Started as a pay-later solution integrated into merchants’ checkouts, Affirm makes money from merchants’ fees as consumers pick up the pay-later solution. Affirm also makes money through interests earned from the consumer loans, when those are repurchased from the originating bank. In 2020 Affirm made 50% of its revenues from merchants’ fees, about 37% from interests, and the remaining from virtual cards and servicing fees.
|Buy Now, Pay Later||Affirm offers a “buy now, pay later” (BNPL) service that allows consumers to make purchases and pay for them over time through installment plans.||Provides consumers with flexibility and affordability in making purchases. Encourages higher order values and increased conversion rates for merchants.||Shoppers can select Affirm as a payment option during online checkout to split their purchase into manageable installments. Affirm then pays the merchant in full, and consumers repay Affirm over time with interest.|
|Consumer Financing||Affirm provides financing options for various types of purchases, including retail, travel, and services. Consumers can apply for loans with transparent terms and fixed interest rates.||Enables consumers to afford big-ticket items and services without the need for traditional credit cards. Gives consumers a transparent and predictable financing option.||Consumers can use Affirm to finance purchases ranging from electronics and furniture to travel and beauty services. Affirm’s loans typically have clear terms, including interest rates and repayment schedules.|
|Merchant Partnerships||Affirm partners with online and in-store retailers to offer its BNPL and financing services. Partnering with Affirm can attract more customers and increase average order values for merchants.||Attracts merchants by providing a competitive financing option that enhances the shopping experience. Expands Affirm’s reach by offering its services through a network of retail partners.||Affirm collaborates with a wide range of retailers, including eCommerce platforms, travel agencies, and brick-and-mortar stores. Customers can choose Affirm as a payment option when shopping at these partner locations.|
|Transparent Terms||Affirm emphasizes transparency by clearly displaying loan terms, including interest rates and repayment schedules, to consumers during the checkout process. This helps consumers make informed decisions.||Builds trust with consumers by providing clear and easy-to-understand loan terms. Reduces the risk of hidden fees or unexpected costs.||When consumers choose Affirm at checkout, they see the loan terms, including the interest rate, monthly payments, and total cost. This transparency allows consumers to make an informed choice before committing to the loan.|
|Credit Scoring||Affirm uses its proprietary credit scoring model to assess applicants’ creditworthiness and determine loan eligibility. The model considers various factors, including income, credit history, and transaction data.||Allows Affirm to serve a broad range of consumers, including those with limited credit history. Provides an alternative to traditional credit scoring methods, making financing accessible to more people.||Affirm’s credit scoring model evaluates applicants’ creditworthiness based on multiple data points, enabling a wider range of consumers to access BNPL and financing services.|
|Interest and Fees||Affirm generates revenue through interest and fees charged to consumers on financed purchases. Interest rates vary depending on the loan term and creditworthiness. Some loans may have no interest if paid within a specific period.||Provides a sustainable revenue stream based on interest income and fees. Offers flexibility with promotional zero-interest options. Encourages responsible borrowing by offering transparent terms.||Consumers may incur interest charges and fees on their Affirm loans, depending on factors such as the loan term and the terms offered by the merchant. Affirm may also offer promotional zero-interest options for specific loans.|
|Mobile and Online Access||Affirm’s services are accessible through its mobile app and website, allowing consumers to manage their accounts, make payments, and access customer support.||Provides convenience and accessibility for consumers to manage their accounts and payments. Enables customer support through digital channels.||Consumers can download the Affirm app or access their accounts online to view loan details, make payments, and receive customer support. The digital platform enhances the user experience and accessibility.|
|Value Proposition||Affirm’s value proposition centers on providing consumers with accessible and transparent financing options that enable them to make purchases they might not otherwise afford while offering clear terms and flexibility in managing payments.||Offers consumers an alternative to traditional credit cards with straightforward terms and predictable payments. Encourages responsible spending and financial control. Enhances the shopping experience with affordable financing options.||Affirm empowers consumers to make desired purchases by spreading payments over time, eliminating the need for high-interest credit cards and promoting transparent and responsible borrowing.|
