service. With that said, we continue to like Affirm’s competitive positioning as Affirm offers a broader set of offerings, including Split Pay, 0% APR loans, and interest-bearing loans (long and shorter duration). This gives Affirm flexibility with merchants and consumers who need different credit offerings as well as the
most levers to pull as interest rates rise to effectively offset higher funding costs. Apple’s announcement indicates it will strictly be a 6-week zero-interest offering, which is most similar to Block's Afterpay, which also exclusively offers a 0% APR service that is paid back over 6 weeks.
Further the demographics of the Apple Pay user base are likely generally higher income and better banked with more credit alternatives than those that have gravitated to BNPL offerings from Affirm and Block’s Afterpay. As such, in our minds the long-term trajectory of BNPL providers remains unchanged: attract consumers that may have more limited access to traditional consumer credit
options, and then mature them into more fully established customers, ultimately with a full suite of banking services. Details on Apple’s announcement are still limited, but the initial announcement indicates users will apply for Apple Pay Later when they are checking out with Apple Pay or in Wallet, though the extent of the underwriting model and credit check requirements are unclear. Afterpay, notably, does not underwrite individual transactions. It's also unclear how Apple plans to fund its BNPL loans. The company works with Goldman Sachs for its credit card loans, and likely can
acquire funding fairly quickly through relationships with financial institutions. The company also has $28B of cash on the balance sheet. Separately, tap-to-pay update likely neutral to slight positive for SQ: Along with the announcement, Apple also provided an update that its Tap to Pay feature for merchants will be available starting this month. While some investors have speculated that Apple’s Tap to Pay could enhance competition for Block's seller
business (Square), we believe it could actually be a benefit, as merchants using this tap to pay feature will still require a merchant account to accept payments. In fact, last week Block announced it is working with Apple to enable Tap to Pay on iPhone, which would enable Square sellers to accept payments utilizing only an iPhone along with Square’s POS app, and not need the additional hardware
that is historically necessary to facilitate payments. While we believe Square can benefit if using phones as payment terminals is successful by reducing cost of hardware in customer acquisition, we are still hesitant that this type of system can actually take off. Phones historically tend to be too expensive and too fragile to support ongoing payments. In our view, not much has changed from more
than 10 years ago when retailers experimented with iPhones (along with Android phones and Windows phones) as terminals and the breakage and replacement costs proved too high to maintain.
MDR (Merchant Discount Rate) is basically a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.
Q2 2021 earnings call
Question :
Got it. And just as a follow-up, thinking about MDRs, there's some concern that maybe MDR will have to kind of go lower in the industry as the BNPL penetration increases and obviously PayPal is pushing their selves and talking a lot more about BNPL as they get into the space. So I guess the question is, Max, on overall MDRs, is it sustainable at these levels or will it be a natural phenomenon, well, as more volume comes on, maybe we'll see rates drop a little bit. Thanks.
Answer :
Yeah, I think it's very difficult to prognosticate about what we expect in the future from – like obviously we think ourselves very special and we provide a service constructively unique even in a highly competitive industry like BNPL. A huge portion of what we do that others can't or don't, is our ability to address the entirety of the transaction values. And in the low AOV space, it's a little bit less of a risk management and more of a marketing-centric component and therefore is more competitive. It's a little bit easier to be successful there versus the more complicated, more time-centric high AOV piece. And so I think we've proven over the years that we're very good at pulling those segments and we've done well there. As a technology and data-centric company we provide a lot of value to merchant that goes well beyond will help you close the transaction, so we have data services, we now have this really rich collection of Affirm and service offerings which we're bringing to market. Ultimately we don't love competing in price. We love competing on value-added and sort of things we can do that others cannot. So I can't prognosticate about where the prices go, but I can tell you we'll continue inventing things that others don't have.
Question:
Hi. Good afternoon. Appreciate you taking the question. Max, maybe I'll build a little bit off Bryan's question from a competitive perspective. There are a number of players in the market. Can you elaborate on why you think Affirm wins and particularly what differentiates Affirm from peers? I mean, you're not really doing Pay in 4 per. Today it's a much more complex model. And I wonder if you could just speak a little bit about why you think you have a competitive advantage and maybe why Affirm is uniquely positioned to take big share exclusivity with platforms like Shopify notwithstanding?
