Affirm is a breakout star of the buy now, pay later craze. Here’s why increased competition and fee pressure still pose significant threats for the fintech looking to go public with a $10 billion valuation.

  • Buy now, pay later startup Affirm filed an updated S-1 filing, signalling its intent to go public soon. 
  • The fintech, which was founded by PayPal alum Max Levchin, filed new paperwork on Monday to update plans to price its shares between $41 and $44, which would value the company at more than $10 billion.
  • Affirm first said it would price shares between $33 and $38 in a filing earlier this month. 
  • The fintech originally planned IPO in 2020, but The Wall Street Journal reported in December that Affirm decided to delay its IPO to 2021.
  • While the proliferation of e-commerce has propelled players like Affirm, increased competition and potential pressure on merchant fees could be headwinds.
  • Here are what experts see as Affirm’s challenges and opportunities.
  • Visit Business Insider’s homepage for more stories.

After a brief delay, Affirm’s IPO is pushing ahead. 

The buy now, pay later player is expected to make its public-market debut soon, looking to raise over $1 billion, according to a revised S-1 filing published Monday. Affirm is looking to issue 24.6 million shares listed under the symbol AFRM on Nasdaq, priced between $41 and $44, potentially valuing the fintech at over $10 billion. 

The company first said it would price shares between $33 and $38 in a filing earlier this month. 

Morgan Stanley is serving as lead underwriter, along with Goldman Sachs and Allen & Company. 

Buy now, pay later is the fastest-growing segment in consumer lending, according to a CB Insights report.

And Affirm, one of the leaders in the space, has taken off. With more than 6 million users, Affirm saw 77% growth in purchase volume year-over-year in its 2020 financial year-end results. From the proliferation of e-commerce to consumers embracing of digital finance, a number of tailwinds in 2020 helped make Affirm one of the year’s fintech standouts.

Originally, Affirm had planned to go public in 2020. But in December, The Wall Street Journal reported the fintech was delaying its listing until January, at the earliest. The story cited the extreme IPO pops that DoorDash and Airbnb saw as one of the reasons for the pause, in addition to delays at the Securities and Exchange Commission processing IPO requests. 

Read more: Why the IPO market is exploding in a frenzy that rivals even the 1999 euphoria

On a vocal mission of honest finance, founder and CEO Max Levchin — of PayPal Mafia fame — founded Affirm as an alternative to credit cards.

Credit cards “failed to keep up with the evolving world,” Levchin said in his opening letter in Affirm’s S-1 filing.

“One could argue cards have devolved, even become corrupted. The barely-readable fine print makes only one thing clear to consumers: You’ll never know exactly what your purchase will really cost you,” Levchin wrote.

How Affirm makes makes loans

Affirm offers loans issued at the point-of-sale, paid in installments over periods ranging from six to 48 weeks. Rates range from 0% to 30% (around 40% of Affirm’s loans are issued with 0% interest). And like many consumer fintechs, Affirm doesn’t charge fees to consumers. There’s no deferred interest, and users see what they’ll pay with each installment, interest included, before agreeing to the loan. 

Since its founding in 2012, Affirm has raised $1.5 billion to date from investors including Andreessen Horowitz, Founders Fund, and Spark Capital.

In the coming years, buy now, pay later is expected to keep growing. In the US, it’s set to grow from 1% to 3% of e-commerce payments by 2023, according to Worldpay’s 2020 Global Payments Report. And in EMEA, where it currently represents 6% of online purchases, buy now, pay later is projected to account for 9% of e-commerce purchases in 2023.

Business Insider spoke to four industry experts, in addition to analyzing recent industry reports and Affirm’s S-1 filing, to understand the challenges and opportunities that Affirm faces as it looks to go public in 2021. 

A spokesperson for Affirm declined to comment.

Here’s how Affirm generates a big chunk of revenue from merchant fees — and why those might come under pressure 

Affirm, like most buy now, pay later players, relies on fees that it charges to merchants for the majority of its revenue. In its past two fiscal years, which end on June 30, half of Affirm’s revenue came from such fees. 

The startup’s revenue jumped to $509.5 million this year, up from $264.4 million the previous year. Affirm had a net loss of $112.6 million, slightly narrower than the $120.5 million net loss the year prior.

Most of the remaining revenue comes from interest income, which sets Affirm apart from its buy now, pay later competitors, who aren’t issuing interest-bearing loans. A small percentage comes from loan sales and card-issuing fees.

Merchant fees on buy now, pay later transactions can go as high at 7% of the purchase. And while that’s higher than average fees on credit and debit cards, merchants can see benefits from higher order values and less cart abandonment (people leaving items in online shopping carts without buying anything) by offering a buy now, pay later option.

Affirm says it increased average order values by 85% across its partner merchants in 2019.

But the growth in buy now, pay later’s popularity raises a question: Will merchants continue to accept higher fees charged by the providers?

“The merchants are essentially now paying in a way that really was not part of point-of sale finance 10 years ago. Or, to the extent merchants paid for it 10 years ago, it was all done through a promotional discount,” Ben Savage, partner at Clocktower Technology Ventures, previously told Business Insider

What’s more, traditional players like PayPal have entered the market, offering a pay-in-four solution at no additional cost to merchants. And with credit-card companies, like Citi and American Express, installment financing options happen post-transaction, so merchants are just paying the typical payments-processing fees.

Analysts at CB Insights, too, foresee potential pushback from merchants.

