Affirm, fully known as Affirm Holdings, is a Fintech company founded by Nathan Gettings, Max Levchin, Alex Rampell, and Jeffrey Katz in 2012. It is headquartered in San Francisco and is regarded as a leading POS loan service provider. It enjoys customer and merchant bases of 14 million and 235,000 (by 2019), respectively. The firm offers convenient POS loans to consumers for point-of-sale purchases and is headed by Max Levchin, a Paypal co-founder who took up the CEO role in 2014.
Affirm became more popular in October 2017 after releasing a consumer application that guaranteed users loans for item purchases from any supported retailer. Over the years, the company has partnered with different entities, such as Walmart, one of the biggest hypermarket chains, to promote its services and acquire more customers. This means that Walmart customers can access this firm’s services inside the stores or on the entity’s website. Other notable partners include e-commerce giants such as BigCommerce, Shopify, and ZenCart.
Now that you have a brief history of this FinTech company, let’s find out more details, like how it operates and makes money.
Mission, Vision, And Core Values
Mission And Vision
Affirm’s mission is to help improve people’s lives by offering genuine financial products: POS loans specifically. It has partnered with several merchants to make that happen. It uses technology to maintain a customer-focused application and allow customers and merchants to enjoy a robust Point-of-Sale payment and commerce solution. Its vision is to be as secure and convenient as pioneer networks but more honest, transparent, and committed to excellent customer and merchant experience.
Values
Affirm has 5 main values that guide its operations. The company puts people first, pushes for accountability between employees and the outside world, and believes in simplicity. (Simpler is better). The two remaining values are no fine print, which refers to no hidden fees and tricking loan statements, and finally, pushing the envelope.
Affirm’s Key Partners And Value Propositions
Affirm exists because of two main partners, i.e., merchants and consumers. Here is a breakdown:
Consumers
Affirm has a customer base of over 14 million, made up of online and offline shoppers looking for simple and fixed-payment POS loans. Most want an alternative to bank loans and credit cards, which generally attract high-interest rates. Millennials and shoppers who cannot access loan facilities and traditional credit cards fall in this category.
Some of the value propositions that this company guarantees its customers include: an Excellent User Experience on its digital platform that can be operated in only a few clicks; Simpleness, Transparency, And Fairness due to zero hidden or additional costs; Flexibility And Control since consumers can choose convenient payment schedules; Customer Trust by monitoring the creditworthiness of all merchants and Accurate Pricing backed by tech.
Merchants
Affirm merchants are brands and entities that offer products such as fashion, travel, home furnishings, and retail. This FinTech company offers them a robust commerce solution, lets them generate more demand for their products, and acquires more customers. Through different empowerment initiatives, they get to optimize their customer acquisition strategies, promote product sales, and generate more income.
Affirm also saves merchants from discounts and expensive promotional and marketing initiatives. Additional offerings include product-level insights and data for informed marketing strategies and value addition, higher conversion due to increased customers, increased repeat business, ease of integration with third-party tools and apps, a broader target market, and compliance, as the company is responsible for the regulatory aspects of all the loans given to customers via the platform.
How Does Affirm Work?
We must discover how this entity works to understand its business model. Affirm has partnered with several merchants that allow consumers to purchase products on credit using Affirm’s POS loans. Buyers are at liberty to choose Affirm as a payment option before checkout. Affirm shoulders all the risks associated with the loan. It reviews the customer’s application before establishing an annual percentage rate based on their spending data and credit score.
This soft credit check is mandatory and does not affect a customer’s credit score/ status with financial lending companies and bureaus. Upon approval, the customer gets a loan facility of up to $17,500- and 3-36-months repayment plans. The company underwrites the loan directly with the customer and pays the merchant. It is reported to have 100,000-plus merchants in the fashion, electronics, travel, auto, and healthcare industries.
Customers are expected to make installments directly to Affirm, which charges interest rates of 0%-30% depending on their credit and financial status. However, it does not charge any account setup, service, prepayment, or late payment fees, which gives it an advantage over most of its competitors.
Note that the company can notify the credit bureau of late or missed payments, which can affect a customer’s credit score.
How Does Affirm Make Money
We have now come to the elephant in the room: how does this POS payment solution company make money? Affirm has built partners over the years for growth increment and merchant expansion. It is strategically placed at checkout points to acquire consumers directly through merchants. Here are the main ways it makes money:
Income From Interests
As we mentioned in the previous section, Affirm charges interests of between 0%-30% on its POS loans depending on the customer’s financial and credit score, which makes up 35-40% of its annual revenue. The average percentage rate for this platform’s loans is 18%, although over 40% of loans enjoy a 0% APR. The company considers its agreements with merchants before coming up with the right APR for loans.