|Customer Segments||Affirm’s customer segments include a wide range of consumers seeking financing solutions, from those with limited credit histories to individuals looking for flexible payment options. Additionally, merchants seeking to boost sales and conversions through financing options.||Diverse customer segments cater to individuals seeking affordable financing for various purchases and businesses looking to improve sales and customer satisfaction by offering Affirm’s financing solutions.||Affirm serves a broad spectrum of consumers who prefer transparent financing options and merchants seeking to attract and retain customers through flexible payment solutions.|
|Distribution Strategy||Affirm primarily distributes its services through digital channels, including its mobile app and website, allowing consumers to access its offerings conveniently. It also partners with a network of retailers and eCommerce platforms to offer its financing solutions.||Digital distribution ensures accessibility through mobile devices and web browsers. Collaborating with retailers expands Affirm’s reach and allows consumers to choose Affirm at the point of sale when shopping online or in physical stores.||Consumers can access Affirm’s services through its digital platform, while partnering with a diverse range of retailers and eCommerce platforms makes Affirm’s financing options available to a wider audience of shoppers.|
|Marketing Strategy||Affirm’s marketing strategy includes collaborating with merchants to promote its financing options during the checkout process, leveraging data-driven marketing to target potential consumers effectively, and offering promotions and partnerships to attract new users.||Drives consumer awareness and adoption by integrating Affirm as a payment option with partner retailers. Utilizes data-driven marketing to target potential consumers with personalized financing offers. Collaborates with merchants on promotions and special offers to encourage consumers to choose Affirm.||Affirm’s marketing efforts focus on enhancing the shopping experience by making its financing solutions accessible and attractive to consumers while collaborating with businesses to promote its services effectively.|
|Competitive Advantage||Affirm’s competitive advantage lies in its user-friendly BNPL platform, transparent and predictable loan terms, and a proprietary credit scoring model that expands access to financing for a broad range of consumers.||Offers a superior BNPL experience by providing clear terms and predictable payments. Broadens its user base through a unique credit scoring model that evaluates applicants based on various data points. Enhances consumer trust and loyalty through transparent financing.||Affirm’s strengths include a consumer-centric approach to BNPL, transparency in financing terms, and an inclusive credit evaluation method, which differentiate it from competitors and attract both consumers and merchant partners.|
Max Levchin, founder and CEO of Affirm, and former member of the PayPal team, who he had co-founded (as a software engineer) with venture capitalist Peter Thiel, saw an opportunity in the space of credit, back in 2012.
As he highlighted in the IPO prospectus, credit cards, which appeared a few decades ago, had improved from a physical standpoint (from the swipe to the chip), and yet the credit mechanism underlying it had not improved.
The opposite, it had devolved. Opaque credit fees buried into the cards’ financial statements became an opportunity for Affirm. Founded in 2012 with a mission-driven approach, where Max Levchin claims to have a built-in “moral backbone” into the way the company operates credit.
Morality here is intended as clarify and transparency in terms of fees that the consumer and merchant will pay. Thus, from there the Affirm business model was built. Therefore, technology here becomes simply a tool to make more transparent the fees due.
Mission, vision, and principles
Mission: Deliver honest financial products that improve lives.
Vision: To be as ubiquitous, secure, and convenient as legacy networks, yet far more transparent, honest, and both consumer and merchant-centric.
As a mission-driven company which founding aim is to “morally restructure” (make more transparent) one of the most opaque industries, Affirm leverages technology (Fintech) to make available to consumers and merchants a point-of-sale payment solution for consumers, a merchant commerce solution, and a consumer-focused app.
Affirm’s employees like to call themselves “Affirmers” and its five core values are:
- People come first.
- No fine print (no hidden fees or tricking statements for loans on the platform are a key element of its value proposition).
- It’s on us (accountability between employees and outside the company).
- Simpler is better.
- Push the envelope.
Value proposition, and key customers
Affirm main goal is to build a set of “honest financial products.” When the company started, just like PayPal narrowed down its market and scaled from there, it only had a “pay-over-time solution.” This became the battle horse and entry strategy for Affirm. Over the years, as more partnerships were signed and more consumers brought onboard, it expanded its suite of available applications.
