affirm-business-model

Affirm Fintech Payment Platform Business Model

Started as a pay-later solution integrated to 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.

The framework used to analyze the Affirm business model

The VTDF framework is the basis to analyze the Affirm business model.

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Origin story

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.

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The Affirm evolution, since its inception, in 2012. Some large merchants like Peloton Expedia, Dyson, and Walmart helped the company over the years to become known and scale its operations. Peloton is as of 2020, the major contributor to Affirm’s revenues. Indeed Peloton’s partnership made up about 28% of Affirm’s total revenues in 2020.
(Image Source: Affirm Prospectus).

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.

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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.

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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.

Customer profiling

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.

net-promoter-score

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.

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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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"