“There may be eventual pushback to BNPL providers’ transaction fees — which in some cases can be as much as 7% — in a way that resembles the mounting dissatisfaction from US merchants with fees paid to payment networks for credit-card transactions,” CB Insights said in its recent report on Affirm’s S-1.

To be sure, card interchange fees haven’t fallen, but the costs are often passed onto consumers through an increase in product prices. The card networks regularly reevaluate the fees, and a planned increase in fees was delayed in 2020 due to the COVID-19 pandemic.

Be it pressure from cheaper competitors or merchants, it remains to be seen whether Affirm’s current economics have staying power.

“Increased competition could result in the need for us to alter the pricing we offer to merchants or consumers,” Affirm said in its IPO filing.

Affirm has a big partnership with Peloton. Here’s what that means in terms of concentration risk. 

In its IPO paperwork, Affirm revealed that nearly 30% of its sales are currently concentrated with one merchant partner: Peloton

Affirm said the loss of Peloton as a merchant, which it signed in 2015, would “materially and adversely” affect its financial condition and future prospects, in its S-1

And that’s not surprising. Concentration risk isn’t generally advised in any business.

“It’s not smart for any business, fintech or not, to concentrate so much of their success on one merchant or partner,” said Ralph Dangelmaier, CEO of payments startup BlueSnap.

“My advice to Affirm would definitely be to diversify — they will always want to partner with other well-known, big-ticket items to grow their business,” Dangelmaier added.

Read more: Affirm’s IPO paperwork shows Peloton sales are a crucial part of the buy now, pay later fintech’s business — and losing that partnership would ‘materially and adversely’ impact it

But some experts see the partnership as a proof point for the Affirm’s viability for big-ticket items. The fintech renewed its agreement with Peloton in September this year for an initial term of three years, followed by one-year renewals after that. After September 2023, either side of the agreement can terminate without cause if they give at least 90-days notice.

“Affirm’s current dependence on Peloton — while concerning in the short term — proves that this underwriting model and lower-friction customer experience can work with large purchases,” Drake Rehfeld, investor at Day One Ventures, told Business Insider via email. 

“I expect Affirm to expand to additional luxury goods and merchant partnerships in appliances, vehicles, and travel,” Rehfeld added. 

And thus far, Affirm has proven stickiness with merchants. The total transaction volume for the annual cohorts of new merchants has increased year-over-year since 2017. 

While Affirm has proven its fit for larger, more considered purchases through retailers like Peloton, it’s also focusing on segments where consumers make more frequent purchases.

“A key principle of our next phase of growth is expanding into higher-frequency purchases, which we believe will position us to increase engagement with consumers and merchants,” the company said in its filing. “We believe this will lead to increased transaction volume on our platform, as well as the expansion of our consumer and merchant network.”

Affirm has a high net promoter score, but that doesn’t mean it’s secured customer loyalty

For the last year, Affirm’s had an average Net Promoter Score (NPS) of 78, which measures the percentage of consumers who would recommend the offering.

“A Net Promoter Score of 78 is very high, and as Affirm highlights, far exceeds what we typically see for banks,” Demitry Estrin, founder and CEO of payments consulting firm The Futurist Group, told Business Insider via email. 

“However, while consumers may be satisfied with a point-of-sale loan, particularly at the outset of the relationship, long-term loyalty, advocacy, and satisfaction will depend on many factors,” Estrin added.

As the buy now, pay later market has matured, competition among players has shifted from nabbing exclusive deals with merchants to winning consumer loyalty. And it’s not yet clear whether consumers are choosing merchants based on which buy now, pay later button they offer at checkout. 

“At this point in time, loyalty to BNPL providers is actually low,” Estrin said. “In our research, we see 84% of BNPL customers indicating that they are open to trying a new BNPL provider in the future.”

Read more: Buy now, pay later startup Affirm just launched a high-yield account with an eye-popping rate. Its CEO explains why the startup wants to cater to both saving and splurging.

That’s not to say players aren’t trying. Both Klarna and Afterpay have their own loyalty programs, where shoppers get points for using their installments.

Affirm doesn’t offer a loyalty program, though it does allow merchants to target users with offers via its app. Affirm does offer a high-yield savings account, which Levchin said is geared toward users that have an affinity for Affirm’s brand.

“We don’t offer the highest annual percentage rates and that is part by design,” Levchin told Business Insider at the time of the announcement. “I don’t see it as competitive. I think it’s a slightly different demographic. People that are signing up for this product are actually doing it for peace of mind purposes. They like Affirm and they think Affirm is trustworthy.”

Competition from other buy now, pay later startups, and incumbents like PayPal, could prove a challenge

Affirm’s iteration on buy now, pay later varies from players like Afterpay and Klarna in that it’s issuing interest-bearing loans, as opposed to non-loan installment plans. But they’re still competing for merchant partnerships and consumer loyalty.

Like Affirm, Afterpay and Klarna have millions of users, and they’ve been growing fast in the US market.

But one of the biggest threats to Affirm comes from a more traditional player. PayPal launched its Pay in 4 offering in the US in September. The buy now, pay later solution is offered to merchants at no additional cost, and its checkout button is already integrated with 83% of the top 100 retailers in the US, according to Forrester.

PayPal also already has traction in the space with PayPal Credit, a longer-term credit option for shoppers. 

Of consumers that have used a buy now, pay later solution, 52% say they’d use an interest-free option from PayPal instead of other providers, according to research from The Futurist Group.

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