- Affirm is an innovative fintech founded by ex-PayPal co-founder, Max Levchin.
- Disrupting the consumer finance space with rapid growth across America and Canada.
- Fierce competition from startups and incumbents will put pressure on their business model.
Point-of-sale (POS) loans and buy now pay later have become increasingly popular payment options for online shoppers. Affirm is one of the established players in this sector, attracting both merchants and consumers with its payment flexibility. POS loans and BNPL target Millennial and Gen Z consumers who tend to have lower earnings, less access to credit cards, and relatively less wealth.
Affirm's business model has allowed them to grow quickly, appearing at the checkout of an ever-increasing number of stores. How they make money has been central to their growth strategy. Find out how it works and how they can grow in the face of such stiff competition.
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What does Affirm do?
Founded in 2012 by Max Levchin (CEO), Jeffrey Kaditz, and Nathan Gettings and headquartered in San Francisco, Affirm is one of the oldest POS loan firms. Affirm has more than 6 million customers and over 11,500 merchants in its partner network across the United States.
Affirm provides convenient POS loans targeting the millennial market. Unlike competitors such as Afterpay, Affirm charges an APR on each purchase, pledging transparency on the total loan amount at the time of sale and promising the customer no hidden fees.
Loans are underwritten using an AI-based algorithm to determine the appropriate financing options and quickly generate loan terms. WIth flexible financing options, the company continues to grow its user base and rapidly onboard new merchants, making it one of the top POS loan companies globally.
How does Affirm work?
This fintech company offers consumers point-of-sale (POS) loans through its network of partner merchants. When the customer checks out with an online or brick-and-mortar merchant, they have the option of selecting Affirm as a payment option. Affirm reviews the customer's application and issues an APR dependent on the customer's FICO score and other spending data. If approved, the customer receives a loan facility for amounts up to $17,500 and repayment plan options spanning 3 to 36 months.
Affirm settles the account with the merchant, underwriting the loan directly with the customer. As of March 2021, Affirm had over 11,500 merchant partners across the fashion, dentistry, electronics, auto, travel, and other industries. Some of the leading merchant partners include Adidas, Peloton, StockX, Walmart, and Eventbrite.
Customers make installment payments directly to Affirm, with APRs ranging from 0% to 30%, depending on the applicant's financial and credit status. One of the most significant differences between Affirm and other POS companies is that there are no fees for account setup, late payments, service, or prepayment.
On the customer's part, Affirm runs a soft credit check before offering the POS facility. However, the credit check doesn't impact the credit score or credit status with the bureaus or banks. If the customer takes a loan from Affirm, Affirm will report any late or missed payments to the credit bureau.
Affirm claims that merchants adding Affirm to its payment methods experience an 85% annual increase in orders, as well as a 20% increase in purchases from repeat customers.
How Affirm makes money
Affirm makes money from two revenue streams-one from customers and one from merchants. They charge customers an interest rate on loans they issue and they charge merchants a processing fee.
Affirm generates revenue on the loans it issues to consumers. Although the company does not charge fees, it does charge interest on its POS loans. The APR can range from 0% to 30%. While the average for an Affirm loan is 18%, approximately 43% of loans are issued at 0% APR. Applicable rates depend on the agreement with the merchant and the credit quality of the buyer. Affirms states that the average loan size is $750, although it offers loan facilities up to $17,500.
Affirm underwrites all its loans through Cross River Bank, Celtic Bank, or Affirm Loan Services. This strategy allows Affirm to make higher volumes of loans and better margin rates in the long term. Unlike many other POS lenders, loans with Affirm don't come with guaranteed approval.
Thanks to a complex algorithm, Affirm can assess its prospects before offering a loan with terms appropriate for the customer’s credit risk. Some of the data points the company uses in its assessment of each customer’s credit quality include the following.
- Current economic conditions.
- Credit score.
- Payment history with Affirm.
- Length of customer’s relationship with Affirm.
- The interest rate offered by the merchant.
According to Affirm, its algorithm ensures borrowers pay back the vast majority of loans taken through the platform.
While charging consumers APR, there are occasions when Affirm financing is available at 0% APR. In this case, the merchant is paying for the transaction cost. Affirm doesn't mention what it charges for merchant fees, but speculation is that it's somewhere between 2% to 4%. The fees depend on the merchant's expected sales volume, purchase price, and type of goods.
The merchant fee handles the payment process, allows the merchant to get paid within 2 days, and subsidizes Affirm taking the risk in the deal.
Future growth engine
Affirm continues to focus on growing its partner merchant network and user base. Although the 2020 pandemic saw the company experience a huge surge in user growth with more people shopping from home, Affirm remains smaller than both Klarna and Afterpay, its two closest competitors.
Affirm should experience solid growth in 2021 through its exclusive deal with Shopify, which will allow all 10,000 merchants on the Shopify network to offer BNPL services. Expanding its merchant base is an important element for growth as almost a third of Affirm’s revenues come from its exclusive relationship with Peloton.
In May 2021, Affirm completed the purchase of Returnly, a leader in online return experiences and post-purchase payments, to broaden the services it offers merchant partners.
Affirm was the originator of the POS loan model. However, the company faces stiff competition from other companies that don't require an APR and offer guaranteed financing approval.