The Affirm Business Model – How Does Affirm Make Money?

Executive Summary:

Affirm is a FinTech company that issues point-of-sale loans to consumers. It works together with merchants, such as Walmart or Shopify, to over loans ranging from 3 to 36 months. Customers directly transact with Affirm via the company’s website or one of its mobile apps.

Affirm makes money through the interest that customers pay on the loan. The company’s average APR is 18 percent. Merchants furthermore pay Affirm a percentage fee of the product’s sales price in exchange for managing the payment and taking on the risk of default.

Founded in 2012 and headquartered in San Francisco, Affirm has become one of the world’s biggest startups in the consumer lending space. It now counts more than 6 million customers while partnering with over 3,000 merchants across the United States.

What Is Affirm & How Does It Work?

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:

  1. The customer places the desired products in the shopping cart and selects Affirm as the desired checkout method
  2. Next, they select the payment schedule. Affirm installments range anywhere from 3 to 36 months. The company makes the amount of interest transparent upon checkout while interest rates remain fixed throughout the payment cycle.
  3. 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 3,000 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.

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.

A Short History Of Affirm (And Max Levchin)

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 history
Wayback Machine

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. Nowadays, more than 1,000 people work for the company across five offices. The firm now serves over 6 million customers that can buy products from a pool of 3,000 merchants.

In October 2020, Affirm filed confidentially to become a public company. The company is set to IPO by the end of 2020.

How Does Affirm Make Money?

Affirm makes money on the interest it charges for its consumer loans as well as fees paid by the merchants to handle payments on their behalf.

So far, the firm has stirred away from focusing on any other income channels. Given that the global market for online payments is valued at almost $5.5 trillion, there’s plenty of money to be made within its current business model.

Let’s take a closer look at each of the two revenue streams down 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.

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.

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.

Affirm Funding, Valuation & Revenue

According to Crunchbase, Affirm has raised a total of $1.5 billion across 9 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.

The firm is set to target a valuation of $10 billion during its IPO. Affirm is going public by the end of 2020. For reference: Affirm’s European counterpart Klarna gathered a valuation of $10.6 billion during its most recent funding round.

For the fiscal year 2020 (ending in June), Affirm generated $509.5 million in revenue while posting a net loss of $112.6 million over the same timeframe. In the year prior, the FinTech generated $264.4 million in revenue while loosing $120.5 million.

One noticeable bit about Affirm’s income statement is that about 30 percent of the company’s revenue can be attributed to Peloton, the bike producer taking the world by storm. This consequently poses a major risk for Affirm going forward while giving Peloton some leverage in future negotiations.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..