How Does Affirm Make Money? Affirm Business Model Analysis

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.

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.

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.

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.

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.

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.

Technological model

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).

Partnerships

Merchants’ partnerships are critical for Affirm growth, both in terms of revenues and brand awareness.

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

Affirm growth strategy moves around a few key areas:

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.

Revenue model

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.

Cost structure

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.

Find the Full 10-Pages Business Model Analysis in 100+ Business Models.

The framework used to analyze the Affirm business model

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

Key Highlights

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.

List of FinTech Business Models

Acorns

Acorns is a fintech platform providing services related to Robo-investing and micro-investing. The company makes money primarily through three subscription tiers: Lite – ($1/month), which gives users access to Acorns Invest, Personal ($3/month) that includes Invest plus the Later (retirement) and Spend (personal checking account) suite of products, Family ($5/month) with features from both the Lite and Personal plans with the addition of Early.

Affirm

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.

Alipay

Alipay is a Chinese mobile and online payment platform created in 2004 by entrepreneur Jack Ma as the payment arm of Taobao, a major Chinese eCommerce site. Alipay, therefore, is the B2C component of Alibaba Group. Alipay makes money via escrows transaction fees, a range of value-added ancillary services, and through its Credit Pay Instalment fees.

Betterment

Betterment is an American financial advisory company founded in 2008 by MBA graduate Jon Stein and lawyer Eli Broverman. Betterment makes money via investment plans, financial advice packages, betterment for advisors, betterment for business, cash reserve, and checking accounts.

Braintree

Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.

Chime

Chime is an American neobank (internet-only bank) company, providing fee-free financial services through its mobile banking app, thus providing personal finance services free of charge while making the majority of its money via interchange fees (paid by merchants when consumers use their debit cards) and ATM fees.

Coinbase

Coinbase is among the most popular platforms for trading and storing crypto-assets, whose mission is “to create an open financial system for the world” by enabling customers to trade cryptocurrencies. Its platform serves both as a search and discovery engine for crypto assets. The company makes money primarily through fees earned for the transactions processed through the platform, custodial services offered, interest, and subscriptions.

Compass

Compass is a licensed American real-estate broker incorporating online real estate technology as a marketing medium. The company makes money via sales commissions (collected whenever a sale is facilitated or tenants are found for a rental property) and bridge loans (a service allowing the seller to purchase a home before the revenue from the sale of their previous home is available).

Dosh

Dosh is a Fintech platform that enables automatic cash backs for consumers. Its business model connects major card providers with online and offline local businesses to develop automatic cash back programs. The company makes money by earning an affiliate commission on each eligible sale from consumers.

E-Trade

E-Trade is a trading platform, allowing investors to trade common and preferred stocks, exchange-traded funds (ETFs), options, bonds, mutual funds, and futures contracts, acquired by Morgan Stanley in 2020 for $13 billion. E-Trade makes money through interest income, order flow, margin interests, options, future and bonds trading, and through other fees and service charges.

Klarna

Klarna is a financial technology company allowing consumers to shop with a temporary Visa card. Thus it then performs a soft credit check and pays the merchant. Klarna makes money by charging merchants. Klarna also earns a percentage of interchange fees as a commission and for interests earned on customers’ accounts.

Lemonade

Lemonade is an insurance tech company using behavioral economics and artificial intelligence to process claims efficiently. The company leverages technology to streamline onboarding customers while also applying a financial model to reduce conflicts of interest with customers (perhaps by donating the variable premiums to charity). The company makes money by selling its core insurance products, and via its tech platform, it tries to enhance its sales.

Monzo

Monzo is an English neobank offering a mobile app and a prepaid debit card for consumers and businesses. It was one of the first app-based banks to enter the UK market, founded by Gary Dolman, Jason Bates, Jonas Huckestein, Paul Rippon, and Tom Blomfield in 2015. All were employees of Starling Bank, a similar neobank challenging the dominance of established financial institutions in England. The company enjoys many revenue streams: business and consumer subscriptions, interchange and overdraft fees, personal loans, and more.

NerdWallet

NerdWallet is an online platform providing tools and tips on all matters related to personal finance. The company gained traction as a simple web application comparing credit cards. NerdWallet makes money via affiliate commissions determined according to the affiliate agreements.

Quadpay

Quadpay was an American fintech company founded by Adam Ezra and Brad Lindenberg in 2017. Ezra and Lindenberg witnessed the rising popularity of buy-now-pay-later service Afterpay in Australia and similar service Klarna in Europe. Quadpay collects a range of fees from both the merchant and the consumer via merchandise fees, convenience fees, late payment, and interchange fees.

Revolut

Revolut an English fintech company offering banking and investment services to consumers. Founded in 2015 by Nikolay Storonsky and Vlad Yatsenko, the company initially produced a low-rate travel card. Storonsky in particular was an avid traveler who became tired of spending hundreds of pounds on currency exchange and foreign transaction fees. The Revolut app and core banking account are free to use. Instead, money is made through a combination of subscription fees, transaction fees, perks, and ancillary services.

Robinhood

Robinhood is an app that helps to invest in stocks, ETFs, options, and cryptocurrencies, all commission-free. Robinhood earns money by offering: Robinhood Gold, a margin trading service, which starts at $6 a month, earn interests from customer cash and stocks, and rebates from market makers and trading venues.

SoFi

SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.

Squarespace

Squarespace is a North American hosting and website building company. Founded in 2004 by college student Anthony Casalena as a blog hosting service, it grew to become among the most successful website building companies. The company mostly makes money via its subscription plans. It also makes money via customizations on top of its subscription plans. And in part also as transaction fees for the website where it processes the sales.

Stash

Stash is a FinTech platform offering a suite of financial tools for young investors, coupled with personalized investment advice and life insurance. The company primarily makes money via subscriptions, cashback, payment for order flows, and interest for cash sitting on members’ accounts.

Venmo

Wealthfront

Wealthfront is an automated Fintech investment platform providing investment, retirement, and cash management products to retail investors, mostly making money on the annual 0.25% advisory fee the company charges for assets under management. It also makes money via a line of credits and interests on the cash accounts.

Zelle

Zelle is a peer-to-peer payment network that indirectly benefits the banks’ consortium that backs it. Zelle also enables users to pay businesses for goods and services, free for users. Merchants pay a 1% fee to Visa or Mastercard, who share it with the bank that issued the card.