Affirm is a fintech company started by Max Levchin in 2012 who is also the co-founder of PayPal.
The company is publicly traded and is based in San Francisco, California. The company is a rapidly growing fintech in the US and Canada and is giving tough competition to other start-ups sprouting up in a similar domain.
Affirm provides loans to customers based on a Point-of-sale (POS) mechanism and this feature is widely liked by customers. This feature has attracted merchants and consumers as it provides greater payment flexibility.
Affirm is targeted towards the millennial and Gen Z category which have multiple expenditures, lesser wealth and lesser income. Affirm issues loans to individuals who have a proven record of timely repayments and good credit scores.
Based on the customer's portfolio, the loan amount is sanctioned to the consumer who can repay the loans within 3 to 26 months. Affirm also provides an app other than its website where the customers can manage their transactions, Affirm account, instalments and set up their bank details, among others.
Affirm makes money through the interest it levies on its customers, the interchange fees, merchant fees and through the sale of loans. Affirm has more than 11 million customers and has more than 1 million merchants in its brigade.
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How does Affirm Make Money?
History of Affirm
Affirm was brought into existence by four partners. These were Max Levchin, Nathan Gettings, Jeffery Kaditz and Alex Rampell.
Affirm started as an initial portfolio or a startup studio. Max Levchin became the CEO of Affirm in 2014; he was also the co-founder of the payments transaction company PayPal.
The great boost of affirming came when the company launched its consumer app in October 2017. The app allowed the consumers to get instant loans with easy repayment options and lower interest rates.
Affirm partnered with Walmart in February of 2019 as one of its payment mechanisms. Under this, any customer of Walmart whether at its store or during online shopping, can select Affirm as its mode of payment.
Affirm accesses the customer profile and based on its merit will generate a loan under his name and the customer can checkout from Walmart without paying a single penny. The customer is obliged to pay Affirm based on the loan policy, duration and interest rate applicable.
Since its huge success with Walmart, it, later on, went ahead and partnered with Shopify, BigCommerce and Zen-cart. Affirm has now established quite a name for itself and is dominating in the sector of POS loans. Major merchant partners of affirming include the domains of fashion, electronics, automobiles and even American Airlines.
Affirm founder Max Levchien was inclined to programming from an early age. Born and brought up in the initial years in Kyiv, Ukraine, he along with his family migrated to the US.
There, Max did his higher education in Computer science at the University of Illinois. In 1997, Levchin went to San Francisco to learn more about programming and its capitalization.
Not only was Max Levchin a good programmer but he was also a good entrepreneur. By the time when he moved to San Francisco, he had started three businesses out of which many failed.
One of the businesses called NetMeridian succeeded and was sold to Microsoft at $100,000. When he completed his graduation he kept himself busy by attending lectures at Stanford University. Thus he was a keen learner who did not stop after his education and early success.
At the University of Stanford, he met Peter Theil, one of his professors whom he managed to convince to invest in his business. This business was PayPal which was joined by other foreseers who boosted PayPal's value to what it is today. PayPal was sold to eBay for $1.5 billion after going public.
Levchin started with yet another business called HVF (Hard, Valuable, Fun) just after he exited PayPal. This was a startup incubator that produced successful pickups like Yelp which was joined by Levchin as a board member.
The next successful startup was Slide which was co-founded by Levchin in 2004. It was sold to Google for $180 million in 2010. Levchin felt the need to revive HVF and it was around that time when Affirm came into fruition.
Affirm Business Model & Evaluation
The company provides a point of sale service to its customers. It has developed a network of partner merchants who allow Affirm as their payment getaway.
When a person selects Affirm as their payment option, they are issued the credit loan based on their credit score registered with the government. The applicant's request is processed and issues an APR which is the interest rate specific to that client. The maximum amount of loan that the consumer can get is $17500 with repayment options as less as 3 months and as much as 36 months.
The main industries of Affirm are the fashion industry, dentistry, electronics, automobile and other industries. Some strongest partners of Affirm are Adidas, Peloton, StockX, Walmart and Eventbrite.
The payment is made directly to Affirm with an interest rate ranging from 0-30%. Even though many other companies are providing POS services, Affirm does not charge any fee for account setup, late payments, after services or prepayment.
Affirm conducts a soft credit check before issuing the credit. The results of this credit check are solely for Affirm's purpose and have no impact on the credit score saved with the government or with banks.
However, if a customer is late in repaying the loan, this will be informed to the bureau and banks. Most of the merchants are opting for Affirm as they report an increase in their sales as high as 85%.
The future growth engine for Affirm is directed towards increasing its merchant base as wide as possible so that more people have access to choose Affirm as their payment getaway.
The 2020 pandemic saw a huge rise in its merchant network but still Affirm has a long way to go. Its closest competitors are Klarna and Afterpay which continue to dominate the market in POS loan facilities.
Affirm had made a deal with Shopify which has opened new avenues for an increase in its sales volume. The Shopify network and users will have access to choose Affirm as their payment option which will increase merchants as well as customers of Affirm.
Affirm also purchased Returnly which is a provider of post-purchase payment getaways.
Affirm was first in line to provide POS service but many other companies have been caught in the line. The main competition for Affirm comes from companies that do not require any APR and will guarantee the payment to the requesting consumer.
This causes a gradual shift of the consumers from Affrim to other vendors who are ready to give the credit without any check but will bother later for repayments, often at unfairly high-interest rates.