Now Affirm comprises a suite of applications that go from its Pay-over-time solution, to Virtual Cards, Split Pay, Marketplace, and Savings.
The suite of applications that Affirm built over the years. It started from a pay over time application, and it scaled from there. (Image Source: Affirm Prospectus).
Affirm has two main stakeholders and customers: consumers and merchants.
Benefits of Affirm for consumers
Affirm claims a few key values for consumers:
- Simple, transparent, and fair (it’s spelled out how much is owed at checkout, and there are no further hidden or additional fees later on).
- User experience through a digital platform, that works in a few clicks for consumers.
Flexibility and control (perhaps consumers set their payment schedules biweekly, 3, 6, or 12 months).
Accurate credit pricing as the company claims to outperform traditional credit models (this is one of the core tech advantages claimed by Affirm).
Consumer trust through the monitoring of the merchants’ creditworthiness.
One of Affirm’s most important value propositions is its ease of use, a smooth platform for consumers. Above an example of the workflow followed by consumers to finalize the transaction and pick a payment plan according to her/his needs. (Image Source: Affirm Prospectus).
Benefits of Affirm for merchants
- More customers, higher conversion, and increased AOV, the company claims that with the option of Affirm at checkout more consumers get to the checkout and higher conversion is achieved. And this applies to higher average order value before refunds as well.
- Increased repeat purchase rate.
- Better data to inform personalized promotional strategies.
- Broader target market.
- Ease of integration.
- Compliance at API configuration, Affirm will handle the regulatory aspect of the loans facilitated through the platform.
As of September 2020, on the Affirm platform, more than 6.2 million consumers completed around 17.3 million transactions with more than 6,500 merchants with a Net Promoter Score score of 78 for the second half of 2020.
The Net Promoter Score (NPS) is a measure of a product or service’s ability to attract word of mouth advertising. NPS is a crucial part of any marketing strategy since attracting and then retaining customers means they are more likely to recommend a business to others.
While the company has over 6500 merchants on its platform, at the same time, there is a major contributor to its revenues, Peloton’s partnership. Peloton represented about 28% of Affirm’s total revenues by June 2020. Another important source of revenue for Affirm is the interest income earned from originating bank partners’ loans. When Affirm purchases the loan, it will make money from the interests earned over the consumer’s loan. Yet by 2020, approximately 15% of loan receivables related to customers residing in the state of California. This makes Affirm geographical exposure skewed toward California. The revenues skewed toward a single merchant is a risk, as to the loss of this single partnership, or perhaps a sudden reduced growth from Peloton might widely affect Affirm’s bottom line.
Affirm’s stack of applications is all built on a cloud-first platform.
The whole Affirm infrastructure is on top of the cloud, where the company built a set of applications for data management (credit, transaction, SKU-level, merchant consumer, and fraud data). From there, a set of machine learning algorithms, combined with predictive economic models, make up the Affirm’s platform. This platform then provides merchants the API to integrate it at checkout, a set of consumer products, and internal tools.
(Image Source: Affirm Prospectus).
The main elements of Affirm’s technology are:
- Fraud detection capabilities which is a built-in capability of Affirm to assess transaction fraud risk, that leverages data combined with a fraud risk model, together with other 40-80 data points.
- Credit check capabilities, a risk model taking five top-of-mind data points, combined with other 200 data points to assess the credit risk of new consumers.
- Modeling improvements to respond to changes in context, environment.
- Data privacy and security.
As of September 2020, 47% of Affirm employees were in engineering and technology-related roles. Affirm emphasizes its role as a tech company, developing from scratch part of the platform that offers services to both consumers and merchants.
Distribution, Sales and Marketing models
Affirm go-to-market strategy Affirm has been entering through its pay-over-time solution by expanding its merchants’ partnership. Being in the checkout of known merchants enables Affirm to become a consumer brand while getting to them via other merchants. This is a B2B2C model, whereas the more Affirm grows through merchant’s partnerships, the more it grows as a consumer brand.
And it also speeds up its adoption, as the more consumers trust Affirm as a brand, the more merchants will want to have Affirm as their main checkout option.