All the loans offered by the platform are underwritten through Affirm Loan Services, Celtic Bank, and Cross River Bank, enabling it to maintain better long-term margin rates and offer higher loan volumes, which lack guaranteed approval. In assessing the customer’s credit quality, Affirm also uses data such as the customer’s payment history, current economic conditions, and how long the customer has been using Affirm.
Network Revenue
Network Revenue makes up 45%- 50% of the company’s revenue. It is obtained through merchant fees and the firm’s virtual card product. Merchant fees depend on the individual arrangements between the FinTech company and the merchants, e.g., merchants are required to foot the transaction costs when loans are offered at 0% APR. The percentage of fees charged is also influenced by the merchant’s purchase price, nature of goods, and expected sales volume. Merchant fees also smoothen the payment processes, guaranteeing that merchants are paid within 2 days.
Affirm also gives its customers a virtual debit card upon application. This can be obtained from the app for online and offline purchases at non-integrated merchants, who pay interchange fees to the virtual debit card transactions processor, which is then shared with Affirm. This revenue stream brings in 4-6% of the company’s annual revenue.
Income Obtained From Loan Servicing
Affirm makes money by helping third-party loan owners to manage their loan portfolios effectively. This channel brings in less than 3% of the company’s annual income.
Profits From The Sale Of Loans
This FinTech company sells part of its loans or purchases obtained from originating bank partners to third-party investors, earning profits from the difference between the date of sale’s proceeds and the current value of the loan.
Affirm’s Revenue, Funding, And Valuation
Affirm has had 12 funding rounds, raising a total funding amount of 1.5 billion dollars. The company has 27 investors with 7 key investors, i.e., GIC, Durable Capital Partners, Spark Capital, Fidelity Management and Research Company, Lightspeed Venture Partners, and Baillie Gifford. Its latest funding happened on September 20 before it went public four months later, in January 2021. Its valuation at the time was $11.9B, a figure that hasn’t changed much.
On revenue, the company made $1.3 billion in 2022, according to its website, which is a 55% increase compared to its 2021 revenue. In case you are wondering why Affirm experienced such a massive increase in revenue, here are the reasons;
- A massive expansion in its active merchant base
- Increased servicing income owing to the scalability of the loan portfolio held by third-parties
- Strengthening of enterprise partnerships
- High-interest income due to a mixed shift towards short-term loans
- Increased revenue on loans sales owing to a high loan sale volume
The total revenue, fewer transaction costs, also increased by 35% from $431.6M in the previous year to $662.4M in 2022. The company attributes this increase to the following:
- A strong revenue growth
- Decrease of loan purchase commitment loans
- Funding of cost efficiencies
- Increased credit losses provision
Affirm’s Technological Model
Affirm runs on a stack of applications built on a cloud-first platform. The company has a set of data management applications built on the cloud. These data include merchant, credit, consumer, fraud, transaction, and SKU-level data. This platform also uses several machine learning algorithms complete with predictive economic models. Lastly, it has an API that supports internal tools, checkout, and consumer products integration. Here are some of the primary elements of the platform’s technology:
Fraud Detection
Affirm has an inbuilt capability that reviews transactions and assesses transaction fraud risk. It is supported by a fraud risk model and diverse data points.
Credit Check
The platform has a credit check capability supported by a risk model with five main and 200 additional data points. It assesses whether new customers are credit-worthy before Affirm disburses a loan to cover their purchases.
Improvement Modelling
Affirm platform’s improvements are modeled to meet environmental and context changes.
The last element is data security and privacy, which is required to win customer confidence.
Major Affirm Partnerships
Affirm’s yearly revenue increment can be attributed to its valuable partnership with e-commerce market leaders and FinTech companies. Here are a few of them:
Woocommerce
Affirm deepened its partnership with WooCommerce, an open-source commerce solution with 3.7 million merchants, in May 2022, allowing WooCommerce customers to obtain POS loans and pay for their products. WooCommerce businesses that meet the eligibility requirements can now offer Affirm services in the US and Canada (through PayBright). Customers can see the total cost of their purchases upfront before checkout for more transparency.
