What Kind of Company is Affirm and Its Innovative Approach to Credit

Affirm is a financial technology company that provides consumers with transparent and affordable payment options for everyday purchases. It's a unique approach to credit.

Affirm offers a different type of credit product that doesn't rely on traditional credit scores. This is a significant departure from the way most credit companies operate.

By focusing on the consumer's ability to pay, Affirm provides a more personalized experience. This approach helps consumers avoid debt traps and high interest rates.

The company's innovative approach to credit has made it a leader in the fintech industry.

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Affirm's business model is built around three core pillars: merchant fees, consumer interest, and capital markets activity. This unique approach allows the company to generate revenue from multiple sources.

Affirm earns a commission from merchants, which can be as high as 12.5% of the transaction value. The company also charges interest on loans opted for by consumers, with APRs ranging from 0% to 36%.

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The interest rates and other loan terms vary depending on consumers and the merchants they purchase from. Affirm's lending increases average order values and reduces cart abandonment, making it commercially attractive for retailers.

To give you a better idea of the fees involved, here's a breakdown of Affirm's merchant fees:

Affirm also earns a servicing fee on loans they sell to funding sources, which accounts for 3% of the company's revenue. The servicing fee is used to manage customer care, priority collections, and third-party collections.

In terms of revenue growth, Affirm's merchant network fees accounted for 44% of revenue in 2022, with merchants paying a fee of 2-4% for every sale through the platform. This fee is used to cover the cost of payment processing and risk of payment default.

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Affirm's products and services are designed to make online shopping more accessible and flexible. The company offers a range of products for both merchants and shoppers.

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One of the key features is Adaptive Checkout, which provides personalized payment options to online shoppers based on their profiles and shopping cart contents. This means shoppers can get pre-approved payment plans with bi-weekly or monthly installments.

Affirm also offers an AI-powered promotion platform called AdaptAI, which allows retailers to offer rewards to shoppers. These rewards can include exclusive APR rates, special repayment terms, or immediate cash savings.

For online shoppers, Affirm provides multiple interest-free products, including Split Pay, which offers a bi-weekly "Pay in 4" option, a "Pay in 2" option, and a "Pay in 30" option. This allows shoppers to split the cost of a purchase into manageable payments.

The company also offers an Affirm Card, which is a debit card that allows consumers to convert debit transactions into installment payments within 24 hours through an app. Additionally, Affirm offers a savings account called the Affirm Money Account, which pays 3.85% annual interest and has no minimum balance or fee requirements.

Here's a list of some of the products and services offered by Affirm:

These products and services are designed to make online shopping more accessible and flexible, and to provide consumers with more choices and control over their payments.

Affirm's infrastructure is built on a proprietary underwriting system that combines traditional credit scoring with alternative data, behavioural signals, and machine learning.

This system enables real-time credit decisions that are both inclusive and accurate, allowing Affirm to extend financing to users who may not have a strong credit file but demonstrate responsible financial habits.

Affirm's platform seamlessly integrates with ecommerce platforms like Shopify and Salesforce, making it easy for merchants to enable Affirm with minimal technical effort.

Users benefit from instant decisions at checkout, and the company also offers a virtual card product that allows users to finance purchases from merchants that are not directly partnered with Affirm.

The Affirm mobile app includes account management tools, payment reminders, and budgeting features, creating a user experience that is accessible and informative.

The Affirm Debit+ card allows users to make purchases using their linked bank account and later opt to split eligible transactions into instalments, blending debit and credit in a flexible spending option.

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Affirm faces stiff competition from online customer lending companies like Klarna, Afterpay, and Sezzle, all of which offer similar installment plans for online purchases.

These platforms also offer interest-free monthly payments, with Afterpay taking it to the next level by offering zero-interest payments for over six weeks.

Klarna has the largest number of partner merchants, with 200,000, followed closely by Afterpay with 48,000, and Sezzle with 10,000.

Some of Klarna's notable partner merchants include big names like Etsy, Macy's, and Sephora, while Afterpay has partnered with Levi's, Urban Outfitters, and GameStop.