Affirm claimed flywheel
As more consumers join through the merchant’s checkouts, the stronger the ecosystem. And as more consumers get exposed to the Affirm brand, they will trust it as the go-to solution. Thus more merchants will want to join. That will make Affirm able to offer more products and grow the volume of transactions on the platform, to offer better data insights to the merchants and further improve the user experience. This is the claimed Affirm flywheel in action (Image Source: Affirm Prospectus).
The platform has over 6500 merchants, spanning across several industries.
Some of the cherry-picked partnerships that Affirm has signed over the years (Image Source: Affirm Prospectus).
Since merchant partnerships are such an important part of Affirm’s growth, the company has therefore invested in merchant marketing activities, consisting primarily of providing technological support to merchants to develop tools that can help them grow their business while using Affirm’s solutions.
Multi-pronged growth strategy
- Expand To More Higher Frequency Purchases.
- Expand Consumer Reach (more consumers to the network, repeat use, and new product solutions).
- Expand Merchant Reach.
- Expand to New Markets.
Financial Model And Economics Of The Affirm Ecosystem
The economics of an Affirm’s transaction starts with the consumer purchase. Perhaps assuming a purchase of $1000 on a Merchant connected to the Affirm’s checkout, once the consumer opts in to Affirm plan, she/he will owe $1000 + interests to Affirm. On the other side, the merchant will make $950 out of the $1000 ($50 is the fee Affirm will collect at the end of the transaction). In parallel, Affirm will send the $1000 loan + fee to the originating bank, and it will buy the loan after a few days. From there, the originating bank will send the $50 fee back to Affirm. In this way, Affirm will make money through merchant fees, consumers’ interests on the loan, and on the difference between the purchased loan from the originating bank (this amount might also be negative (Image Source: Affirm Prospectus).
As we’ll see Affirm makes money primarily via fees earned from merchants. However, when the consumer opts into the Affirm plan, if the company buys this loan from the originating bank, it will also make money from the interests earned over time. Let’s assume two scenario to understand the economics of the Affirm’s platform:
- Affirm gets the merchant fee, but it doesn’t buy the originating bank’s consumer loan: In this case, Affirm will make money only from the merchant fee earned. As the consumer loan gets to the originating bank partner, the bank will pay back the fee to Affirm.
- Affirm gets the merchant fee, and it does buy the consumer loan from the originating bank: In this case, instead, Affirm will make money both on merchant fee and on interests maturing from the consumer loan. Indeed, as the loan is passed to the originating bank, Affirm will buy this back after a few days. Therefore, the originating bank will pay to Affirm the merchant fee. And Affirm will take over the consumer loan. This means the consumer will pay the installments directly to Affirm. It’s important to understand this dynamic as this changes the whole financial model. In fact, Affirm will anticipate the cash to the originating bank to buy the consumer loan, and it will earn it back as the consumer completes the loan payments. This results in a cash negative financial model. Where Affirm anticipates the money from the loan, it gets it back over time, with interests. As those are personal loans, they do not have any collateral, neither is guaranteed nor insured by a third-party. Therefore, any failure from the consumer to pay back Affirm will generate a large loss. It’s important that Affirm can fairly predict the consumers who will be able to repay back to loans, and therefore only purchase those with higher potential predictive scores.
Affirm primarily makes money by collecting fees from merchants, and through the interests earned on consumers’ loans, when those are purchased from the originating bank (the bank to which the instalments are initially due by the consumer). Affirm also issues virtual cards to consumers through the app, thus making money as a portion of the interchange fee from the transaction.
Therefore the revenues can be broken down into:
- Merchant network revenue collected as Affirm charges a fee on each transaction processed through the platform. In 2020, 50% of Affirm’s revenues came from the merchant network fees.
- Interest income earned on the loans purchased from the originating bank partner. In 2020, Affirm generated 37% of its revenue, from interest income.
- Virtual card network revenue for the creation of virtual debit cards used by customers at checkout which generated 4% of its total revenues in 2020.
- Gain (loss) on sales of loans as Affirm sells a portion of the loans purchased from the originating bank partner to third-party investors through its platform, which generated 6% of its total revenues in 2020.
- Servicing income for providing professional services to manage loan portfolios on behalf of Affirm’s third-party loan owners which made up 3% of its revenues in 2020.
