Mercator Blog

The BNPL Value Proposition: Consumers, Don’t Throw Away Your Credit Card
Date: May 7, 2021
Brian Riley
Director, Credit Advisory Service

Interest-free buy now, pay later loans- they sound enticing, but consumers (and regulators) should do the math.  In today's blog, we provide the calculus of lending and compare the difference between BNPL lending to credit and debit cards. 

Spoiler Alert: the argument for the promise of interest-free loans fizzles for consumers when you look at the numbers.

In the example that follows, a debit card transaction would carry the exact cost as a BNPL loan, and the difference for credit cards would be between $0.35 and $0.74, depending on the type of credit card.

For this example, we consider a $100.00 retail transaction and assume a retail sales tax of 8.5%.  That brings the transaction value to $108.50.

The BNPL loan structures the purchase into four equal payments.  The first payment is due upon sale.  The remaining three payments process to a debit card, a credit card, or an ACH payment over the following six weeks.  In this case, the consumer would pay $27.13 at the point of sale, then the remaining $81.38 over the next 45 days.


Debit cards do not carry debt, but rather settle to an established account at a financial institution.  Unlike the credit card examples that follow, the debit transaction settles in full at the point of sale and there would be no financing cost.

¬The BNPL Value Proposition_IMAGE

Consider the debit card if you have available funds

Two Credit Card Examples

In this case, we compare two credit card types.  The first model uses the average interest rate charged in the U.S. according to the Federal Reserve Bank and carries a 15.91% APR.  The second model uses a credit card with a rate twice as high as the average interest rate, with a 32.99% APR.  To calculate the daily interest rate, we simply divide those rates by 365; the result is a daily interest charge of 0.04359% and 0.09038%, respectively.

We will calculate the interest impact in a moment. First, remember that we are using a 30-day grace period and that credit card issuers may not charge interest during the grace period.  This allows us to cover the second and third payments before accruing interest.

As the table above illustrates, we use the same BNPL terms, but in the context of the credit card.  With the original transaction, $108.50, a 25% down payment is required at the point of sale.  This purchase requires a $28.13 down payment, which we assume the customer will settle after making the transaction.

Payments 2 and 3 will happen within a 30-day period, one on day 15 and the other on day 30.  These carry no interest, and in both cases, the balance reduces to $27.13. 

In the case of the example using the average rate, that means the interest charge for the next (and final) payment will be $27.13 times 0.04359% for 15 days or, [$27.13*(15*0.04359%)].  The result is $0.35 in interest.  Using the same logic, in the case of the higher interest rate, the difference would be $0.74, based on [$27.13*(15*0.09038%)]. 

With all the buzz about interest-free lending, the consumer could save between $0.35 and $0.74 on the $108.50 transaction by using BNPL.  However, that does not account for the fact that the consumer would not receive any potential credit card reward points.

As shown in our recent blog on the Merchant Proposition, the benefit to merchants is overstated, as credit card interchange would often be lower than the BNPL merchant discount.  Likewise, here we illustrate that the consumer proposition is overstated.  If the consumer were prudent on their credit card usage, they could reduce the financing cost to peanuts.

For more information on BNPL, see the recent report: Buy Now Pay Later Lending: Gaining Scale and Disrupting Status Quo.