Afterpay's recent partnership with Stripe is a significant move to further expand its capabilities and offer seamless integration with Stripe merchants.

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Affirm faces stiff competition from online customer lending companies like Klarna, Afterpay, and Sezzle, all of which offer similar installment plans for online purchases.

These platforms, including PayPal's Credit product, allow users to make online purchases with easy installment plans and interest-free monthly payments, with some offering zero-interest payments for several weeks.

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Klarna has the most partner merchants, with 200,000, followed by Afterpay with 48,000, and Sezzle with 10,000. Some notable merchants partnered with Klarna include Etsy, Macy's, and Sephora, while Afterpay has partnered with Levi's, Urban Outfitters, and GameStop.

Afterpay recently partnered with Stripe to expand its "buy now, pay later" capabilities, combining its payment service with Stripe's merchant network for seamless integration.

Affirm looks to maintain its grip in the online customer lending market, with a successful IPO under its belt and a growing demand for affordable installment plans.

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Market Challenges are a major concern for companies like Affirm. Rising interest rates have increased the cost of capital, making it more expensive to fund loans and pressuring margins.

Macroeconomic uncertainty and inflation have impacted consumer repayment behavior, leading to climbing delinquencies in recent quarters. This is a challenge that Affirm's adaptive risk models are struggling to keep up with.

Regulatory scrutiny is also on the rise as Buy Now, Pay Later (BNPL) becomes more mainstream. The Consumer Financial Protection Bureau is focusing on key areas such as disclosure clarity, consumer over-indebtedness, data privacy, and the impact on credit health.

Affirm has taken proactive steps to address these concerns, including reporting user activity to credit bureaus and enhancing transparency within its app.

Affirm has made significant partnerships with major retailers, including Walmart, to offer its buy now, pay later (BNPL) service.

In 2019, Affirm partnered with Walmart, making its service available at self-checkout kiosks in stores and on the Walmart website. This partnership expanded Affirm's reach to a wider audience.

Affirm's BNPL service is also available on various e-commerce platforms, such as Shopify, Magento, and BigCommerce.

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In 2016, Affirm announced its buy now, pay later (BNPL) service for retailers using various e-commerce platforms, including Kibo Commerce, BigCommerce, and Shopify.

By 2017, Affirm's service was available at over 10,000 online retailers, with the company aiming to "build and perfect a new underwriting system" powered by machine learning to determine consumer creditworthiness.

The company's use of machine learning in underwriting has been claimed to generate a "higher loan approval rate compared to its competitors", while ensuring the borrower can "comfortably repay".

In 2018, CBS News cited Affirm's BNPL service as an alternative to traditional credit cards, but also expressed caution about the interest rates charged by BNPL services.

Affirm announced a partnership with Walmart in February 2019, making its service available to customers at self-checkout kiosks in-store and on the Walmart website.

Today, Affirm's partners include major retailers like Amazon, Shopify, Walmart, and Target, which address over 60 percent of total U.S. retail e-commerce sales.

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Affirm is expanding its offerings beyond buy now, pay later (BNPL) to become a comprehensive financial platform for the modern consumer.

The company is developing tools to manage subscriptions, track recurring payments, and help users understand their cash flow.

It's also investing in fraud detection, automation, and AI-powered financial coaching to deepen engagement and improve outcomes.

Affirm aims to move from transactional credit towards full-stack digital finance, becoming a daily-use financial companion for millions of users.

This vision signals a significant shift towards providing users with a more holistic financial experience.

Visa is part of the legacy e-commerce network that Affirm is trying to disrupt. Affirm aims to modernize the way people shop and pay for things.

One of the ways Visa is involved is through instore credit cards for financing. This suggests that Visa is still a relevant player in the payment industry.

Visa's presence in the instore credit card market is a testament to its long history in the industry.

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Affirm has a proven track record of strong growth and ability to scale. They've seen a significant jump in revenue, with a 93% increase from $264.4 million in 2019 to $509.5 million in 2020.

Their revenue multiple is quite high, at 80x, even for a tech stock. At the time of writing, this was a notable figure.