Amazon
Affirm partnered with Amazon in August 2021, which saw its shares surge by 43%. This partnership allows Amazon customers to obtain loans for purchases starting from $50 and clear them through monthly installments. According to the agreement, Affirm is Amazon’s only non-credit card and BPNL service provider in the United States, a deal that exists up to January 2023. Affirm is currently an embedded payment method in the e-commerce platform’s digital wallet.
Shopify
Affirm partnered with Shopify to power the latter’s shop pay installments in the United States. It guarantees Shopify merchants full purchase amounts and fewer fees, which increased its acceptance. This partnership was extended in May 2022, confirming Affirm as the platform’s only pay-over-time provider in the US. Some of the reasons that can be attributed to the success of this partnership include Affirm’s technology and expertise in this particular purchase and payment system, its commitment to transparency, and the lack of hidden fees.
Stripe
Affirm partnered with Stripe in May 2022 for an adaptive checkout feature for US stripe users. It makes real-time underwriting decisions using the platform’s smart decision engine and allows customers to make optimized payments over time.
Verifone
The Affirm and Verifone partnership happened in January 2022, leading to the incorporation of Affirm’s flexible payment solutions on Verifone’s card-present payment and eCommerce platforms. It is also a testament to Verifone’s commitment to staying ahead of market trends and constantly meeting consumer and customer needs in a dynamic payment space.
Other major partnerships witnessed over the years are with fintech companies such as Global Payments, Adyen, and Fiserv, all of which have strengthened Affirm’s position in the market as a POS loan service provider.
Affirm’s Main Competitors
Affirm doesn’t enjoy a market monopoly. If anything, it faces stiff competition from well-established Fintech companies such as:
Sezzle
Sezzle, a publicly-traded Fintech company, was founded in 2016. It is headquartered in Minneapolis, Minnesota, with operations in Canada, Germany, India, and the United States. Like Affirm, it offers installment plans at in-store locations and online stores. Customers also enjoy a 14-days free payment rescheduling duration. Interests are not charged on purchases, making this company the biggest Sezzle competitor.
Afterpay Limited
Founded in 2014 and headquartered in Melbourne, Australia, AfterPay Limited is present in 5 markets, i.e., the US, Canada, New Zealand, Australia, and Europe. Block acquired it in January 2022. Users love this option because of its seamless integration with online stores through APIs or third-party plugins.
Klarna
This Swedish-based FinTech company, founded in 2005, offers BNPL, post-purchase payment solutions, money requests, P2P payments, funding, and debit services. Users can settle their loans after 14-30 days or take up to three years. It offers slightly lower interest rates than Affirm and operates in 45 countries worldwide, with 400,000+ partners globally.
Paypal Holdings Inc.
PayPal is one of the biggest Fintech companies in America. It is known as an online payment processing platform that supports P2P payments. It serves online vendors and commercial users who pay service fees in return. This company has an in-store and online purchase payment option in its platform. It also updated its Cashback Mastercard credit card to give users 3% Cashback for every PayPal payment. Lastly, the PayPal ‘Pay on 4’ feature supports online transactions of between $30 and $1,500.
Zip Co. LTD.
Zip is relatively new, as it was founded in 2013. It is headquartered in Sydney, Australia, and lets users pay for products in four installments. It is one of the fastest-growing Affirm competitors following its recent acquisitions.
Splitit
Splitit, founded in 2012, has its headquarters in New York City, New York. It supports a BNPL application, allowing users to purchase goods from eCommerce platforms using different credit card options such as Mastercard, Union Pay, Visa, and Discover and earn rewards in return. This platform’s BPNL service can be used without any application or registration. Monthly installments are deducted from customers’ cards until the purchase amount is settled. Consumers do not also pay any interest or fees.
Other worthy competitors include GoCardless, Uplift, ViaBill, and Amazon.
Conclusion
Despite negatively affecting several businesses globally, the COVID-19 pandemic positively impacted Affirm’s growth as it saw a commendable increase in its users as more people shopped online. Currently, the company is more focused on its partner merchant network and user base, which has been steadily growing. The company also entered into an exclusive deal with Shopify in 2021, which saw its merchant base rise from 29,000 to 235,000 customers after Shop Pay Installments adoption. By March 2022, the platform’s active users had grown by 96% to 14 million.
This platform, therefore, has a bright future. Its innovative model should help it define the future of payments and e-commerce. However, it must also be ready to counter the increasing number of buy-now-pay-later companies by offering even better services and partnering with more e-commerce and Fintech companies. Extending its current partnerships would also be an excellent move.
