Invest1 publisher3 min readPublished
Management Science study puts the BNPL merchant fee onto the shopper who pays in full
Nearly one in three Americans has financed groceries with buy now, pay later, close to double the share of two years ago. A forthcoming WashU model of retailer profit finds the merchant fee comes back as a higher shelf price for everyone.
The Investor · Invest desk
What happened
- LendingTree's July survey of more than 6,000 US consumers found 29% saying they had used buy now, pay later for groceries, close to double the 14% recorded two years earlier.
- A study due in the next issue of Management Science found that as more consumers finance necessities this way, retailers may raise prices and cut inventory in response.
- In the model the retailer raises its sticker price to offset the merchant fee, so customers paying in full effectively subsidise financed customers and all shoppers see higher prices.
- Federal Reserve Bank of Richmond figures cited by Fortune have BNPL purchases up 20% from 2021 to 2025, still about 1% of credit card transactions.
- LendingTree also found 47% of buy now, pay later users had been late repaying a loan in the past year.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- cost The fee attaches to a minority's payment choice and, in the model, reaches the shelf tag that every shopper reads, including the ones who have never opened Klarna or Affirm.
- constraint Thin grocery margins cap how much fee a retailer can absorb, so the pressure surfaces in what stays on the shelf, and a delisted item does not show up in a price index at all.
- exposure A borrower carrying five to 10 unreported loans presents a clean credit file to the next lender who pulls it. That is the phantom-debt problem, and it lands on underwriting.
- contradiction Fortune's headline says 30% while the survey it cites says 29%, and the price finding comes out of a profit model, not measured grocery prices, so it is a prediction awaiting a test.
The two percentages here do not share a denominator. LendingTree's 29% counts people who say they have financed groceries at some point [1]; the Richmond Fed's 1% counts card transactions [7]. The grocery share is up 15 percentage points in two years, 2.07 times where it started [15].
Kouvelis and his co-authors modelled consumers' willingness and ability to pay with these loans alongside retailers' expected profits [3]. In the model the retailer lifts the sticker price to cover the merchant fee it owes on every financed transaction [5], so the customer paying in full picks up part of the financed customer's cost and every shopper meets the higher price [4]. The size of that fee sets the size of the price increase, and Fortune does not report it.
"Retailers, as a result of accepting these kinds of payments, they are going to increase prices, which basically means that all of us are going to pay for these practices that are out there," Kouvelis told Fortune [6].
The product was built for furniture and gaming consoles, where the margin was wide enough to absorb a fee; groceries are much thinner [9]. A retailer on a thin margin can raise the price or drop the item, and dropping it is the paper's second prediction: goods that stop being profitable stop being stocked, and the shopper gets less choice [10]. Kouvelis framed the retailer's side as a question. "Why does it really make sense for the retailer," he said, "unless they are hoping that as a result you are buying a much larger basket of goods and therefore they are making money on other products" [11].
Per loan the credit is small. LendingTree found 47% of users late on a repayment in the past year [13], on debt averaging about $135 [14]. Kouvelis says borrowers may hold five to 10 of these loans at once, and the lenders have historically not reported them to credit agencies [12]. If $135 describes a single loan, a borrower stacking five to 10 owes $675 to $1,350 [16]; one loan each across 91.5 million users comes to roughly $12.3 billion [17].
In my view the price result is right in direction and small in magnitude, and there are two ways it fails. Grocery chains negotiate hard, and a merchant fee well below what a furniture retailer pays shrinks the modelled increase toward nothing. Or the financed basket is genuinely bigger, and the retailer earns the fee back on the rest of the cart; Kouvelis raised that possibility himself [11]. The paper is a model of retailer profit [3], so the test is a price comparison between grocers that take these loans and grocers that do not.
What to watch
- LendingTree's next survey wave, and whether the 29% grocery share and the 47% late-payment rate hold.
- Whether BNPL lenders begin furnishing loan-level data to credit agencies.
- The published Management Science paper, and the merchant fee assumption its price result rests on.