Affirm struggles to convince investors of fintech bona fides
Buy now pay later’ group becomes more reliant on loans amid plummeting share price. Max Levchin founded Affirm Holdings in the belief that younger people were more open to borrowing from Silicon Valley start-ups than established lenders. “Consumers, particularly millennials and Gen Z, have lost trust in financial institutions,” Levchin told investors last year, and “increasingly prefer more flexible and innovative digital payment solutions in lieu of traditional credit payment options”. His vision has made San Francisco-based Affirm one of the biggest “buy now, pay later” companies, which allow shoppers to obtain unsecured instalment loans when they buy clothes, electronics and other goods online. Quarterly results due on Thursday are expected to show a net loss of $156mn on $345mn of revenue, according to a Bloomberg poll of analysts. Some say Affirm bears a closer resemblance to a traditional financial institution than its digital sheen would suggest.
“These kind of hybrid financial technology stocks, they kind of trade like tech stocks when they’re growing really fast and the financial side of their business doesn’t cause any problems,” said Chris Brendler, an analyst at D A Davidson. “But if you start having higher losses or funding problems, that’s when they start to perform like financials.” Affirm’s pitch to retailers has been simple: by allowing the customers to split up payments for merchandise, sometimes without interest, they will sell more products. Retailers pay Affirm “merchant discount fees”, effectively a commission of a few percentage points of a purchase price. In 2020 nearly 60 % of the company’s revenue was derived from such fees. Affirm’s largest merchant during the pandemic was Peloton, the stationary bike maker whose sales are now in decline. But Affirm’s business mix has begun to shift after it signed partnerships with large retailers such as Amazon and Walmart — companies with enough heft to avoid having to pay merchant discount fees. Instead, the majority of Affirm’s revenue is now coming from its function as a lender: by selling loans either through securitisations or to third-party buyers such as insurance companies, or by earning interest income for the assets that it keeps on its own balance sheet. In its most recent reported quarter, more than half of the revenue came from interest income and gains on the sale of loans.
Affirm said it was still committed to growing its fee-generating businesses as part of a strategy to build “a menu of different products to meet consumer and merchant needs across cart sizes, categories, and payment terms”. Affirm said. Unlike a traditional bank, Affirm does not hold consumer deposits and instead relies on “warehouse” lines of credit.
“These kind of hybrid financial technology stocks, they kind of trade like tech stocks when they’re growing really fast and the financial side of their business doesn’t cause any problems,” said Chris Brendler, an analyst at D A Davidson. “But if you start having higher losses or funding problems, that’s when they start to perform like financials.” Affirm’s pitch to retailers has been simple: by allowing the customers to split up payments for merchandise, sometimes without interest, they will sell more products. Retailers pay Affirm “merchant discount fees”, effectively a commission of a few percentage points of a purchase price. In 2020 nearly 60 % of the company’s revenue was derived from such fees. Affirm’s largest merchant during the pandemic was Peloton, the stationary bike maker whose sales are now in decline. But Affirm’s business mix has begun to shift after it signed partnerships with large retailers such as Amazon and Walmart — companies with enough heft to avoid having to pay merchant discount fees. Instead, the majority of Affirm’s revenue is now coming from its function as a lender: by selling loans either through securitisations or to third-party buyers such as insurance companies, or by earning interest income for the assets that it keeps on its own balance sheet. In its most recent reported quarter, more than half of the revenue came from interest income and gains on the sale of loans.
Affirm said it was still committed to growing its fee-generating businesses as part of a strategy to build “a menu of different products to meet consumer and merchant needs across cart sizes, categories, and payment terms”. Affirm said. Unlike a traditional bank, Affirm does not hold consumer deposits and instead relies on “warehouse” lines of credit.
