Deep-dive guide
BNPL Instalment Fee Simulator: Conversion Lift vs Merchant Fee and Defaults
Executive industry analysis
Buy now, pay later and card instalments are sold to merchants on one promise: shoppers who hesitate at the full price will buy when the monthly price looks small. That promise is often true, particularly for baskets in the middle and upper price range. What the sales pitch leaves out is that the merchant fee does not apply only to the extra orders. It applies to every order that goes through the instalment product, including the customers who would have paid by card at the same price. A fee of five or six percent is a large number when your gross margin is forty.
The structure of the problem is a race between two quantities. On one side is the margin on the sales that exist only because of instalments. On the other is the fee on all instalment sales, plus the losses and delays that come with them. Whether the offer pays depends on the lift in conversion, the share of existing buyers who switch, the fee, and the margin you earn. None of these can be judged alone: a high lift is cancelled by a high switching share, and a low fee is cancelled by a thin margin.
The domino cascade runs from the top. The lift decides how much new revenue the offer wins. The fee, defaults and payout delay together decide what share of instalment sales is lost. Dividing the total cost by the new sales gives the cost to win a sale, which is the number to compare with advertising. Margin cover then shows whether the new gross profit pays for that cost. When any link weakens, the final box turns red even though revenue looks higher than ever.
The iceberg shows what the provider dashboard does not. Above the waterline is the fee on new orders, the one most owners calculate. Below it sit the fee on orders you would have won anyway, defaults and chargebacks, the cost of waiting for delayed payouts, and the support work of reconciliation and disputes. In many stores the hidden part is larger than the visible one. Use the simulator to find the lift you need, then decide whether to restrict, renegotiate or drop the offer.
Formula and methodology blueprint
The model works per month and measures the offer itself, not the whole store. New sales are baseline sales times the lift. Instalment sales are new sales plus the share of baseline sales that switch from cards. Costs are the merchant fee on all instalment sales, the default loss, the financing cost of a fixed payout delay at an assumed annual capital rate, and a small dispute and support cost. Net gain is the margin on new sales minus these costs.
- New sales
- N = baseline sales × lift
- Revenue that exists only because the price can be split.
- Instalment sales
- B = N + baseline sales × switching share
- Everything that passes through the instalment product, new and cannibalised.
- Fee
- F = B × fee rate
- Charged on all instalment sales, which is why switching buyers matter.
- Delay cost
- D = B × delay days × capital rate / 365
- The price of waiting for money that a card sale would have paid sooner.
- Net gain
- Net = N × margin − F − B × default − D − disputes
- Margin on new sales less every cost of running the offer.
- Cost to win
- (F + defaults + D + disputes) / N
- What each unit of new sales costs, to compare with advertising.
Cascading elasticity
The lift is the most powerful input, because it is the only source of income in this model. Every point of lift adds margin, while every point of switching share adds fees without adding sales. The fee is next: each percentage point is charged on all instalment sales, new and old. Defaults are small in most months, but they are non-linear in a downturn and are the input that turns a comfortable offer into a loss.
Three real-world case studies
Bootstrapped starter
A small shop testing instalments
A boutique with modest sales adds instalments on larger baskets. Lift is healthy, few regular buyers switch and defaults are rare, so the offer pays a little. Load it to see how thin the gain is even in a good month.
Scaling mid-market
A high-volume store with a negotiated fee
A large retailer uses its volume to negotiate a lower fee and keeps a solid lift. The absolute numbers are big, so one point of fee moves thousands. Load it to see the benefit of negotiating and the size of the fee at scale.
Black-swan crisis
Instalments everywhere with no lift
A store switches on instalments for every product. Most customers who switch would have paid by card, the lift is tiny and defaults rise in a weak economy. Load it to see how the fee on old orders and the losses exceed the new margin.
Industry benchmark matrix
| Metric | Danger zone | Industry average | Top 10% elite |
|---|---|---|---|
| Merchant fee on instalment orders | Above 7% | 4–6% | Below 3% |
| Sales lift from instalments | Below 5% | 8–15% | Above 20% |
| Share of baseline sales that switch | Above 50% | 20–35% | Below 15% |
| Default and chargeback loss | Above 3% | 0.5–1.5% | Below 0.5% |
| Cost to win a unit of new sales | Above 60% | 30–45% | Below 25% |
Variables and levers
Monthly sales before instalments
Revenue you would make in a month with card payments only.
Lever: Judge the offer on the sales it adds, not on the total, because volume that arrives anyway only multiplies the fee.
Gross margin
Share of the selling price left after the cost of goods, before payment fees.
Lever: Offer instalments first on higher-margin products, where the fee takes a smaller bite out of each sale.
Sales lift from instalments
Extra sales, as a share of baseline, that exist only because customers can split the price.
Lever: Test instalments against a control group and show the monthly price on product pages, so the lift is real and measured.
Existing buyers who switch to instalments
Share of baseline sales that would have been paid by card but now go through the instalment product.
Lever: Limit instalments to larger baskets so small orders that would pay by card do not drift into the expensive product.
Merchant fee
Percentage of each instalment order kept by the provider or bank.
Lever: Negotiate the fee by volume, or offer a cheaper plan with fewer instalments, and compare at least two providers.
Default and chargeback loss
Share of instalment sales you lose to unpaid plans, fraud or disputes that fall on you.
Lever: Move credit risk to the provider where possible and check who bears chargebacks before you sign.
How to use this simulator
- 1Enter last month's sales, your margin and the fee from your provider contract.
- 2Estimate the lift and the share of existing buyers who switch from a test, not from a guess.
- 3Read the five boxes to see whether the cost to win is below your advertising cost.
- 4Press Find my breaking point to learn the lift at which the offer stops paying.
- 5Compare the current offer with instalments on large baskets only, over 24 months.
Mistakes to avoid
- Counting all instalment sales as extra revenue. Most of them are usually existing customers who changed payment method, so the fee on them buys nothing.
- Ignoring who carries the credit risk. A cheap headline fee is not cheap if chargebacks and defaults come back to you.
- Forgetting the payout delay. Money that arrives later has a financing cost, and small stores feel it most.
- Switching instalments on for low-priced products. On small baskets the fee is the same percentage and the lift is usually close to zero.
Frequently asked questions
Does buy now, pay later always raise sales?
No. It tends to help on higher-priced baskets where the monthly price is clearly smaller than the total. On low-priced items it often only moves customers from cards to a more expensive product.
Why does the fee on old orders matter?
Because the provider charges on every order that uses the product. If a customer would have paid by card anyway, you simply pay a fee for nothing.
Who bears the credit risk?
It depends on the contract. Some providers take the risk and pay you in full, others pass losses or chargebacks back to you. Read the terms carefully before you rely on this figure.
How do I measure the lift?
Run the offer for part of your traffic only, or on selected products, and compare conversion with a control group over a few weeks. A before-and-after comparison is distorted by season and campaigns.
Is this financial advice?
No. This is an educational model with simplified assumptions. Fees, regulations and consumer-credit rules vary by country and change over time, so check current rules and your contract.
This is an educational planning model with stated assumptions. It is not financial, tax or legal advice. Replace the inputs with your own figures and verify important decisions with a qualified professional.