The Rise and Challenges of Affirm: An Analysis of the Point-of-Sale Lender

Affirm, the point-of-sale lender, has experienced a remarkable turnaround in 2023. Just a year ago, the company was plagued by rising interest rates, recession fears, and weakening consumer spending. Its shares plummeted, wiping out billions of dollars in market value. However, as of Wednesday’s close, Affirm shares have skyrocketed by 430%, outperforming all other U.S. tech companies valued at $5 billion or more. This extraordinary surge can be attributed to multiple factors, including the Federal Reserve’s plans for interest rate cuts and an increased number of retailers adopting Affirm’s buy now, pay later (BNPL) offerings.

Affirm, founded by PayPal co-founder Max Levchin in 2012, operates in a highly competitive market. It faces stiff competition from companies like Klarna, Block’s Afterpay, and Zip in the burgeoning BNPL sector. BNPL services allow shoppers to split their purchases into several installments, typically over three months to a year, often without incurring compounding interest. The lenders generate revenue through interest payments and fees charged to merchants for offering their lending services. Retailers benefit from offering consumers an alternative payment option that reduces sticker shock and minimizes cart abandonment.

Affirm made its initial public offering on the Nasdaq in January 2021, at a time when the COVID-19 pandemic was driving the adoption of BNPL services. However, by early 2022, its share price had fallen more than 60% from its peak in 2021. Soaring interest rates further exacerbated the company’s challenges in borrowing money to fund installment loans. As a result, Affirm had to cut 19% of its workforce in February 2023. But the company experienced a turnaround in August, following its fiscal fourth-quarter earnings report. It secured new merchant deals in various sectors beyond retail, such as travel, wireless, ticketing, and healthcare. Affirm’s stock has more than doubled in the fourth quarter, fueled by its recent partnership with Walmart and the expansion of BNPL loans to self-checkout kiosks.

Looking ahead to 2024, BNPL lenders, including Affirm, face a favorable interest rate environment and cooling inflation. Dan Dolev, managing director at Mizuho Securities, believes that Affirm is well-positioned to retain users. The company has secured numerous merchant partnerships and boasts a user base of 16.9 million people. Affirm is also eyeing international expansion and has recently introduced a debit card that offers upfront or installment payment options. Its plans to introduce a spending account tied to the debit card indicate a potential move towards becoming a comprehensive financial services firm.

The Skepticism and Challenges

Despite its recent success, Affirm faces skepticism and challenges. Tom Hayes, chairman at Great Hill Capital, believes that Affirm is engaged in a challenging battle against established players like PayPal and Block, as well as credit card companies such as American Express, Citi, and Chase that have entered the installment loans market. Hayes believes that Affirm’s attempts to compete on multiple fronts, similar to online lender SoFi, will not be successful in the long run.

Affirm and other BNPL lenders also face the increased risk of users failing to make payments on time. A report by the Consumer Financial Protection Bureau revealed that BNPL users tend to have higher levels of credit card debt and lower credit scores. However, Affirm’s default rates remain low compared to industry peers, and the company considers multiple data points beyond credit scores in its loan decision process.

As the BNPL market continues to grow, regulators are closely monitoring the industry. In September 2022, the Consumer Financial Protection Bureau announced that it would subject BNPL providers to greater oversight, similar to credit card companies. Three U.S. senators recently sent a letter to the CFPB, urging the agency to closely monitor the rise in BNPL usage during the holidays to prevent consumers from becoming overextended.

Affirm’s remarkable resurgence in 2023 can be attributed to various factors such as changing interest rate expectations and increased adoption of BNPL services by retailers. However, the company still faces significant challenges in competing with established players and mitigating the risks associated with user defaults. The future success of Affirm and the BNPL market will largely depend on the company’s ability to navigate these challenges and leverage its growing user base and merchant partnerships.


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