The Thesis in a Nutshell

In a flurry of year-end IPOs, Affirm (AFRM) stands out for an array of reasons. Legacy financial institutions have long sought refuge in the comfort of their business models, fomenting the sort of regulatory capture that benefits incumbents.

AFRM, however, is seeking to change the way consumption occurs, both on the merchant and consumer sides. The core tenet of these new technologies has mainly been transparency – an effort to have clear lines of communication between company and consumer, maligning hidden fees, and all sorts of surprising costs.

The buy now, pay later (“BNPL”) space is exactly what it sounds like – you purchase something that has to be paid for at a later date. One may ask: how does this differ to a credit card? Well, that’s where the straightforward becomes a tad messy. The difference is not that BNPL companies do not charge interest (they might not), but rather they’re very clear in how much they’re going to charge from the get-go.

The buy now, pay later (“BNPL”) space had seen some rapid adoption overseas in recent years, spearheaded by the likes of Afterpay (OTCPK:AFTPF) [ASX: APT] and Klarna. E-commerce’s rise was flung into overdrive as a result of COVID tailwinds, illustrated by companies achieving growth metrics forecast for years in the future.

While the company has made significant strides in recent years and is led by an iconic founder/CEO, we remain unconvinced by a company burdened with a few risks we’ll explore in depth. Similarly, there are a few tipping points that, were AFRM manage to push them over the edge, could send the company to the very top. As of this moment however, it lags behind its peers.

While there’s a lot to like about this interesting company, we plan on cheering from afar – for now.

Let’s dive in.

Affirm (company) - Wikipedia

(Source: Wikipedia)

Business Model

Affirm offers point-of-sale financing to consumers. Rather than paying all at once, the company enables consumers to spread out their payments over 3, 6 or 12 months. One of the selling points for merchants is that BNPL companies become the bearers of risk. In other words, merchants receive their money upfront when a customer opts to purchase a product via Affirm, and it is the latter that assumes a risk of payment default over the agreed-upon payment schedule.

Merchants, conversely, benefit from higher average order value (“AOV”) as affordability becomes less of an issue for consumers. Internal studies in 2018 and 2019 state that merchants reported 92% and 85% higher AOV, respectively, when compared to other payment methods. Moreover, AFRM also claims to provide increased customer conversion to merchants offering Affirm as a result of its “frictionless consumer experience and enhanced buying power”.

With trust being one of, if not the company’s core tenet, Affirm asserts that the financial products it builds are meant to improve lives. For instance, they state that they provide both true 0% APR payment options on interest-bearing loans, along with only charging simple interest (i.e. no compounding), and not charging any late fees on missed payments.

A typical customer journey would look like this:

  1. A customer adds their desired product to their shopping cart and selects Affirm as the desired checkout method (right next to credit cart, PayPal (NASDAQ:PYPL), etc.)
  2. The customer chooses their payment schedule. Once inputted, Affirm makes the amount of interest known upfront, remaining fixed throughout the payment cycle.
  3. Customer pays their monthly installment directly to Affirm.

As a two-way marketplace, the company acts as an intermediary between merchants and customers, providing features, generating revenue, and aligning its interests with both. AFRM also partners with originating banks, paying a fee to purchase said loan, of which the vast majority emanates from Cross River Bank. The following graph illustrates how it all ties together:

[MISSING IMAGE: tm2026663d4-pg_funds4c.jpg]

(Source: Affirm S-1)


  • Flexible marketing features: Merchants may offer either 0% APR or interest-bearing pay-over-time payment plans. Moreover, they may subsidize and determine a range of interest rates that enable customers to spread out the cost of their purchase.
  • Brand-sponsored promotions: For large, diversified merchants Affirm offers brand-specific 0% APR financing offers, which are in turn funded by the supplier at no added cost to the merchants. This is an alternative to markdowns and can boost selling volume.
  • Merchant dashboard & analytics: Provides an in-depth analytics tool that provides daily insights relative to all things purchase-related, such as average order value (“AOV”), amount captured, and total charges. The goal is to understand consumer behavior, optimize conversion, and decrease customer acquisition cost (“CAC”).
  • Client success support: Support team focused on helping merchants make the most of their Affirm experience, including insight interpretation and overall platform usage.
  • Affirm app: Access to the app enabling personalized offers.
  • Affirm prequalification: Allows consumer to prequalify for financing. A 2019 study by Affirm conducted with a pool of select merchants yielded that there was a 30% average increase in applications as a result of this feature.

