Executive Summary:
Affirm is a FinTech company that issues point-of-sale loans to consumers. It works together with merchants to offer loans ranging from 3 to 12 months. Customers directly transact with Affirm via the company’s website or one of its mobile apps.
Affirm makes money on the interest it charges for its consumer loans, interchange fees, as well as fees paid by the merchants to handle payments on their behalf.
Founded in 2012, Affirm has become one of the world’s biggest firms in the consumer lending space. It now counts more than 11 million customers while partnering with over 100,000 merchants across the globe.
What Is Affirm?
Affirm is a FinTech company that offers point-of-sale loans to consumers. These loans allow customers to pay the product in various installments over the course of a few months. Here’s how buying a product with Affirm works:
- The customer places the desired products in the shopping cart and selects Affirm as the desired checkout method
- Next, they select the payment schedule. Affirm installments range anywhere from 3 to 12 months. The company makes the amount of interest transparent upon checkout while interest rates remain fixed throughout the payment cycle.
- Lastly, customers then pay each monthly installment directly to Affirm. Customers can use the company’s app to conduct payments.
The firm works together with over 100,000 merchants across industries such as Fashion, Electronics, Travel, Auto, and more. Examples of merchant partners are Peloton, Adidas, StockX, Eventbrite, or Walmart.
Customers do not pay the merchant, but Affirm directly. Hence, the company is responsible for ensuring loan payments and thus takes on the risk of payment defaults.
Interest rates typically range anywhere between 0 percent to 30 percent. A selected few merchants offer 0 percent installments.
From the consumer’s perspective, one of the major advantages of Affirm is that it does not charge customers for late payments nor does it apply service or prepayment fees.
Nevertheless, Affirm will conduct a soft check on the customer’s credit score to assess whether he or she is able to potentially pay the loan back. In some instances, a down payment may be required.
Conversely, Affirms offers multiple benefits on the merchant side. The firm claims that adding Affirm as a checkout will lead to an 85 percent increase in annual order volume as well as a 20 percent increment in repeat purchases.
Apart from its loans, consumers can also order a debit card issued by Affirm. The card can be used to pay for goods and services at any shop where Visa is accepted.
Customers can access Affirm directly via its website or download one of its mobile apps from the Google Play Store or Apple’s App Store. One can, furthermore, conduct their shopping directly within the Affirm app.
A (Not So) Short History Of Affirm
Affirm, headquartered in San Francisco, was founded in 2012 by Max Levchin (CEO), Nathan Gettings, and Jeffrey Kaditz.
Levchin spent the first decade of his life in Kyiv, Ukraine, where he was born in 1975. Both his grandparents and parents were accredited scientists who worked for the Soviet government.
One day, his mother’s employer prompted her to create a software program, which she sourced out to the 10-year old Levchin. So every day after school, he’d visit her at work and help out on the programming assignment, which ultimately made him fell in love with software from an early age.
Unfortunately, soon after, that passion was interrupted by the Chernobyl accident. Max and his family were forced to move away to an extremely rural community in Crimea – with no computers in sight. To satisfy his hunger for programming computers, Levchin learned how to write code on pen and paper.
He created stacks upon stacks of notebooks populated with programs for software and games. When the smoke (quite literally) cleared, his family was able to move back to Kyiv. Armed with access to a computer, Levchin typed in his notebook software into the computer. Much to his surprise, all of it worked seamlessly.
His family later migrated to the United States where he attended the University of Illinois to pursue a degree in Computer Science. In 1997, Levchin moved to San Francisco after his studies to capitalize on the dotcom craze.
By the time, he had already started three businesses, one of which was NetMeridian, a software tool he sold to Microsoft for $100,000 just prior to his graduation. While waiting for the money to hit his bank account, he kept himself busy, for instance by attending lectures at Stanford.
One of these lectures was held by Peter Thiel, which he quickly became acquainted with and convinced to invest in a new business venture of his. That business, after a few iterations, eventually became PayPal.
Levchin, Thiel, and a bunch of other entrepreneurs you might have heard of, helped PayPal to revolutionize the online payments industry. In 2002, PayPal went public and soon after was sold to eBay for a combined $1.5 billion.
