Fin-tech company Affirm [$AFRM], which lets consumers breakdown purchases into installments, has filed for an IPO with plans to list on the Nasdaq. The company asserts that its revolutionizing the world of payments by offering an option to make purchases over time without bearing the interest for consumers that qualify and “simple-interest” loans for others.
The date of Affirm’s IPO is still unknown, as the company was planning to push back its offering to January, in part because of the strong first-day rallies for Airbnb [$ABNB] and DoorDash [$DASH] which both went public last week. Affirm is able to make money on its “0% APR” installment options by taking a cut of the merchant end of the transaction.
The idea is that customers are willing to pay Affirm to conduct risk modeling and offer its service as a way to magnify the rate of online browsing that actually leads to a transaction. The 0% APR options net Affirm its largest fees from customers, though it also offers “simple-interest” loans through which it receives fixed interest payments on the consumer end as well.
The company has embraced the buy-now-pay-later trend, which has popularity overseas and is gaining traction in the U.S. Worldpay forecasts that 20% of consumers in Germany and Australia are using BNPL services, with room to catch up in the U.S., the industry is only “partway through the first inning,” Brian Barth, CEO of Uplift.
Affirm competes with Sweden’s Klarna, which counts Visa [$V] as an investor; Afterpay, which trades publicly in Australia; and the more travel-focused Uplift. The company was cofounded by PayPal [$PYPL] cofounder Max Levchin, a member of the so-called PayPal Mafia that includes notable executives once affiliated with the digital payments giant, such as Tesla [$TSLA] CEO Elon Musk and Palantir Technologies [$PLTR] Chairman Peter Thiel. PayPal recently came out with its own dedicated installment offering, called Pay in 4.
Affirm intends to trade under the ticker $AFRM, with the offering led by Morgan Stanley, Goldman Sachs. The company stated a target of raising $100 million in its first filing with the SEC, though that figure is typically a placeholder that will be updated in future filings. Affirm makes its dough by collecting vig from merchants when it helps make a sale and enables the associated payment. The company offers both “0% APR financing products” and “simple-interest” options, the latter of which makes money on the consumer end of the interest-bearing order.
Merchant network revenue accounted for just over half of Affirm’s total revenue in its latest fiscal year, while interest income grossed about 37%. The company also pumped up revenue from loan servicing and its virtual card network, through which customers are issued virtual cards that they can use for purchases with merchants “that may not be fully integrated with Affirm.” The company gets a cut of the exchange fee when customers take this route.
The company contends that its key competitive edge is its risk model “built on more than a billion data points” that analyzing risk at the “transaction level” by considering the item that a customer is buying. Affirm insists that it’s able to approve 20% more customers on average than its competitors—helping to dole out more purchases for merchants—while also pricing risk “with a high degree of accuracy.”
Affirm says its mission is to “deliver honest financial products that improve lives,” per the company’s prospectus. Levchin wrote a letter enclosed in the filing that grieved a lack of innovation in the payments industry dating back to the 1940s when cards first came on the scene. “With most of the payments industry deriving profits from late fees, overdraft charges, and gimmicks like deferred interest, it’s not hard to agree that there has to be a better way: it’s time to evolve payments again,” he wrote in the letter.
Levchin thinks that the payments industry has to support growing clarity for consumers about what they’ll be paying and when. He also mentioned that merchants ought to come to expect more from their payments partners, who can help push sales and customer acquisition. He painted Affirm as the opposition to financial players that “derive profit from their customers’ missteps,” calling out the credit-card industry and arguing that such products could “before too long” wind up in the “shrinking minority” of ways that customers pay.
Affirm almost doubled its revenue in June, generating $509.5 million during in 2020 compared with $264.4 million during fiscal 2019. The company saw its losses slightly narrow as well, to $112.6 million from $120.5 million. The company divulged in its prospectus that its “0% APR” payment option represented 43% of gross merchandise value facilitated through its platform during the last fiscal year. Affirm says that, through September, 6.2 million consumers completed about 17.3 million transactions across more than 6,500 merchants through the Affirm platform.
Though Affirm works with more than 6,500 merchants, the company generates a substantial portion of its business from Peloton [$PTON] The maker of connected fitness equipment accounted for about 28% of Affirm’s revenue in the latest fiscal year. Affirm’s top 10 merchants made up roughly 35% of revenue.
“The concentration of a significant portion of our business and transaction volume with a limited number of merchants, or type of merchant or industry, exposes us disproportionately to any of those merchants choosing to no longer partner with us or choosing to partner with a competitor,” the company warns in its risk factors.
Affirm and Shopify [$SHOP] struck an agreement in July through which Shopify would list Affirm as a payment option, giving the company exposure to Shopify’s broad base of merchants. Affirm will pay Shopify a small fee for sales processed through its platform, and the company will be Shopify’s exclusive partner for such payment options over the course of the arrangement, which lasts three years and then subsequently renews for additional one-year terms unless one party decides to cease the arrangement.
The mot intriguing part of this agreement in the context of Affirm’s upcoming IPO is a warrant arrangement, which will green light Shopify to purchase close to 20.3 million shares of Affirm’s common stock at a price of a penny a share. A quarter of the shares issuable per this arrangement became exercisable in July when the two companies entered their agreement, and the rest “are subject to accelerated vesting immediately prior to the completion” of Affirm’s IPO.