Affirm’s tempting pay-less-upfront-now proposition is popping up on more and more retail product pages. Instead of forking over a full $250 for a new rug, pay just $25 a month for 10 months, with 0 percent APR. That sounds a lot better on the surface, but Affirm’s loan system has broader implications for retailers.
A fin-tech company that positions itself as an alternative to credit cards, Affirm is moving closer to becoming a mainstream payment option for more people. Earlier this month, Affirm announced a partnership with Walmart, its largest partnership with a brick-and-mortar retailer to date. Walmart customers can make purchases through Affirm — which allows customers to pay for a single item like a mattress or a handbag through a series of installments, with interest — at any of Walmart’s 4,000 stores. Customers will also be able to pay for items on Walmart’s website using Affirm in the coming weeks.
Affirm’s earliest partnerships were with direct-to-consumer companies that sold the types of big-ticket items that most people associate with using a credit card to buy, like Wayfair, Casper and Peloton. Today, 2,000 merchants allow customers to pay using Affirm. And as the Walmart partnership shows, consumers can now use Affirm to pay for more than just luxury times — they can use it to finance items they might have previously paid upfront with cash or a debit card, or with another credit card.
It’s layaway for the modern age.
Merchants who use Affirm say that it helps them reach lower-income customers who might not otherwise have been able to pay for some of their items, and that it’s especially appealing for younger consumers who might not have as much disposable income and prefer paying less upfront for items like mattresses or plane tickets. But it’s still unclear whether most customers are using Affirm as a substitute to or in addition to taking out a credit card. If the latter’s the case, then customers might find themselves in more trouble come a recession — which could also hurt retailers, even though Affirm tries to downplay how much risk retailers are taking on. Although Affirm takes on the burden of the loan and pays retailers upfront, taking on too many credit cards or loans through Affirm can limit their ability to make other purchases.
“I think it’s really important to note that most of these types of solutions [like Affirm] weren’t available during the last economic downturn,” Leslie Parrish, a consumer lending analyst with Aite Group, said. “And we know that unsecured personal loans is one of the things we first see defaults in if there’s a change in the credit cycle.”
Affirm’s origin story has been much repeated at this point by founder and CEO Max Levchin — when Levchin was in college, he opened up a department store credit card, thinking that he was going to save 10 percent on a pair of jeans with no catch, unaware that he would end up paying more than the jeans initially cost thanks to late fees and compound interest.
“Across all industries — whether it’s travel or retail — customers are no longer all that interested in adding another purchase onto their credit card, or even using their debit card,” Affirm’s vp of partnerships, Sara Wyman said.
So Affirm presents itself as a fairer, more transparent competitor to department store credit cards: It doesn’t charge late fees or compound interest, and Affirm tells customers before they enter their payment information how long they have to repay the loan, and how much interest they’ll owe — anywhere from 0 to 30 percent, though Affirm says that the average interest rate is 17 percent. That’s about the same as the average APR rate on a credit card. Affirm works with Cross River Bank to underwrite loans.
Affirm said that the average order value today is $800 and that the average Affirm customer takes around 10 to 11 months to repay their loans. Affirm does not share how many customers end up defaulting on their loans — if an Affirm customer is over 90 days late on a payment, they have to report the customer to credit bureaus.
Merchants who use Affirm — many of them DTC companies — say that they wanted to add a financing option to their websites instead of their own branded credit cards, and decided on Affirm because they felt it was more transparent than other financing options and was easier to integrate with their website. Wayfair has its own credit card, but most online startups don’t. Affirm also gives merchants aggregated data about how old customers are, what type of credit score they have, and other customer demographics.
David Kalt, the founder and CEO of Reverb.com, a secondary marketplace for instruments, said he wanted to add Affirm as a financing option, because “musicians tend to have less traditional career paths and lifestyles. They’re not bad lending candidates, but they’re underserved by banks and credit card companies because of unpredictable income streams, disinterest in credit cards, and more. Affirm’s creative approach to determining credit-worthiness helps us serve those customers.”
Sash Catanzarite, the chief product officer and co-founder of women’s fashion resale marketplace Tradesy, said that the average order value of a customer who uses Affirm to finance their payment is about 45 percent higher than those who don’t use Affirm.
“We see people using it as an alternative to a credit card. And anecdotally, it’s hard for us to measure — but we even see people using it who could probably purchase that thing outright but for whatever reason have decided that they would prefer to make a monthly payment rather than laying out the cash upfront,” Catanzarite said.
When asked whether they were worried about purchasers taking on too much interest through Affirm or financing purchases they shouldn’t have, the merchants who spoke with Digiday say that that hasn’t been a concern for them.
“I think that, yes, there’s a risk if people were all of a sudden to start financing everything that they purchase [through Affirm] and trying to pay that out over time,” Catanzarite said. “However, I think that the thing that historically has been an area where people get into a huge problem with credit on, is not being able to pay off the bill and then having the rate go up really dramatically, and that’s where I think Affirm has the potential to do differently.”
As Affirm’s gotten bigger, it’s had to find ways to market itself to a broader variety of companies, some of which might not have immediately thought to add a financing option like Affirm. It made a big push into apparel, last year for example, with a three-month interest-free offering. Affirm’s been able to do this because it’s taken on $450 million in equity funding, as well as a $100 million credit line from Morgan Stanley. The company declines to say what percentage it takes of each purchase made through Affirm, saying that it varies by merchant.
Many of the companies that Affirm partners with right now are DTC companies that never offered their own branded credit cards in the first place. So, in order for Affirm’s vision to come to fruition — to replace the traditional department store credit card with a more transparent option — it’s going to have to partner with more traditional retailers and convince them to ditch their credit cards once and for all.