The deal netted Levchin, who acted as PayPal’s CTO, a sweet $34 million. But instead of spending the rest of his days surfing on the beach, he continued to use that money to start new businesses. Levchin launched the startup incubator HVF (short for Hard, Valuable, Fun) soon after his PayPal exit.
The incubator had two major successes early on. The first one was Yelp, which Levchin joined as a board member for the next decade-plus. The other one became Slide, which Levchin himself co-founded in 2004.
Slide, which was a personal media-sharing service for social media platforms like Facebook or MySpace, was sold to Google in 2010 for over $180 million. Levchin remained with Google for a little over a year, but left the search engine giant to revive HVF.
One of those ideas turned out to become Affirm. Levchin initially planned to only join the business as chairman and investors, but became so consumed with the idea that he decided to lead the company as CEO.
Due to Levchin’s far-reaching network in the Valley, he was able to raise the first round of seed funding soon after launch. Investors, you guessed it, included former PayPal acquaintances Peter Thiel and Reid Hoffman (via Greylock).
Affirm’s beta version was launched to the public in early 2013. The company’s first and only merchant partner was 1-800-Flowers, which they used to test the concept. The company launched during a time when trust and fondness for banks were at an all-time low.
Four of America’s leading banks were among the 10 least-loved brands. Moreover, over 71 percent of millennials stated that they would rather go to the dentist than listen to the advice of their bank.
Furthermore, credit card companies (which, in some instances, were operated by banks) often inserted hidden fees whenever a consumer’s card would be over the limit. Transparency about interest rates and potential penalties was pretty much non-existent.
Affirm launched with the belief that consumers, especially millennials, would gravitate towards the company’s promises. The startup would put transparency and accessibility at the epicenter of their operations.
Consumers would not encounter any hidden fees. Furthermore, interest was kept fixed and be made transparent upon completion of the purchase.
Another major advantage was that Affirm was a lot faster and more generous with handing out loans. Credit card companies would often decline customers if they had any negative data points in their credit reports. Affirm would be less restrictive in this regard and often hand out loans to consumers that traditional institutions would deem too risky.
Affirm’s focus on big data and machine learning allowed them to mitigate that risk. Instead of only looking at a consumer’s FICO score, the firm would take more than 80 data points into account.
It, for instance, would look at a consumer’s social media presence and behavior. The algorithms are complex by design so that no one can trick the system by, for instance, posting “brain surgeon” as a new job on LinkedIn and then applying for a big line of credit.
By mid-2014, Affirm had already raised more than $50 million in venture funding while amassing a team of 32. Because of Affirm’s confidence in their algorithms (and Levchin’s financial ties), it was able to fully take on the risk of the consumer loans it underwrote.
This allowed Affirm to quickly onboard many new merchant partners, which helped to build up the supply side of their marketplace.
Over the next years, Affirm continued to expand its merchant as well as a customer base. The startup even acquired two companies, LendLayer in 2015 and Sweep in 2016, themselves. Despite Affirms overwhelming success, its rise to the top did have its bumps along the way.
The company encountered numerous instances of public criticism. Consumer activist groups and finance academia was issuing concerns that Affirm’s less stringent loan application process would target the poorest people of society and putting them into debt they cannot recover from.
But despite these roadblocks, Affirm has been going strong ever since the company’s inception. The coronavirus pandemic, in particular, allowed the company to grow at a rapid pace.
The explosive growth, furthermore, enabled Affirm to make some significant acquisitions. In December 2020, for example, it purchased Canadian BNPL provider PayBright for CA$340 million.
The consistent growth ultimately allowed Affirm to go public on the Nasdaq stock exchange in January 2021. Some of the proceeds from the IPO were used to make additional acquisitions such as Returnly, a returns payment platform, which Affirm bought for about $300 million in April.
Its shares skyrocketed after Affirm, within weeks of each other, announced integrations with both Apple and Amazon. At the time of the IPO, almost 30 percent of Affirm’s revenue could be attributed to Peloton. With those two deals, it could further decrease its reliance from the bike maker.
Apart from increasing independence, it also needed to fend off competition. In August, the same month those two partnerships were announced, Square (now Block) acquired Affirm competitor Afterpay for a whopping $29 billion.
