Why Merchants Now Offer No-Interest BNPL Plans: Causes, A/B Test and Approval Flow

A buy-now-pay-later lender lets shoppers pay for a purchase in installments at a merchant's checkout, and each merchant chooses which payment plans the lender offers its customers. Assume the usual point-of-sale lending economics: the merchant pays the lender a fee on every financed purchase; on an interest-bearing plan the customer also pays interest, while on a no-interest (0% APR) plan the customer repays only the purchase price and the merchant pays a higher fee instead. When merchants first launched the lender's financing, they typically chose interest-bearing plans. Now more of them are willing to launch no-interest plans. Why? The interviewer followed up with two questions: how you would design an A/B test for this and which metrics you would use, and what steps a financing application goes through before it is approved. ### Clarifying Questions - Does "no interest" mean 0% APR monthly installment plans, short interest-free plans such as four payments over six weeks, or both? - Is the shift about new merchants launching with no-interest plans, existing merchants switching, or merchants adding no-interest plans alongside interest-bearing ones? - Does the merchant fund the full cost of the interest the customer does not pay, or does the lender share it? - Are no-interest plans offered on all purchases, or only on some products, order sizes or promotional periods? ### Part 1 — Why merchants now launch no-interest plans Explain why merchants that once chose interest-bearing plans would now pay more to offer no-interest plans, and how you would find out which reasons are actually driving the shift. ```hint Who pays for zero The customer pays no interest, but the loan still costs money to fund. Compare what the merchant gives up with what it can gain at checkout. ``` ```hint Compare to a discount A merchant has other ways to make a purchase easier to afford. Ask what a no-interest plan costs compared with them, and on which purchases. ``` #### What This Part Should Cover - The merchant's economics of interest-bearing versus no-interest plans, including the cost on purchases that would have happened anyway - Demand-side, competitive and cost-side reasons for the shift - Data and methods that would show which reasons hold ### Part 2 — Design an A/B test Suppose you want to test a no-interest plan against an interest-bearing plan. How would you design the test, and which metrics would you use? ```hint Pick the unit Merchants choose plans, but customers make purchases. Decide what gets randomized and what could contaminate the comparison. ``` ```hint Slow outcomes Some of the lender's outcomes, such as repayment, are known only months after checkout. ``` #### Clarifying Questions for this Part - Is the test meant to show merchants the value of the plan, or to set the lender's own pricing and credit policy? - Can customers at the same merchant be shown different plans, or must every customer at a merchant see the same plans? - Does the lender have access to the merchant's total checkout sales, or only to purchases financed through the lender? #### What This Part Should Cover - Hypothesis, randomization unit, and interference or contamination between groups - A primary metric, secondary metrics and guardrails for merchant, customer and lender - Power, duration, lagging credit outcomes and a decision rule ### Part 3 — Steps before an application is approved When a customer chooses to pay over time at checkout, what steps does the financing application go through before it is approved? ```hint Follow the customer Trace the application from the moment the customer picks the payment option to the moment the merchant is paid. ``` ```hint Two questions before lending Before approving, a lender must settle who the applicant is and whether they will repay. ``` #### What This Part Should Cover - Identity verification and fraud screening - Credit and affordability assessment, and how the approved amount and terms are set - The customer's acceptance of terms and where in the funnel applicants are lost, connected to the metrics in Part 2 ### What a Strong Answer Covers - Merchant economics stated precisely enough to compute the sales lift a no-interest plan needs to pay for itself - Hypotheses tied to data that could confirm or reject them, with awareness that merchants who switch are self-selected - An experiment whose unit, primary metric and guardrails match the decision, covering both merchant value and the lender's credit risk - An accurate picture of the application funnel and of how the plan type changes who applies and who is approved - A clear recommendation path when results are mixed, such as higher sales with worse early repayment ### Follow-up Questions - Merchants that switched to no-interest plans saw higher sales afterwards. Why is that not proof that the plan caused the increase, and how would you estimate the effect from that data? - In your test the no-interest arm has a lower approval rate than the interest-bearing arm. How could that happen, and what would you check? - How would you set the merchant fee for a no-interest plan with a given term length? - The no-interest arm raises sales but shows higher early delinquency. How would you make the launch decision before final losses are known?