[MISSING IMAGE: tm2026663d4-pg_innov4c.jpg]

(Source: Affirm S-1)


  • Checkout: The core product offering, wherein a consumer selects Affirm at checkout. The payment structure can either be in the shape of 0% APR or simple interest loans that are plainly laid out at inception.
  • Virtual card: Consumers can apply for a virtual card that functions both online or offline, leveraging Affirm’s pay-over-time features even with merchants not yet integrated into the company’s ecosystem.
  • Split pay: At select merchants and for orders below $250, consumers may pay by way of a multi-part payment plan with 0% APR.
  • Affirm app & marketplace: App (+4.8 million downloads in the US) that enables merchants to provide personalized offers depending on consumers’ spending habits. Upon checkout, consumers are equally allowed flexibility in structuring their repayment terms. 32% of Affirm’s transactions during last quarter occurred within the marketplace.
  • High-yield savings account: In its latest product expansion, the company has rolled out FDIC-insured, interest-bearing savings accounts within its own app. In line with its broader model, Affirm does not charge fees nor does it require minimum balances. APY stands at 1.00%.
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Key Metrics & Highlights

After a relatively slow start, Affirm experienced an impressive growth spurt from 2016 to the end of fiscal year 2020 (September 30th). In that span, over 6.2 million consumers have completed ~17.3 million transactions across 6,500 merchants, accounting for $10.7 billion total gross merchandise volume (“GMV”).

[MISSING IMAGE: tm2026663d4-pg_history4c.jpg](Source: Affirm S-1)

Further, 64% of loans were from repeat customers during the company’s last fiscal year, coupled with a dollar-based merchant retention rate above 100% in each cohort that joined the platform from 2016 henceforth. Affirm generated $509.5 million in total revenue in FY’20, up 93% YoY, while revenue for three months ended September 2020 rose to $174 million (+98% YoY).

The company, however, is not yet profitable, incurring a $120.5 million and $112.6 million loss for fiscal years 2019 and 2020, respectively.

(Source: Affirm S-1)

The Compelling Case

Macro Outlook & Demographic Trends

As we covered in our Adyen (OTCPK:ADYEY) piece, the payments industry is as mammoth as it is obsolete in its current form. Moreover, e-commerce as a whole remains in diapers, accounting for only 14% of total retail sales. According to eMarketer, global online sales grew 20% to approximately $3.4 trillion in 2019 and is expected to grow to $5.8 trillion by 2023 – a number that could well be eclipsed with the advent of COVID.

The demographic factor is also key in shaping how the financial industry has and will continue to evolve. On the one hand, Gen Z and Millennials prefer shopping online, and it is no coincidence that these two segments make up over 50% of Affirm’s customers. On the other, these generations have grown up constrained by their limited purchasing power, and while they may be drawn to BNPL products out of sheer glee derived from the customer experience, the crude reality is that such payment solutions are one of their few available means of financing both small and large purchases.

The BNPL industry is far more mature in regions such as Europe, the Middle East, and Africa (EMEA) in that it already accounts for 6% of the e-commerce payment market in the region, while it is expected to jump almost ~70% to 10% by year-end 2023. Conversely, North America trails these regions as BNPL market share will reach 3% by 2023, albeit tripling from today’s proportion.


The winners of the BNPL rat race will be those that manage to secure exclusive partnerships with as many merchants as possible, especially those with broad customer bases. Just this year, Affirm announced a couple of partnerships with two key players: Shopify (SHOP) and Adyen. The former, who has a stake in AFRM, (more on that later) powers over one million businesses in more than 175 countries. While the initial agreement is limited to the US, SHOP captured ~6% of US retail e-commerce in 2019, and the relationship suggests that Affirm could tap into the Ottawa-based company’s growing merchant base around the globe. Similarly, the Dutch payments company has enabled its merchants to offer Affirm as a checkout method through a single integration, both online and in-store.

Given that AFRM caters to two very distinct customers (merchants and consumers) it aims to be the best at serving both. For merchants the goal is clear: create value by converting sales and powering payments. The merchant fees that Affirm collects vary based on the individual agreement between each merchant and the company. However, purchases financed through 0% APR financing result in larger fees for Affirm, as is the case with Peloton (PTON), and exemplified by representing 43% and 46% of total GMV facilitated through the platform for fiscal year ended June 30, 2020 and three months ended September 30, 2020, respectively.

[MISSING IMAGE: tm2026663d4_pg-select4c.jpg]

(Source: Affirm – S1)

Investors & Ownership

As has been the case with many startups prior to debuting on the public markets, AFRM has raised significant amounts of both equity and debt. According to Pitchbook, the company has raised $1.6 billion in equity alone, with a star-studded roster of investors that includes Durable Capital, Thrive, Spark Capital, Founders Fund, Wellington, A16Z, Lightspeed, Khosla, Ribbit Capital, Battery, GGV, and Shopify.

