DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech unicorn, discussing its history, products / services, and how it has grown to be an industry leader. 

“We’re here to improve lives. If that means more work for us, or that we make less money, we will always take the more difficult path in favor of treating people better.”

Max Levchin, Founder & CEO of Affirm

Affirm is a San Francisco-based financial technology company providing installment purchase loans at point-of sale for US consumers. Founded in 2012, the fintech unicorn offers an online and mobile platform for lending and credit services that allows customers to buy what they want and pay over time. Purchases are filled with simple-interest loans without higher-rate penalties or late fees. The result is a transparent buying decision on the total cost a consumer will pay over the life of a loan.

HISTORY OF AFFIRM

Affirm was founded by Max Levchin, Nathan Gettings, and Jeffrey Kaditz — originally part of HVF’s initial portfolio (Max’s startup / incubator studio). Levchin made his name as a co-founder of PayPal back in 1998, launched Slide.com, and was an early investor in Yelp. Gettings was the co-founder of Palantir (a big data startup).

Max formerly took on the role of Affirm’s CEO in 2014, after validating significant traction in early product testing. In the same year, Affirm raised a $45 million round from Khosla and  Lightspeed Ventures and grew the company to a team of 32.

In 2015, the company raised $275 million in debt and equity financing and partnered with Clover (a point of sale system) to capture purchase traffic at brick-and-mortar stores. Affirm also worked with coding bootcamps (such as General Assembly) to help incoming students pay for courses.

In October 2017, the company launched a consumer app that allowed loans for purchases at any retailer instead of only in-network merchants. The online checkout option of “Pay with Affirm” was becoming widely popular among young millenials and Gen X shoppers.

In February 2019, Affirm made a landmark partnership with Walmart that allowed customers to make purchases both in store and on the company’s website. The fintech lender was now available in over 4,000 brick-and-mortar stores as an exclusive partner.

Two months later in April, the company raised a Series F round of $300M at a $3B valuation, led by Thrive Capital. Investors to date included Ribbit Capital, Founders Fund, Andreessen Horowitz, Khosla Ventures, and Lightspeed Venture Partners.

Additional notable partnerships have been made with e-commerce platforms Zen-Cart, BigCommerce, and Shopify — as well as top live event ticket provider, StubHub (in January 2020).

how it WORKS

Affirm facilitates microloans at point of sale as a fast, transparent, and inclusive lending alternative to costly credit cards. Shoppers are able to check their eligibility before buying and receive a decision in real time (with no impact to credit scores unless they move forward with a purchase). Individuals can opt for a repayment plan of 3, 6, or 12-month installments and are shown the total repayment amount owed (in dollars, not as a %) without hidden fees. Everything from sneakers to jewelry now has an option of “Pay with Affirm.”

Customers enter basic info and receive a decision in seconds (instead of days) about being approved. Using machine learning, multiple data points and criteria are evaluated besides FICO score to decide on ability to pay — such as social media and purchase details. There is no paperwork, minimum credit score, or income required. Consumers are able to put it on their “(digital) tab” to buy a product now and pay later.

Lower interest rates, increased transparency, and flexible payments plans make Affirm appealing to millennials and young shoppers lacking established credit. Merchants flock to Affirm because the fintech lender assumes all the lending risks and allows for customers to make larger and more frequent purchases.

Affirm generates revenues from fees merchants pay to offer the new payment option, a small percentage of sales, interchange revenue from purchases with their virtual card (see below), and interest revenue on loans. Interest rates vary depending on the retailer, from 0% - 29.99%. The loans are offered in partnership with Affirm’s bank partner, Cross River Bank.

AFFIRM’s PRODUCT offerings

Affirm’s core product is the payment option of purchases through an installment loan. The initial focus was on growing merchant partnerships individually by integrating into their site’s shopping cart page. Once the lender rolled its own new app for customers to shop at “virtually any store” — pools of retailers and brands became instantly available as prospective shoppers now became pre-qualified to shop everywhere. By providing personal information (name, phone number, email address, date of birth, and last four digits of social security number) for a soft-credit pull, approved customers gained a virtual card to pay for their future purchase. These virtual cards could be loaded to Apple Pay and Google Pay wallets instantly.

The fintech lender also lauched in the B2B lending space by creating a separate financial services business. In April 2019, Resolve branched out from Affirm to provide a similar “buy now, pay later” product for business clients that expands traditional payment terms of net 30 (i.e. payment in full in 30 days), to 60 or 90. These favorable plans were being offered only to established, high-revenue companies in the past. All other firms would opt for short-term financing through costly credit cards. Increasing flexibility and payment horizons has a positive impact on companies that struggle with cash flow shortages in the near-term, saving on interest.

Affirm has hinted at launching its own savings product as well —currently invitation-only. This is a great segway into a powerful add-on consumer product that may minimize the need for lending products, but also increase a customer’s ability to repay and qualify for larger-size purchases.

what’s next for fintech consumer lending

A general industry concern becomes magnified with lenders in the personal lending space — overspending leads to unmanageable debt obligations. For millennials that have lived through the Financial Crisis of 2008 - 2009 and now the pandemic of COVID-19, carrying excessive credit card debt and paying high interest rates isn’t financially feasible. High credit utilization rates trigger poor credit scores, making it difficult for consumers to lower interest rates and qualify for auto loans and mortgages in the future. The goals of home ownership and starting a family continue to get pushed out further due to struggles with debt.

Partnerships will increase as banks aim to compete in the point-of-sale loan segment by partnering with Affirm-like competitors such as Afterpay, Sezzle, Klarna, and Splitit. There are also exclusive deals being made outside of partnerships, such Citizens Bank supporting Apple on its point-of-sale integration and Ally Bank acquiring Health Credit Services to expand lending functionality.

As the global economy continues to adjust to the impact from COVID-19, the personal lending model will be tested in terms of growth and viability. Record-levels of unemployment are directly impacting consumer spending, especially of non-essential purchases. Credit qualification models based on alternative data will be truly tested as customers struggle to pay on existing loan obligations. How long will fintech lenders be able to hold out on payment deferral requests from clients?

As a key leader in the personal lending space, all eyes will be on Affirm in 2020 and its ability to weather the current storm. Once the economy starts showing signs of stability, expect Affirm to follow though on its rollout of a savings account, and other complementary products to its consumer programs. The fintech could also start exploring direct partnerships in large purchase categories such as motor vehicles and travel, which would satisfy the nation’s pent-up demand to escape their neighborhood for a vacation (instead of “staycation”).

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