BCG immunotherapy is the gold-standard treatment for non-muscle-invasive bladder cancer at high risk of recurrence or progression. Preclinical and clinical studies have revealed that a robust inflammatory response to BCG involves several steps: attachment of BCG; internalization of BCG into resident immune cells, normal cells, and tumour urothelial cells; BCG-mediated induction of innate immunity, which is orchestrated by a cellular and cytokine milieu; and BCG-mediated initiation of tumour-specific immunity. As an added layer of complexity, variation between clinical BCG strains might influence development of tumour immunity. However, more than 40 years after the first use of BCG for bladder cancer, many questions regarding its mechanism of action remain unanswered. Clearly, a better understanding of the mechanisms underlying BCG-mediated tumour immunity could lead to improved efficacy, increased tolerance of treatment, and identification of novel immune-based therapies. Indeed, enthusiasm for bladder cancer immunotherapy, and the possibility of combining BCG with other therapies, is increasing owing to the availability of targeted immunotherapies, including checkpoint inhibitors. Understanding of the mechanism of action of BCG immunotherapy has advanced greatly, but many questions remain, and further basic and clinical research efforts are needed to develop new treatment strategies for patients with bladder cancer.