As mentioned, AFRM scored a monster win by managing to become the engine powering Shop Pay Installments for SHOP. As a result of this agreement, SHOP was granted a block of warrants that, if exercised, could give it a tenth of the company. By collecting the total share output and preferred financing rounds, while also assuming Shopify exercises its warrants, the resulting ownership structure would look like this:

(Source: Curious Capital with data from Affirm S-1)

Max Levchin

The impact of a founder-led company cannot be understated. As we can see, founder Max Levchin owns a significant stake in the company, notwithstanding the fact that his shares grant him voting control. This leads us to perhaps the most potent case for Affirm’s success going forward.

The founder’s track record has been one of the most glittering emanating from the now infamous PayPal Mafia, who have all gone on to find multi-billion dollar companies. Following the sale of PYPL to eBay (EBAY), the Ukranian-born Levchin launched an incubator known as HVF/MRL Investments. Most notably, successes from this exploration company include Yelp (YELP) and Slide, which was sold to Google (GOOG) in 2010. In that same vein, Affirm was spun out of HVF in 2012, upon which Levchin joined full time after becoming engrossed with the idea.

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There’s no questioning that Levchin has the rare qualities of a once-in-a-generation founder that can follow through on an ambitious vision for the long term. At 45, his best days are still ahead, while Affirm is the vehicle through which he can make his own indelible impact on society by building a growing company from the ground up. As CTO of PYPL back in the day, he understands payments better than most. What’s more, Affirm’s board has determined that nearly 100% of Levchin’s compensation will be comprised of equity incentives. If former accomplice Elon Musk’s performance at Tesla (TSLA) is anything to go by-especially given the incessant amount of skepticism-then both the company and him will fare rather well. These founders have illustrated an uncanny ability of willing their visions into fruition.

Network Effects

The Affirm flywheel is underpinned by the principles inherent to all marketplaces: a self-reinforcing ecosystem compounded by every consumer and merchant onboarded onto the platform. As more customers use the platform, the solution becomes more and more valuable to merchants, who will want to offer Affirm financing. Additionally, the more data AFRM collects on consumer habits, the better-equipped it will be to infer and manage risk. Ultimately, Affirm would benefit significantly from generating economies of scale, boosting its profit margins, connecting more consumers with even more merchants, and building a seamless payment ecosystem that feeds on itself to create value.

Although +6,500 merchants are on AFRM’s platform, they are but a tiny drop in the ocean of businesses both domestically and worldwide. Were Affirm able to become the de jure payment method, merchants would be left with no choice but to join the marketplace in an effort to reap the associated benefits.

[MISSING IMAGE: tm2026663d4-pg_affirm4c.jpg]

(Source: Affirm S-1)

Analytics & Risk Management

The BNPL companies are part payments, part lending businesses in the sense that they claim (and should) facilitate higher approval rates rather than becoming an impediment across the customer journey.

As opposed to legacy lenders, Affirm focuses on analyzing risk at the transaction level, zeroing in on more than 80 data points rather than merely relying on a consumer’s FICO (FICO) score. The value-add is driving more transactions without compromising the loan portfolio quality. This has translated into an impressive weighted-average quarterly delinquency rate of approximately 1.1% for the 36 months ended September 30, 2020.

Since Affirm’s model is meant to become smarter as it processes more and more transactions, the company will generate predictable servicing and interest income, allowing it to attract funding sources.

[MISSING IMAGE: tm2026663d4-pg_propri4c.jpg]

(Source: Affirm S-1)

The Cause(s) for Concern

Peloton & Cross River Bank: Concentration Risk

There is a significant link to Peloton which, surprisingly, was never mentioned in either PTON’s IPO filing, nor in its subsequent 10-K and 10-Q filings. As of the three months ended on September 30, 2020, PTON makes up 30% of AFRM’s revenue, up 14% from last year.

Much has been said about this relationship to Affirm’s detriment, and with good reason, yet PTON could well be scrutinized for the same. PTON assumes no consumer credit and no balance sheet risk, all while their addressable market expands. Given Peloton has sold over a million bikes over the course of the pandemic, there is a mutual dependence between the two companies. This is because Affirm’s revenue rose over 100% YoY, while its PTON share of revenue also increased as much, implying that Peloton’s growth was financed by Affirm while the latter’s top-line increase was driven by the demand for stationary exercise equipment. Some have labeled the arrangement as “balance-sheet-as-a-service”, which is an admittedly tidy description of this relationship.

Were the agreement between PTON and AFRM to materially change in the near future, both companies would be significantly hard-hit. Even now, this degree of dependence on a single merchant will inevitably lead to intense fluctuations in AFRM’s performance over the near to medium-term horizon. After all, AFRM’s non-Peloton revenue growth (+60% YoY) dwindles in comparison to the company’s revenue from its largest client (333% YoY).

The issue with Cross River Bank speaks more broadly to Affirm’s ample dependence on funding. As a result, the IPO is a smart move countering this phenomenon, especially during a holiday season that is bound to produce stellar results. Remember, timing is everything. Were the company’s funding to dry up, as it has yet proven an ability to execute a self-origination model at scale (which would inevitably improve the transaction economics), the company’s solvency could genuinely come into question.

