 13.7% of BNPL loans in 2021 involved a return or dispute.

To keep returns from turning into disputes:

1. Refund through the lender's system or your integration, not in cash or store credit, so the customer's loan actually goes down.
2. Process partial returns as partial refunds through the same channel.
3. Refund promptly. Until the lender records the refund, the customer's payment schedule may keep running, and a frustrated customer is more likely to dispute.
4. Keep the evidence you'd keep for a card dispute: order details, proof of delivery and messages with the customer. Our guide on how a chargeback works shows what that looks like.
5. Write your return policy so it clearly covers BNPL orders.

For about a year, federal policy pointed toward a more formal process. When the CFPB announced its BNPL interpretive rule in May 2024, it said BNPL lenders must investigate disputes that consumers start, pause payment requirements during the investigation, and credit refunds to consumers' accounts when they return products (CFPB). That rule has since been withdrawn, so each lender's own policies now carry more weight. Our guide to chargebacks vs refunds explains how card disputes differ.

What is the current CFPB rule on buy now, pay later?

The CFPB issued a BNPL interpretive rule in 2024 and withdrew it in 2025. When we checked the CFPB's pages on October 9, 2026, they still listed it as withdrawn.

While it stood, the rule treated those lenders as subject to the parts of Regulation Z that include credit card dispute and refund rights, while leaving them generally outside the separate credit card rules in subpart G (Federal Register). Before withdrawing it, the CFPB said it would not prioritize enforcement actions based on the rule and was considering rescinding it (CFPB). The withdrawal notice of May 12, 2025 lists the rule among the withdrawn interpretive rules (Federal Register), and the CFPB's withdrawn guidance page and BNPL resource page give the same date. You can still read the original rule's page on the CFPB's site.

What does that mean for you? The rule was written for lenders, not merchants, so the withdrawal doesn't change your obligations directly. It does mean your customers' dispute and refund experience depends largely on each lender's policies and on whatever state rules apply to that lender. Read those sections of any agreement before you sign, and check the CFPB's site before relying on any of this, since federal policy on BNPL has already changed twice.

What should you disclose when you offer buy now, pay later?

Show customers what they need to make a fair decision, in plain view, and let the lender's terms cover the loan itself. The FTC's advertising guide for small businesses sets the baseline: ads must be truthful and not deceptive, an ad can mislead through what it leaves out, and qualifying information has to be clear enough that people notice and understand it. A fine-print disclaimer won't fix a misleading headline (FTC).

For BNPL, that translates into a short checklist:

• Show the full price first, before any installment amount.
• Say that financing comes from a third-party lender and is subject to its approval.
• Don't promise approval, "no credit check" or "no interest" unless the lender's terms make that true for the plan you're advertising.
• If you show an installment amount, show how many payments and how often, using the wording your lender approves.
• Link to the lender's terms rather than restating them.
• Make sure your return policy says how refunds work on BNPL orders.
• Train staff to send loan questions to the lender instead of explaining terms they don't control.

State law adds another layer. The FTC's guide notes that every state has consumer protection laws governing the ads that run there, so a retailer selling across the United States may face different rules in different states. If you write your own BNPL marketing rather than using the lender's approved materials, have a lawyer review it.

Is buy now, pay later worth it for your business?

Sometimes. It makes the most sense where the price is big enough that customers hesitate, and the least sense where tickets are small or margins are thin.

It's worth testing when:

• Your average order is large next to your customers' budgets, such as furniture, equipment, repairs or bikes.
• Customers ask for it, or abandon their carts at the payment step.
• You sell online, where adding a checkout option is simple.

It's probably not worth it when:

• Tickets are small, so fees and refund admin outweigh any lift.
• Margins are thin, so the extra fee eats the sale.
• Returns are frequent, which multiplies refund work.
• Your customers are businesses that pay on invoice terms. Clear invoice payment terms and a card payment link usually serve them better.

An e-bike shop in Sacramento selling $2,400 bikes is a natural candidate. A coffee roaster selling $18 bags is not.

Remember the alternatives, too. Customers who want to spread a payment can already use their own credit card, at your normal card cost. And a deposit now with the balance due later, sent as a payment link, spreads a big purchase without a lender at all.

Questions to ask any BNPL lender

1. What does each plan cost me, and how are fees taken?
2. When am I paid, and does that ever depend on the customer repaying?
3. How do refunds work, and does any of the fee come back?
4. How are disputes decided, and what can I be charged when I lose one?
5. Who pays for fraud, and what proof do you need from me?
6. How does it work at my online checkout and in my store?
7. What marketing language am I allowed to use?
8. What reports will I get for reconciliation?
9. How long does the agreement run, and what will it cost me to get out of it?

How does BNPL fit with your card processing?

For most merchants, BNPL sits next to card acceptance rather than replacing it, and the two are managed separately.

• Card costs still apply to every customer who doesn't choose BNPL, so they stay worth watching.
• BNPL payouts arrive from the lender, net of its fees, separately from your card deposits. Our guide to payment reconciliation shows how to keep them straight.
• BNPL is set up through the lender. On the card side, our online payments cover hosted checkout and gateway integration, and our POS terminals take chip, tap and swipe in store.

Our guide on how to accept payments online covers how the checkout options fit together.

Next step

Before you add BNPL, know what your card payments cost today, since every BNPL quote should be measured against that number. Send a recent statement for a free statement review, and we'll break down your card costs by card type. Or contact us with questions about your card setup.