Throughout the coming months, Affirm doubled down on its ambition to become a financial super app. It, for example, launched a debit card as well as savings account and the option to purchase crypto all in the second half of 2021.
How Does Affirm Make Money?
Affirm makes money on the interest it charges for its consumer loans, interchange fees, as well as fees paid by the merchants to handle payments on their behalf.
Let’s take a closer look at each of Affirm’s revenue streams in the section below.
Interest Rates
Affirm generates revenue on the loans that it issues to consumers. The biggest draw for Affirm is that it does not impose any hidden fees (for instance on late payments) and makes the interest rate transparent upfront.
Rates range from anywhere between 0 percent to 30 percent APR. Affirm claims that its average loan size is around $750. Customers normally pay it back within nine months at an APR of 18 percent. This is equal to a monthly payment of $90 and a total order volume of $807.
Next to venture capital funding, Affirm has also raised over $100 million in debt financing from Morgan Stanley and other financial institutions. The cash allows them to underwrite loans themselves, which generates higher margins in the long run.
To minimize risk, Affirm takes into account over 80 factors that feed its credit assessment algorithms. Example data points include:
- A user’s social media behavior
- Timeliness of past payments, such as rent or college loans
- US reported education, employment, and income
- Types of purchases a customer makes, especially in relation to their financial means
According to CEO Levchin, almost all of the loans the company issues are paid back in time. A detailed figure has not been provided today.
In some instances, Affirm’s financing service is available at 0 percent APR. While the company does not make any money on interest, it does so through merchant fees, which we are going to discuss next.
In January 2021, Affirm launched a shopping app as well as Google Chrome extension, which gives customers two additional avenues to use the service. Competitors such as Afterpay, Klarna, or Sezzle have similar offerings in hopes of keeping consumers engaged.
Merchant Fees
Affirm charges merchants a percentage fee for every sale that is conducted through its platform. The company does not publicly disclose its fee structure, but it reportedly falls somewhere between 2 percent to 3 percent.
The actual fees are dependent upon the expected sales volume, purchasing price, and types of goods sold.
A partner like Apple or Amazon will certainly pay a much lower fee due to their brand (and thus negotiation) power.
Merchants pay Affirm a fee for handling everything with regards to the payment process as well as for taking on the risk of payment default.
Furthermore, Affirm claims that working together with them leads to 85 percent higher order volumes and a 20 percent increase in repeat purchases.
Interchange Fees
In October 2021, Affirm unveiled multiple debit cards that are issued in partnership with payment processor Visa.
The debit card as well as other products, such as its dedicated shopping app (released in January 2022), are part of its goal to become a financial super app.
That means Affirm not only wants to incentivize users to make loans but to become a greater part of a user’s life. This has two major advantages.
First, Affirm gets more data points about a user’s financial situation and spending habits, which it can use in turn to better assess risk about loans defaulting.
Second, it can open up new monetization channels for the company. With regards to the debit card, which had over one million people on the waitlist before the launch, Affirm generates revenue via so-called interchange fees.
These fees are paid by the merchant who accepts that payment. Visa, the card’s issuer, charges between 1.15 percent + $0.05 to 2.40 percent + $0.10.
Affirm and Visa then share the revenue between them. The actual split is not disclosed to the public,
Affirm Funding, Valuation & Revenue
According to Crunchbase, Affirm has raised a total of $1.5 billion across 1 rounds of venture capital funding.
Notable investors in the company include the likes of Spark Capital, Wellington Management, Founders Fund, Lightspeed Venture Partners, Khosla Ventures, Andreessen Horowtiz, and many others.
The company raised its latest round of funding in September 2020, which netted them $500 million in the process. Unfortunately, no valuation figures were shared publicly. Its prior Series F round, announced in April 2019, catapulted the company’s valuation to $2.9 billion.
When Affirm went public in January 2021, it raised another $1.2 billion. At the time, its business was valued at $11.9 billion. The valuation has largely remained unchanged ever since.
For the fiscal year 2021, Affirm generated $870.5 million in revenue, an increase of 71 percent from the year prior. The company lost $379.2 million over the same timespan.
