Buy now pay later: revenue and ECL

How does buy now pay later work?

A shopper buys goods for US$ 100 and agrees to pay four instalments of 25 over six weeks. The provider pays the merchant immediately, keeping a fee of a few per cent, and collects the instalments from the shopper. Some products charge interest on longer plans, and most charge late fees if instalments are missed. The provider's income comes mainly from merchants, so it depends on the merchant fee, how quickly the receivables are collected and how many go unpaid. See fintech accounting.

Is the merchant fee revenue or interest?

There are two views. Under the first, the provider supplies a service to the merchant, enabling the sale and taking on the payment risk, and the fee is revenue under IFRS 15, recognised when the purchase is made; the receivable from the shopper is recognised at fair value, close to the purchase price for a short interest-free loan. Under the second, the provider in substance buys the shopper's debt from the merchant at a discount: the receivable is recognised at the amount paid, and the discount is interest income spread over the instalment period using the effective interest method. The contract terms, such as whether the provider takes an assignment of the merchant's receivable and what services it provides to merchants, decide which view fits. See the effective interest method.

Buy now pay later accounting: a month of purchases

A provider finances US$ 100,000 thousand of purchases at the start of a month, paying merchants 96,000 thousand after a 4% fee. Shoppers repay in four instalments over six weeks; by the month end half of the balance has been repaid, and about half of the fee would have been earned under the effective interest method. The provider expects 1.5% of outstanding balances to go unpaid.

If the fee is IFRS 15 revenue, the provider recognises the full 4,000 thousand when the purchases are made. If it is part of the receivable's effective interest, it recognises about 2,000 thousand by the month end and the rest over the remaining weeks. Either way, it holds a loss allowance of 750 thousand on the 50,000 thousand still outstanding. Over the life of the loans, total income is the same; what differs is when it appears, which matters for a fast-growing provider whose loan book is rising.

How are expected credit losses measured?

Under IFRS 9, the provider recognises a loss allowance when it recognises each receivable, so growth in lending brings an immediate expense. Stage 1 assets carry 12-month expected losses, but because the loans last only weeks, 12-month and lifetime losses are almost the same. Providers estimate loss rates from repayment data by customer type, purchase size and how many instalments have been paid, adjusted for the economic outlook, and move balances into stage 2 or 3 when instalments are missed. Write-offs happen quickly, often within months of the due date. See ECL stages.

How are late fees treated?

Late fees are charged when an instalment is missed. Because they arise from the financial asset, they are recognised as income when charged under IFRS 9, and the expected credit loss model then reflects the chance they will not be collected, which is often high. Some regulators cap late fees, and providers disclose how much income comes from them, because a provider that relies on late fees is earning from customers in difficulty.

How are buy now pay later receivables funded?

Providers fund their receivables through warehouse facilities from banks and through securitisations, selling pools of receivables to special purpose entities that issue notes to investors. Where the provider keeps the first losses or controls the entity, it usually consolidates it, so the receivables stay on its balance sheet with a matching borrowing. See securitisation and derecognition.

How is buy now pay later regulated?

In the UK, interest-free buy now pay later, known as deferred payment credit, comes under Financial Conduct Authority regulation from 15 July 2026, with creditworthiness checks before lending, clear product information and access to the Financial Ombudsman Service for agreements made from that date. Regulation affects the accounting indirectly, through the cost of credit checks, customer outcomes and expected losses.

How does US GAAP differ?

Under ASC 326, current expected credit losses over the whole life of the receivables are recognised from day one, which for short loans gives a similar allowance to IFRS 9. US providers face the same question about merchant fees, and some present them as revenue from merchants when the purchase is made. See IFRS 9 ECL and CECL compared.

This guide is general information. It is not tax or legal advice for your situation.