Analysis

Affirm- revolutionizing point-of-sale financing and eCommerce

Affirm takes instant lending decisions of financing customers at the point of sale. The strategy of not being dependent on FICO and making a credit decision in seconds with very few customer inputted parameters has helped expand the potential pool of customers exponentially. It has even led to a 20% lift in merchant sales conversions.

Affirm, incorporated in 2012 with its headquarters in San Francisco, is in the business of 21st-century banking for the millennials. The fintech startup offers instalment loans at eCommerce check-out and is looking to recast the credit card market, which is synonymous with hidden charges and high APRs. Affirm utilizes its huge data bank and algorithms, analyzing 70,000 to 80,000 data points on each customer.  Affirm is linked with Demandware, Magento, Shopify, etc. – big names in e-commerce segment. Besides, customers can get integrated directly with Affirm’s Application Program Interface (API) for instant approvals.

The team

Affirm was founded jointly by Max Levchin, Nathan Gettings and Jeffrey Kaditz. Presently, Max Levchin is Chairman and CEO.  He was earlier a co-founder of PayPal. Nathan Gettings is Chief Risk Officer & Jeffrey Kaditz is the Chief Strategy Officer. Nathan and Jeffrey are also co-founders of the $20bil Data Analytics giant – Palantir Technologies. The company has an all-star founding team and seems to have created a credit card killer and eCommerce enabler rolled into one. The team would be competing with their own creation- the payments giant PayPal. They have some other well-funded competitors in the form of Klarna( 291.33 million$ funding) and Bread(14 million$).

Revenue Streams

Aside from the interest charged to the borrowers Affirm charges a merchant discount rate for every transaction. In certain cases, the startup offers a 0% interest rate to push sales, the loss of interest being borne by the merchant in the form of a higher discount rate. Thus, the company is not a plain vanilla lender but it adds additional value by increasing conversion rates for eCommerce companies. Merchants are happy to partner with Affirm as they have experienced a growth of 20-25% lift in sales conversion rates and 80% increase in average order values due to offering Affirm as a payment method. Even a 0% financing offer with higher charges from Affirm is beneficial for the merchant. This is because luxury brands are not in favor of discounting due to the dilution of brand image. The 0% financing options solves both of their problems; the company sees an increase in sales volumes and the brand image remains intact. Large merchants like BCBG, Casper, Huawei, iCracked, Jomashop, MakerBot, One Kings Lane, Peloton, Reverb, Tradesy, etc. are actively associated with Affirm.

How Affirm is More Advantageous for its Borrowers?

  • Affirm takes instant decisions regarding loan approvals at the point of sale.
  • Affirm allows flexibility to its borrowers to pay back the loan through pre-determined fixed monthly instalments.
  • Rates of interest are far less as compared with credit card companies. Affirm charges 0 to 17% annual interest (0-30% APR) varying on the basis of the credit rating of the borrower and the merchant involved.
  • 0% rate is charged in case of transactions through certain merchants.
  • Affirm never discloses or shares borrowers’ personal information unless it is statutorily bound to do so.
  • There are no backdoor charges whatsoever and there is no origination or any other fees charged from the borrower.

Affirm vs. Credit Card Companies

Credit card companies often fleece the borrower through compounded interest, penal charges and huge late fees.  Borrowers have to repay the amount to credit card companies at the end of the month, whereas with Affirm the amount has to be paid in instalments over a period of 9 months on average. 75% of Affirm’s clientele is of 30+ years of age and 40% of Affirm’s borrowers have a prime credit rating. Borrowers of both these categories can become conveniently eligible for issuance of credit cards but they prefer to deal with Affirm because of the cost and trust factor.

Affirm vs PayPal Credit

PayPal Credit is a revolving credit product. For certain purchases, PayPal Credit offers consumers promotional financing for six months at no interest. If the entire payment is not made within six months, interest is charged retroactively at a rate of 19.99% APR. Additionally, consumers can face a $35 late charge. Affirm, on the other hand, is not a line of credit, but instead, offers loans for specific, discrete transactions. Affirm offers a way to pay over time in monthly installments, with a fixed amount due each month until a predetermined payment date. This provides borrowers with budget certainty and cash flow flexibility. 

Affirm vs Klarna

Klarna is a slightly different model than Affirm, in that they offer a deferred payment method that takes over all merchant process rather than Affirm’s installments option which complements existing payment options. Klarna has done well in Europe and is just entering the US market. Affirm believes that their significant investment of time and people resources into understanding the US market from a consumer, merchant, underwriting, and regulatory perspective will give them an edge as well.

Future Prospects

Affirm raised $45 million in June 2014. Six VCs led by Spark Capital invested $ 275 Million in May 2015. Though the company has not disclosed the percentage of debt and equity in the financing rounds or its valuations, Pitchbook.com has reported a post-money valuation of around $600 million. Affirm acquired “Lendlayer” on August 5, 2015, and is in the process of partnering with Hackbright, Coder Camps and the New York Code and Design Academy to offers finance options to their students. The company is also looking to tap into the auto and mortgage segment.

To enable consumers to use Affirm at any merchant the company is offering consumers one-time use “virtual cards” that enables them to transact online or in store at specific retailers.  The virtual card comes with a string of numbers that can be entered at the point of sale in a very similar manner as a Master Card. Average financing per borrower of Affirm is around $700 but can lend up to $17,500 per transaction. The company is looking as well to finance customers at brick-and-mortar stores and has entered in collaboration with First data owned- “Clover”.

Future needs

At present Affirm is always keeping an eye out for an alternative, lower cost sources of capital so that we can pass along the savings to consumers in the form of lower interest rates.  In addition, as expected, Affirm is presently focused on increasing consumer and merchant customer base.

Affirm is definitely one of the hottest new startups in Fintech space. It’s all-star team and a massive funding round has caught the fancy of the industry. Most importantly its integration at the point of sale is a huge differentiation from Lending club and Prosper. LC and Prosper have CAC of 200 to 500$(depending upon different sources); whereas Affirm gets paid by the merchant for accessing the merchant’s own customer. Also Max and Nathan were responsible for stemming losses of over 16 million$ a month due to frauds on PayPal’s platform. They have proven their ability to create a successful fraud detection model in payments space and their experience in scaling a business is unparalleled. The coming years will witness a giant battle in the point of sales financing between PayPal Credit, Affirm and potentially other players as Klarna, Bread or more.

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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