Affirm finds favour with Millennials and e-commerce

Serial entrepreneur, Max Levchin, has made a cool $2.5 billion stake in Affirm, his latest brainwave in the fintech sector, and he drew on his personal experience as a Ukrainian immigrant to come up with the idea.

As he Jeff Kauflin at Forbes, when he arrived in the USA with his family in 1991, he wasn’t prepared for some of the trappings of a capitalist society after living in a socialist country: “I got my first credit card a couple years after coming to America and promptly destroyed my credit, because I had no idea how to use this power tool.”

Now he is CEO of Affirm Holdings, a buy now, pay later fintech that aims to end millennials’ aversion to the credit card system as it currently operates, and consumer debt. This is not Levchin’s first foray into finance: he co-founded PayPal, and his other ventures include Yelp, Slide and Glow, the latter a fertility-tracking app.

He identified that what millennials disliked most about credit cards were the late fees and the fact that it was all too easy to run up large debts, “particularly for those who didn’t understand the way interest charges on revolving credit cards compound,” as Kauflin explains.

Affirm doesn’t offer particularly low interest rates – they run from 0% to 30% a year, depending on a customer’s creditworthiness and if a merchant subsidises interest-free payments. What it does not do is charge late fees. Furthermore, the consumer is shown from the start the total amount of interest they will have to pay on any purchase, and these are fixed payments lasting from three to 12 months. With very large purchases this period can be extended to up to four years. What is more, Kauflin says, “Consumers can instantly finance an expensive item through Affirm while paying off routine credit card charges in full each month.” This is dramatically different to the current conditions for cardholders, who end up paying interest on every item bought, no matter the size, if their account carries a balance.

Affirm has also taken advantage of the millennial enthusiasm for point-of-sale finance, and upmarket brands, such as Peloton, Mittor and West Elm are now using Affirm to subsidise interest-free instalment loans. Indeed, retailer payments make up around 50% of Affirm’s $596 million revenue in the year to 30th September 2020. It is worth noting that it has booked a profit yet and lost $97 million in the same period of time.

That will probably change, as “buy now, pay later will become the fastest-growing e-commerce payment method on the planet by 2025, predicts Worldpay,” boding well for Affirm and its main competitors Klarna and Afterpay.

In a recent letter to investors about Affirm’s pre-IPO filing, Levchin said he was determined to accelerate the demise of companies that “peddle toxic financial products and derive profit from their consumers’ missteps.”

Affirm may have some way to go before it generates profit, but it looks like momentum is on Levchin’s side. In July 2020 he concluded a deal for Affirm to become the exclusive instalment-financing service for Shopify’s US-based merchants, and with $1.2 billion of IPO cash to spend, it could be something very interesting for the millennial consumer.

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