Operating expenses primarily comprise commitment made to the originating bank partner, the provision for credit losses, funding costs, processing and servicing, technology and data analytics, sales, and marketing.
Cash Generation (or Cash Burning)
Since its inception, Affirm accumulated a deficit of $462.4 million as of September 30, 2020, primarily financed through sales of equity, borrowings, and third-party loan sale arrangements.
Key Business Models Highlights
- Affirm’s primary goal is to make loans and pay later solutions as transparent as possible in an industry driven by opaque gains and hidden fees.
- Affirm is a fintech platform entirely built on cloud infrastructure pay-later solutions to consumers at checkout and a set of other applications for both merchants and consumers.
- Affirm technology is based on a mixture of proprietary applications and machine learning models which aim is both to predict the ability of consumers to repay their loans (as Affirm has no collateral for the purchased loan), for consumers to have the scoring of merchants’ trust and to offer a set of additional tools to merchants and consumers.
- The company primarily makes money through merchants’ fees as consumers opt in the Affirm’s pay-later solution. Affirm also earns interest when it buys back the consumer’s loan from the originating bank.
- Affirm leverages on flywheels come from data networks, merchant partnerships, and brand recognition at the consumer level to scale up its operations.
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The framework used to analyze the Affirm business model
- Revenue Generation: Affirm generates revenue through various avenues, including merchant network fees, interest income from consumer loans, virtual card network revenue, gain or loss on sales of loans, and servicing income. In 2020, approximately 50% of Affirm’s revenue came from merchant network fees, 37% from interest income, 4% from virtual card network revenue, 6% from gain or loss on sales of loans, and 3% from servicing income.
- Origin Story: Founded in 2012 by Max Levchin, Affirm was built with a mission to deliver honest financial products that improve lives. Max Levchin, a former member of the PayPal team, saw an opportunity to address the lack of transparency in credit card fees and developed Affirm to offer more transparent credit solutions.
- Mission and Principles: Affirm’s mission is to deliver honest financial products that improve lives, with a vision to provide a transparent, secure, and convenient alternative to legacy networks. The company follows five core values: putting people first, providing transparency, being accountable, focusing on simplicity, and pushing boundaries.
- Value Proposition and Key Customers: Affirm’s value proposition revolves around providing honest financial products to both consumers and merchants. For consumers, this includes simplicity, transparency, flexibility, and accurate credit pricing. For merchants, it leads to higher conversion rates, increased average order value, better data insights, and compliance support.
- Partnerships: Affirm partners with merchants to offer its pay-later solutions at checkout. The company has over 6,500 merchant partners across various industries. Large partnerships, such as with Peloton, have significantly contributed to Affirm’s growth.
- Technology and Data: Affirm’s technology is cloud-based and relies on machine learning algorithms and predictive economic models. It utilizes data to assess transaction fraud risk, credit check capabilities, and modeling improvements for personalized strategies. Data privacy and security are prioritized.
- Growth Strategy: Affirm’s growth strategy includes expanding to higher-frequency purchases, reaching more consumers, expanding merchant reach, entering new markets, and offering a suite of applications beyond its pay-over-time solution.
- Economics of Transactions: Affirm’s economics involve collecting fees from merchants, earning interest from consumer loans, and purchasing loans from originating bank partners. Affirm’s revenue is a combination of merchant fees, interest income, virtual card network revenue, loan sales, and servicing income.
- Cost Structure: Affirm’s operating expenses encompass commitments to originating bank partners, provision for credit losses, funding costs, processing and servicing, technology and data analytics, as well as sales and marketing.
- Cash Generation: Since its inception, Affirm has financed its operations primarily through equity sales, borrowings, and third-party loan sale arrangements. As of September 30, 2020, the company had accumulated a deficit of $462.4 million.
- Flywheel: Affirm’s growth is fueled by a flywheel effect, where data networks, merchant partnerships, and brand recognition contribute to a self-reinforcing cycle of growth.
- Consumer Trust: Affirm’s focus on transparency, fairness, and simplicity in its financial products aims to build consumer trust in an industry known for hidden fees and lack of clarity.
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