Millennials are driving a change in the traditional idea of paying by credit, and soon investors will have a way to play that trend on the U.S. markets.
Financial technology company Affirm Holdings Inc.
AFRM,
which allows consumers to split purchases into installments, has filed for an initial public offering, with plans to list its shares on the Nasdaq. The company argues that it’s modernizing the world of payments by offering an option to make purchases over time without incurring interest for consumers that qualify and “simple-interest” loans for others.
Affirm is able to make money on its “0% APR” installment options by taking a cut of the merchant end of the transaction. The idea is that merchants are willing to pay Affirm to conduct risk modeling and offer its service as a way to boost conversion, or the rate of online browsing that actually leads to a transaction. The 0% APR options generally net Affirm its largest fees from merchants, according to the company’s prospectus, though it also offers “simple-interest” loans through which it receives fixed interest payments on the consumer end as well.
The company plays into the buy-now-pay-later, or BNPL, trend, which is highly popular overseas and gaining traction in the U.S.
Worldpay estimates that 20% of consumers in Germany and Australia are using BNPL services, but that this way of paying accounts for only 1% of e-commerce payments in the U.S. With room to catch up in the U.S. and elsewhere, the industry is only “partway through the first inning,” Brian Barth, the chief executive of fellow BNPL player Uplift, told MarketWatch.
Affirm competes with Sweden’s Klarna, which counts Visa Inc.
V,
as an investor; Afterpay, which trades publicly in Australia; and the more travel-focused Uplift.
The company was cofounded by PayPal Holdings Inc.
PYPL,
cofounder Max Levchin, a member of the so-called PayPal Mafia that includes notable executives once affiliated with the digital payments giant, such as Tesla Inc.
TSLA,
Chief Executive Elon Musk and Palantir Technologies Inc.
PLTR,
Chairman Peter Thiel. PayPal recently came out with its own dedicated installment offering, called Pay in 4.
Affirm intends to trade under the ticker AFRM, with the offering led by Morgan Stanley, Goldman Sachs and Allen & Co. The company stated a target of raising $100 million in its first filing with the Securities and Exchange Commission, though that figure is typically a placeholder that will be updated in future filings.
Here are five things to know about the impending offering, based on the SEC filing.
How Affirm works
Affirm makes money by collecting fees from merchants when it helps make a sale and powers the associated payment. The company offers both “0% APR financing products” and “simple-interest” options, the latter of which makes money on the consumer end of the interest-bearing arrangements. The interest amounts are fixed and Affirm says it doesn’t charge customers more than the agreed-upon amount, even if they miss a payment.
Merchant network revenue accounted for just over half of Affirm’s total revenue in its latest fiscal year, while interest income made up about 37%. The company also generated revenue from loan servicing, gains on the sale of loans, and its virtual card network, through which customers are issued virtual cards that they can use for purchases with merchants “that may not be fully integrated with Affirm.” The company gets a portion of the interchange fee when customers pay this way.
Affirm’s BNPL products have repayment options spanning from six weeks to 48 months, with an average duration of six months for assets that Affirm retains on its balance sheet.
The company argues that one of its key competitive advantages is its risk model “built on more than a billion data points” that looks at risk at the “transaction level” by taking into account the item that a customer is purchasing. Affirm claims that it’s able to approve 20% more customers on average than its competitors—helping to facilitate more purchases for merchants—while also pricing risk “with a high degree of accuracy.”
Affirm works with bank partners to originate many of its loans and said that Cross River Bank originates “a substantial majority of the loans facilitated through our platform.”
On a mission
Affirm says its mission is to “deliver honest financial products that improve lives,” according to the company’s prospectus. Levchin penned a letter enclosed in the filing that lamented a lack of innovation in the payments industry over the past seven decades since cards first came on the scene.
“With most of the payments industry deriving profits from late fees, overdraft charges, and gimmicks like deferred interest, it’s not hard to agree that there has to be a better way: it’s time to evolve payments again,” he wrote in the letter.
Levchin argued that the payments industry has to support increased clarity for consumers about what they’ll be paying and when. He also said that merchants should come to expect more from their payments partners, who can help drive sales and customer acquisition.
He painted Affirm as the opposition to financial players that “derive profit from their customers’ missteps,” calling out the credit-card industry and arguing that such products could “before too long” wind up in the “shrinking minority” of ways that people pay.
Growing revenues, narrowing losses
Affirm nearly doubled its revenue in its latest June-ended fiscal year, generating $509.5 million during fiscal 2020 compared with $264.4 million during fiscal 2019. The company saw its losses slightly narrow as well, to $112.6 million from $120.5 million.
The company disclosed in its prospectus that its “0% APR” payment option represented 43% of gross merchandise value facilitated through its platform during the last fiscal year.
Affirm says that, through September, 6.2 million consumers completed about 17.3 million transactions across more than 6,500 merchants through the Affirm platform.
Spinning wheels
Though Affirm works with more than 6,500 merchants, the company generates a substantial portion of its business from Peloton Interactive Inc.
PTON,
The maker of connected fitness equipment accounted for about 28% of Affirm’s revenue in the latest fiscal year. Affirm’s top 10 merchants made up roughly 35% of revenue.
“The concentration of a significant portion of our business and transaction volume with a limited number of merchants, or type of merchant or industry, exposes us disproportionately to any of those merchants choosing to no longer partner with us or choosing to partner with a competitor,” the company warns in its risk factors.
With Peloton in particular, the company has benefitted from increased spending on home-fitness products during the COVID-19 pandemic, but Affirm warns that “there can be no assurance that such trends will continue.”
Going shopping
Affirm’s and Shopify Inc.
SHOP,
struck an agreement in July through which Shopify would list Affirm as a payment option, giving the company exposure to Shopify’s vast base of merchants. Affirm will pay Shopify a fee for each sale processed through its platform, and the company will be Shopify’s exclusive partner for such payment options over the course of the arrangement, which lasts three years initially and then subsequently renews for additional one-year terms unless one party decides to discontinue the arrangement.
The more interesting part of this agreement in the context of Affirm’s upcoming IPO is a warrant arrangement, which will allow Shopify to purchase nearly 20.3 million shares of Affirm’s common stock at a price of a penny a share. A quarter of the shares issuable per this arrangement became exercisable in July when the two companies entered their agreement, and the rest “are subject to accelerated vesting immediately prior to the completion” of Affirm’s IPO.