Answer :
So I'm not 100% sure what you meant by we're not doing Pay in 4. I think Pay in 4 may be a trademark of PayPal's at this point. So we're not by way of not using someone else's trademark, but we very much have a product that we have to market under the name of split pay which competes in that very space. Ours is better because we don't charge late fees and we are much more transparent and simpler. But that said, the sort of the idea of taking a $80 item and splitting into four repayments of $20 is something that we do in borrowing quite nicely. I do agree that there are plenty of players in the space that do this particular product. The air becomes a little bit rare if you start saying, well, what happens when you get to, let's say, $800. And that product – $800 is too much to just put in a single transaction; probably $200 every two weeks is also a little bit uncomfortable from the cash flow perspective, and that's where you end up having to do things that take 6 months, 12 months, et cetera. And we have products that span all of it from six weeks to 48 months. So in that sense we offer consumers a choice and merchants an opportunity to offer a payment plan that is quite short for low AOV items and potentially as long as four years for higher AOV. That's one of the key advantages especially enterprise merchants where – and platforms which are enterprise merchants or merchant aggregators tends to want to partner with a provider that has excellence in technology which will certainly bring and someone who can service the totality of their customers and the totality of their products. And we are able to do all of that and we are quite good and scalable in such matters. An those are the two endpoints of why we've been selected by Shopify, why Rakuten, why other partners in the space have consistently chosen us. The other one which I feel never gets enough fair play and so I'll just keep on repeating it, we're the only ones in the space that actually speaks to the end consumer truthfully. We don't charge late fees, we don't do it for interest, we don't do any of the things that ultimately spurs somewhere between rolling their eyes at and just get very, very angry about. And consumer brand love is important to us and it's very important to merchants which fundamentally what drives repeat transaction. So we are very keen on continuing down that line as well because ultimately merchants and merchant platforms want to partner with brands that add to their own brand love as opposed to potentially embarrass them. And that's something that we feel very strongly about and we continue to wish the industry would change and follow our lead. But for the moment we are unique in that sense and we take great pride in that, just continue winning deals because of that point of view.
Question :
sort of the competitive environment from a sort of different perspective. Do you think it's a little bit of a land grab right now with buy-nowpay-later really taking off here in the US and around the world? So my two questions on that front are, do you see any impact or do you see any instances where there's more than one provider and how does Affirm sort of market share at the point of sale hold up when there is more than one provider?
And then my second question, more of a strategic question is, this Shopify deal seems super exciting and has a lot of potential. Do you expect to do more of these sort of megadeals where you're providing a little bit equity incentives, or is this kind of the one you're going to stake a claim in near term? Like how are you thinking about these large marketplace transactions where there's a lot of volume, but potentially some equity cost as well? Thanks.
Answer :
Great questions. So on the former, I think history is always a good predictor of the path. And we'll do a first round of payment network creation ultimately settled with three or four brands that are universally recognized depending on whether you include Discover or not, but Visa, Mastercard, AMEX are certainly more or less on every checkout at this point. So I think the expectation should be that there will be more than one BNPL brand that wins. And the reality is we're all – yeah, land grab especially positive, but I'd like to believe we're all peeking over 偷窺 parts of the credit card volume, and that is an enormous chunk of transaction volume, and there's quite a lot of growth for everyone. Obviously we're biased in our favor but , I do expect to have multiple players at at least some of the checkout. Some of the deals that we signed are exclusive, some of the deals are not. In some cases we are added two interesting provider our worth by doing better then. So I think overall we are happy with how that is developing.
So the Shopify question is a good one. Two-part answer in very short form is we would love to do more megadeals. I think the structure of those deals are by definition unique and special. And so any form of speculation of what exactly what it would take to sign another Shopify is probably beyond the scope of this conversation. But that said, we are – again if I do say so myself, the perfect provider for these very, very large platforms specifically because we have this enormous advantage in data and technology at a proven scalable and robust. And so fundamentally I don't think offering someone a chunk of your company if a mega partner doesn't believe you'll be able to withstand their mega volume, So the equity piece is not a reason a company selects a partner, it's because we're actually good at what we do and we can take on
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