0% APR Loans

The 0% APR loans, which are most common with merchants selling expensive products (i.e. PTON), essentially function as zero coupon bonds, wherein Affirm recognizes the discount upfront as revenue and cannot sell along without giving back a cut of its merchant fee to finance partners. Let’s recall that these loans pay no interest and the only tangible benefit for AFRM lies in the upfront merchant fee it receives.

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What’s more, the revenue associated with these loans is a one-time occurrence, while costs are recurring. As we mentioned earlier, these loans amount to 46% of the company’s total loan portfolio.

The company’s answer to this headache has been channeling the 0% APR loans into its batch of securitizations it has issued throughout this calendar year. While shrewd, it remains to be seen how AFRM manages to navigate the burden of managing a momentous volume of administrative costs.


Huge markets generally lure a swath of competitors – and BNPL is no exception. Across the Atlantic, Klarna has grown to dominate the European landscape and has even begun going after the American pie. Afterpay, inversely on the Pacific, is also targeting global expansion as has already established a strong presence in Canada, the United Kingdom, and the US, in addition to its native Australia and neighboring New Zealand. Further, both companies boast higher growth rates and gross margins. As we alluded to before, the nature of the BNPL lies in the importance of cementing exclusive partnerships from the onset, and as a result plays against AFRM’s last-mover status.

Legacy payment methods (read: Banks) and the payment rails on which the economy is built (MA and V) will also compete to retain customers, especially as they seek to reinvent themselves by offering more competitive products.

One of the biggest threats to AFRM’s prospects, however, might be the oedipal PYPL. The company Levchin helped build could come back to haunt him. According to Statista, PayPal has over 346 million active accounts worldwide, and growing at ~21% YoY. With an established, dominant, and highly profitable payment network, PYPL can leverage its business model and massive two-sided network to undercut the competition in a heartbeat. For perspective’s sake, 80% of the top 100 retailers in the US offer PayPal at checkout, and ~70% of US online buyers have a PYPL account.


Given the highly-regulated nature of the financial services industry, Affirm is beholden to extensive oversight. Without delving into too much detail, the regulatory environment is highly complex and mostly beneficial to incumbents, notwithstanding that in the US alone compliance can vary significantly between states.

As Affirm attempts to expand its offering overseas, it will also have to contend with the laws pertaining to each market it seeks to penetrate. As governments clamp down on data privacy issues, AFRM could further be adversely affected by regulation that limits its business model in this respect.

Given the aforesaid, AFRM’s business model has been described (rather harshly) in the following terms:

(Source: Twitter – @MarcRuby)


Given the unique nature of the BNPL business model, Afterpay is the only real comparable listed on the public markets. Trading at > 20x forward revenue, it also enjoys stronger margins, higher growth rates, and a proven international expansion strategy. Payment companies like PYPL and Square (NYSE:SQ) trade at the high single digit, lower double digit NTM revenue multiple, while legacy competitors are in the low single digits.

As a result of Affirm’s profile, we expect the company to be assigned a SaaS-like multiple from the onset, significantly surpassing its Series G round that values the company at ~$5 billion in September. We fully expect the company to have a successful IPO, while performing well in the short term for traders.

However, as investors, we’re focused on the long term. The risks we mentioned are a significant barrier to entry as of this moment. We mentioned at the beginning that there’s a lot to like, and rightfully so, but we remain unconvinced up to this point. Below is an illustrative valuation in line with peer multiples we discussed, although we expect these numbers to pale in comparison to where it might actually trade. Snowflake (NYSE:SNOW) can justify its mammoth multiples due to its organic, diversified revenue growth while Palantir (NYSE:PLTR) was significantly undervalued upon listing.

(Source: Curious Capital)

Key Takeaways

Affirm is one of the more fascinating iterations of companies attempting to dethrone legacy institutions while revolutionizing the financial services industry. With a focus on trust and transparency at the heart of its business model, it aims to be axis on which merchants and consumers transact. It is both an answer to the archaic systems that are in place but also a tool that more accurately caters to the needs of younger generations.

In many ways, the company remains in its infancy, but a dyad of agreements with SHOP and ADYEY, respectively, could act as the fulcrum for the company’s growth moving forward. Moreover, the company is spearheaded by a serial entrepreneur that appears committed for the long haul and bent on making his mark.

On the balance, however, there are too many risks and unknowns that put us off. This could very well change and, more importantly, we would welcome being proven wrong. After all, Affirm’s success would represent a huge win in democratizing the payments landscape.

Our support, at least initially though, will remain from afar. We look forward to following the company’s path in the quarters and years to come.

As ever, thanks for reading – especially if you made it this far.

Disclosure: I am/we are long SHOP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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