The top competitors of Affirm are Sezzle, PayPal Credit, Klarna Afterpay, GoCardless and Quadpay. These competitors are competing for the territories of the US and Canada and many have expanded internationally as well.
Affirm must also engage with new customers and provide them with the facility to choose and decide which POS service they like best. Further, Affirm must propagate and market its app and debit card feature that might attract newer customers and merchants as well.
How Does Affirm Make Money
Affirm's money-making process is divided into two sources- customers and merchants. The interest rate is charged by the customers and the merchants are levied a merchant fee that they have to pay for every Affirm transaction of the customer.
How does Affirm make money?
Affirm can be described as an instant loan provider. This loan has an interest rate and this is paid by the consumer to Affirm in instalments. This becomes Affirm's income.
The average interest rate is 18%, almost 43% of loans are processed at a 0% interest rate and from here, Affirm is not getting any money. The interest rate is dependent on the consumer and the merchant as well.
Affirm states that its average loan amount is $750 as people generally use it for purchasing grocery or salon visits, or other short expenditures, although the loan amount can go as high as $17500.
Affirm is associated with Cross River Bank and Celtic Bank which underwrite most of Affirm's loans. Loans with Affirm are not always guaranteed; they might get rejected if the credit score is not satisfactory.
The issue of the loan is based on several parameters and not the credit score alone. Factors such as shopping patterns, travel and frequency of dining out and other lifestyle studies are done on the consumer to create a probability of the return of the loan from the consumer's side.
Affirm does not explicitly Mention how much it is charging the merchants but it could be anywhere between 2-18%. This merchant fee is dependent on the amount of sale done, types of goods and course credit score of the consumer.
The merchant fee processes the payment process smoothly. The merchant fee also ensures the risk is minimum for Affirm. Any payment failure will be the merchant's problem and will have to pay to Affirm the share from the earnings of the consumer.
Merchants have reported an increased sale volume after including Affirm as their payment getaway. The hike is as high as 85% which is substantial and proven effective in the long run.
Affirm introduced Visa debit cards under Affirm in October 2021. The debit card and the shopping app exclusively under Affirm is also a new change brought about in Affirm to increase their consumer base.
The shopping app for Affirm was released in January 2022 and is faring among the top downloaded apps from the Google Play Store and Apple Playstore.
The introduction of the shopping app of Affirm has other benefits as well. It allows Affirm to understand the shopping pattern, behaviour and choices of the consumer in a deeper manner.
The company can analyse what the consumer likes and how often he or she is shopping which shows light on purchasing capability and strength of bank balance. This information is vital for processing loans as the company can get a fair idea of the repayment possibility and probability.
The debit card option is an equal hit with Affirm. This can be gauged from the fact that Affirm debit card had a waitlist of one month before the official launch of debit card.
This can be owed to the fact that how Affirm has become a part and parcel of people's lives and how dependent they are on Affirm. This also shows the trust the company has been able to build with its consumers. The debit card transaction at the merchant's end is shared between Affirm and Visa, the percentage of each is not disclosed.
Funding Valuation & Revenue
The venture capital funding has been of immense use to Affirm, with the company raising about $1.5 billion from the funding process. The company found investors like Spark Capital, Wellington Movement, Founders Fund, Lightspeed Venture Partners, Khosla Ventures, Andreesen Horowitz and others who found Affirm as a potential company worthy of its investments.
The funding again began in September 2020 which was able to churn $500 million which was again a great boost to the company. Earlier in April 2019, the company was able to generate a good number of funds with the company's market value at $2.9 billion.
Affirm went public in January 2021 and its value again jumped to $1.2 billion. At this time, Affirm was valued at $11.9 billion in the market. In 2021, the revenue generation by Affirm was $870.5 which was a high 71% increase from the past year. But it was never all roses for Affirm; it lost $379.2 billion around the same timespan.
How does Affirm make money on 0%?
In many instances, the company Affirm offers POS loans at 0% interest. Although the company is not charging any extra amount from its customers, the mode of earning for Affirm in this case scenario is through its merchants, who are still liable to pay to Affirm for every transaction irrespective of the APR. Thus Affirm earns through merchant fees and interchange fees from Visa as well.
What is the catch with Affirm?
If a consumer has obtained a loan at 0% and is making its repayments on time, there is no trouble with Affirm at all. But if the loan is obtained at a high APR like 30% and the loan instalments are not paid on time, it can severely damage the credit score of the applicant which can make other asset accumulation in the future extremely difficult. Obtaining a credit loan is easy but when it piles up in a stack, the repayment becomes a problem for the customer who is unable to manage his expenses and his budget as well.
Does using Affirm hurt your credit?
No, Affirm does not hurt the customer's credit score. However, Affirm does not issue loans without any background check. Affirm conducts a soft credit check to assess the consumer's paying habits, income sources and frequency of shopping, among other factors to create a digital profile of his repayment probability and frequency. This is done on Affirm's part and does not affect all-over credit score.
4. Can I pay off Affirm early?
Yes, consumers have the option of paying off their loans early. It is highly encouraged and Affirms does not charge any extra fee for prepayment. A prepayment is an excellent option that saves on interest that is accrued on the loan value. Customers should try to prepay as much amount as possible to save from scorching high-interest rates and defaulter tags.