Affirm — 3 Big Things Every Investor Should Know

What Affirm Does — Its Products and Services

Affirm has three products:

• Consumer loans
• Merchant commerce solutions
• Consumer app

Let's go through each of them...

Consumer loans

Helps people pay for goods over time, rather than all at once. Customers pay in fixed amounts without deferred interest, hidden fees, or penalties.

Affirm has two financing products:

• 0% APR (annual percentage rate). Customers pay zero interest and no additional costs.
• Interest-bearing loans. Affirm charges simple interest that never compounds. Customers pay a fixed amount that is agreed to upfront and not a penny more, even if they miss a payment.

An example:

Merchant commerce solutions

They help merchants sell and promote their products and give them product-level data and insights.

Here's a rundown of what they offer:

• Flexible loan options-Merchants can offer either one or a combination of 0% APR and interest-bearing, pay-over-time offerings. For interest-bearing financing, merchants can subsidize and pick the range of interest rates their customers pay.
• Merchant dashboard-Merchants can view transaction data, manage charges, and access API (application programming interface) keys. The dashboard is updated daily and shows merchants the number of charges, total amount captured, total amount authorized, and AOV (average order value) across different timeframes.
• Analytics-Data to help merchants understand how their products are performing and insights into its customers' shopping habits.
• Support-They have a team ready to help merchants interpret and act on their data.
• Affirm app-Allows merchants to make personalized offers based on consumers' spending patterns, shopping habits, and purchase intent.

To see a full list of products and services they offer merchants, start reading on page 128 of its S-1.

Consumer app

An app where consumers can manage their payments to merchants in one place, open a high-yield savings account, and discover personalized offers from Affirm's merchant partners.

Affirm manages the customer journey from end-to-end. They don't sell the servicing rights for your account, even in delinquency.

How Affirm Makes Money — Its Business Model

Affirm makes money from three sources:

• Merchants
• Consumers
• Banks (financing partners)

Merchants:

• They earn a fee when they help a merchant sell a product or power a payment plan.
  • Merchant fees aren't standardized. They vary based on the merchant and type of product.
• They earn larger fees on 0% APR financing products.
  • For June 30, 2020, FY, 0% APR financing products were 43% of GMV (gross merchandise volume).
  • For the quarter ending on September 30, 2020, 0% APR financing products were 46% of GMV.

Consumers:

• They earn interest on loans they make to consumers.
  • The interest rate they charge varies based on the product, creditworthiness of the consumer, repayment term, amount of loan, and the arrangement with the merchant.
• They issue virtual cards to consumers through its app, allowing consumers to shop with merchants that aren't fully integrated with Affirm. When these cards are used over established card networks, they earn a portion of the interchange fee from the transaction.

Banks (financing partners):

• They earn a small fee when they sell the loans to their funding sources. However, they retain servicing rights that allow them to control the consumer experience end-to-end.
• All loans are underwritten through Affirm's proprietary risk model. The majority of the loans are funded by Cross River Bank, one of its banking partners.
• In Canada and some U.S. states, they originate loans themselves. This helps them have better transaction economics because they don't have to pay a third party to fund the loans.

Affirm's revenue breakdown for FY ended June 30, 2020

Affirm's flow-of-funds ecosystem

Affirm's Key Business Metrics

How Affirm gauges the health of its business.

What the metrics mean:

• Gross merchandise volume (GMV) is the total dollar amount of transactions on its platform during a specific period, net of refunds.
• Active consumers are consumers who engage in at least one transaction during the 12-months before the measurement date.
• Transactions per active consumer is the average number of transactions an active consumer has performed during the twelve months before the measurement date.
• Contribution profit is total revenue minus these direct costs:
  • Amortization of discount
  • Unamortzied discount released on loans sold to third-party loan buyers
  • Provision for credit losses
  • Funding costs
  • Processing and servicing expenses

Contribution margin (profit) is a product’s price minus all associated variable costs. This tells us how profitable or un-profitable a company's product is on a per-unit basis.

Gross merchandise volume (GMV) by cohort

This shows how well Affirm retains its merchant partners based on GMV, not by the number of merchants using its platform.

Financial Highlights

Not much to see here. Affirm isn't profitable on a GAAP basis but is trending in the right direction.

A better way to measure Affirm's profitability is contribution margin (see Key Business Metrics section above).

Two risks to watch:

• Net charge-offs
• Revenue concentration

Net charge-offs

Net charge-offs are the debt owed to a company that is unlikely to be recovered. It's expressed as a percentage of loan volume originated.

Affirm's 2018 cohort of consumer loans has a charge-off rate of around 4%. Both its 2019 and 2020 cohorts are doing better, coming in at sub 3%, respectively.

For comparison, the charge-off rates for credit cards for the top 100 banks in the U.S. is between 4%-5%, outside of recessions.

Revenue concentration

For the fiscal year ended on June 30, 2020, ~28% of Affirm's revenue came from Peloton ($PTON).

Affirm and Peloton signed a three-year deal ending in September 2023 that makes Affirm Peloton's financing partner. After the three year deal, the agreement renews in successive one-year terms until terminated.

Affirm's Competitors:

• Klarna
• Afterpay
• Mobile wallets from PayPal and Venmo
• Legacy payment methods like credit and debit cards from banks like Citi, JPMorgan, and Bank of America
  • Last year, Citigroup launched Citi Flex Pay and JPMorgan introduced My Chase Plan

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