Affirm's business model is built on microlending, which is a common practice in China. As people get comfortable breaking up payments for smaller things, the market for microlending is expected to be huge.

Affirm's revenue saw a significant jump in 2020, reaching $509.5 million, a 93% increase from the previous year's $264.4 million.

This growth was a major factor in the company's public offering, where it raised $1.2 billion from a stock price of $49 per share.

Affirm's revenue is comprised of different fee structures, with two main categories: servicing fees and merchant network fees.

Servicing fees account for a smaller portion of revenue, at 3% of total revenue.

Here's a breakdown of the two main revenue streams:

These fees are generated through different channels, with merchant network fees being charged at a rate of 2-4% per sale.

Affirm has a proven track record of strong growth and ability to scale.

The author has personally used Affirm multiple times and has been delighted with the easy experience and 0% APR.

Compared to legacy businesses for loans, Affirm offers a much better experience and trust model for the customer.

In China, microloans are very common with many tech companies and startups offering ways to pay over time.

Currently, in the US, consumers are just beginning to get used to microlending and as people get comfortable breaking up payments for smaller things the market will be huge.

Affirm has many headwinds that will help them grow very fast, including partnerships with major ecommerce behemoths.

At time of writing (9/19/2021), Affirm has a revenue multiple of 80x which is quite high even for a tech stock.

The author believes that in 4 years (2025), Affirm has the potential to hit 100B in GMV and bring in $4-5B in revenue (less transaction costs) as a $100B company.

Affirm will also be quite dependent on its partners to be drivers of revenue.

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Affirm has built a strong brand by providing unsecured cash loans with a unique approach. They've managed to create customer trust by being transparent and fair in their dealings.

One key aspect of their brand is that they don't charge fees or make collection calls even when payments are late. This shows that they prioritize customer comfort over profits.

Their goal is to make customers feel at ease with these loans, which is likely to result in long-term customers who enjoy the experience of BNPL.

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Affirm claims to beat current credit scores using their proprietary models. This unique approach sets them apart from competitors like Klarna, Afterpay, and Sezzle, which rely on traditional credit scoring methods.

Klarna has the most number of partner merchants, with 200,000, followed by Afterpay with 48,000, and Sezzle with 10,000. This vast network of partners is a significant advantage for Affirm, allowing them to reach a broader customer base.

Affirm focuses on higher-value purchases and long-term repayment options, targeting more affluent or credit-conscious consumers. This strategic positioning enables them to differentiate themselves from competitors that focus on small-ticket retail transactions.

The company's exclusive partnerships with brands like Peloton and its prominent integration with Amazon significantly expand its market exposure. This exposure is a major competitive advantage, allowing Affirm to reach a wider audience and establish itself as a leader in the industry.

Building a strong brand is key to customer loyalty and retention. Affirm has successfully done this by treating customers with respect and fairness.

Their commitment to not charging fees or making collection calls when payments are late has earned them customer trust. This approach is a refreshing change from the typical loan industry practices.

Customers appreciate being able to make late payments without fear of penalties. Affirm's goal is to make customers comfortable with their loans, which is likely to result in long-term customers.

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Affirm has been expanding its reach through partnerships with e-commerce platforms, making its buy now, pay later (BNPL) service available to a wider range of retailers.

In 2016, Affirm partnered with several e-commerce platforms, including Kibo Commerce, BigCommerce, AspDotNetStorefront, and Zen Cart, making its service available to retailers using these platforms.

By 2017, Affirm's service was also available on the Salesforce Commerce Cloud, Magento, and Shopify.

Affirm's use of machine learning in underwriting has allowed it to generate a higher loan approval rate compared to its competitors.

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This approach has also ensured that borrowers can comfortably repay their loans, which is a key aspect of Affirm's service.

In 2018, CBS News cited Affirm's BNPL service as an alternative to traditional credit cards, highlighting its potential benefits for consumers.

Affirm's partnership with Walmart in 2019 made its service available to customers at self-checkout kiosks in stores and on the Walmart website.

This partnership expanded Affirm's reach and made its service more convenient for customers.

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