How Does Affirm Make Its Money?

With the Affirm IPO on the way, here's a rundown on how this buy-now-pay-later company makes money.

Rachel Curry - Author

Oct. 16 2020, Updated 1:35 p.m. ET

Affirm is one of many personal loan companies on the rise. A competitor of Afterpay, the company promotes the buy-now-pay-later route for consumers seeking an alternative to traditional credit cards. With the Affirm IPO date on the way, potential investors will want to know just how Affirm rakes in the revenue.

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The logistics behind how Affirm makes money

Credit card companies are known for their high interest rates. In Q1 2020, the average interest rate for new credit card offers was 18.61 percent according to a WalletHub study.. However, it's not just interest rates that make crawling out of credit card debt so difficult. There are also late fees (the average U.S. credit card late fee is $36), which can increase if you miss more than one due date.

Credit card offenses can negatively impact your credit score and make it increasingly difficult to pay off your debt. This is why people are turning to buy-now-pay-later options like Affirm.

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When a consumer uses Affirm as a personal loan provider, their credit score determines their interest rate. Affirm doesn't charge any late, service, or pre-payment fees.

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However, Affirm has partnerships with a plethora of big-name corporations (this is called Affirm for Merchants and is where most of their money comes from). Most notably, Affirm works with Peloton, Walmart, WooCommerce, and Shopify to power their monetary transactions.

In this case, Affirm charges the merchant for the service. They tout boosted sales as the reasoning behind this—specifically, an 85 percent increase in average order value and 20 percent higher repeat purchase rate as of May 2020.

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When a merchant uses Affirm, customers have the option to pay off their purchase within 3–48 months. Merchants can also let customers split their purchase of $50 or more into four, equal, and interest-free payments paid every other week over 6–8 weeks. Affirm claims to take on the risks of potential fraud and chargebacks. 

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How Affirm's competition is performing in the public market

Affirm may have been the first of its kind (it was founded in 2012), but it's not the only fish in the sea. The company has some major competition, namely Australian fintech company Afterpay, which came on the scene in 2014.

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Afterpay stock is doing particularly well, with a 4.5 percent increase throughout the day on Oct. 12. In the past month, Afterpay stock (which goes by the ticker symbol "AFTPF" on the OTC) rose 26 percent.

Another competitor is Openpay, an Australian company that trades under "OPY" on the ASX. Founded in 2013, Openpay stock is rather volatile but has seen a prominent boost in the last few weeks.

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The adage 'invest in what you know' rings true

Consumers can find Affirm on more than 6,000 merchant sites. Meanwhile, Afterpay powers transactions for 30,000 merchant sites. Whoever is doing the loaning for consumers, the truth is that more than a third of e-commerce platforms in the U.S. plan to implement financing options at checkout within the next two years.

The Affirm IPO has yet to get here, but their pay-later offering seems to be making waves—despite America's rising unemployment rates and struggling economy.

Correction: The article has been updated to show that Affirm has more than 6,000 merchant sites. The company offers monthly repayment terms from 3–48 months.


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