Buy Now, Pay Later: Putting the Credit Card out of business

Buy Now, Pay Later

Buy Now, Pay Later (‘BNPL’) services offer consumers a way to split payments for purchases over an extended period of time, often for zero interest. Whilst the US retail market is worth an estimated $800m, BNPL services only account for 4% of sales currently. In the e-commerce market, BNPL penetration is even lower (at 2.1% in 2020), making the US a laggard compared to other developed economies where BNPL accounts for over 10% of online payments. With 70% of millennials preferring to shop online and e-commerce retail sales expected to account for nearly a quarter of all sales by 2025 (from 17.8% today), BNPL is the fastest-growing e-commerce payment method globally.

US BNPL still has low penetration compared to other economies

BNPL replacing Credit Cards

The problem that BNPL companies are trying to solve is the distrust that the younger generation of shoppers have with traditional credit cards. According to TD Bank’s Annual Consumer Spending Index, approximately 25% of Millennials do not carry credit cards and 64% of Americans would consider purchasing or applying for financial products through a technology company’s platform instead of a traditional bank.

Affirm (Tickr: Afrm)

‘Building honest financial products that improve lives’ is the mission statement for one of the leading BNPL service providers in the US, Affirm. In practice, this means no late fees, no hidden charges and a seamless tech-enabled shopping experience for users.

Affirm was founded in 2012 by Max Levchin (who was also a co-founder of PayPal). It filed for IPO in late 2020 and began trading on the Nasdaq Stock market on January 13, 2021. Whilst Affirm is the first-mover in the US BNPL space, it has pivoted its business model away from initially targeting larger purchases that would typically be put on credit cards (e.g. travel, auto) to every day short term purchases (with resultingly lower interest costs). Currently, loans with a term length greater than 12 months account for only 22% of its outstanding loans (versus 43% last year).

Affirm Business

Why is BNPL a superior form of payment?

Naturally, the key question I had was how Affirm’s services offer anything fundamentally better than credit cards i.e. does Affirm offer a truly disruptive technology or is this just a replacement to something which already (sort of) works?

  • Smarter Loans

The key advantage Affirm believes it has over rivals is (unsurprisingly) in its technology platform to generate loans. By using Artificial Intelligence models that detect affordability, monitor shopping habits and financial prudence, Affirm believes that it can facilitate more effective loans i.e. higher approval rates and lower default risks.

There is proof in the pudding here. Despite growing users rapidly over the last few years, delinquency rates for Affirm have been falling (just over 1% currently), showing that the company is clearly doing something right.

  • Merchant Integration   

The second key advantage to using Affirm’s platform is in its integration with merchant providers. US companies spend over $1tn annually on user acquisition costs. By providing an effective payment platform which leads to higher retail sales conversion, Affirm is driving these costs down.

To improve its offering, Affirm has gone one step further and launched its own merchant vendor network (think of an e-commerce site hosted by Affirm). This proprietary network, with 29,000 total merchants, is now driving a third of total transactions on its platform; cementing Affirm’s business moat.

How does Affirm make money?

What I like about Affirm is that the business model is very easy to understand. The two key revenue generators are 1) Merchants and 2) Loan Revenues/Banks.

44% of total revenues come from Merchants who pay a fee to Affirm for sales converted on their platform. 47% of total revenues come from interest income/sales of loans to banks.

Unlike credit card companies, Affirm has no vested interest in ripping off customers with late fees as most of the loans are passed on to banks, for which Affirm collects a fee from the originating bank. (Equity capital used to fund loans has been decreasing 19% despite Affirm more than doubling GMV).

Affirm is in Hypergrowth Stage

Affirm is currently is currently a ‘hyper-growth’ business. In its last quarter, the business increased the number of vendors on platform more than fivefold, more than doubled Gross Merchandise Value, and its number of active customers grew 97% y/y. Today, Affirm is now offered as a payment option for merchants representing more than half of the U.S. e-commerce market.

What is impressive about these numbers is that this is despite interest rate costs increasing on its platform, which indicates user stickiness. In its last quarter, only 38% of GMV came from 0% APR products vs 54% for the same quarter the prior year (due to fewer zero interest travel merchants).

Affirm as a Hypergrowth Business

More partnerships required to reduce concentration risk

The biggest issue with this growth right now is that Affirm has significant concentration risk with its key customer, Peloton. Peloton accounts for 20% of Affirm’s total revenues currently (28% in 2020, 20% in 2019) and the companies top ten merchants represented 25% of total 2021 revenues (35% in 2020, 30% in 2019).  In order to diversify the business, Affirm needs to continue to strike partnerships with new merchants, which it seems to be executing on well, so far.

Affirm is the exclusive partner of Shopify and is still in the process of enrolling all of Shopify’s merchants onto its own platform. Affirm has also been made available at Walmart and Target, which account for ~20% of the US retail market. In August 2021, Affirm agreed a non-exclusive partnership with Amazon. As Amazon serves over 300 million active customers worldwide, the partnership will expand Affirm’s total addressable market significantly. In late 2021, Affirm also added American Airlines to its list of vendors which becomes especially important as travel spending begins to increase on the back of easing travel restrictions.

Affirm’s increasing merchant network is a competitive advantage

User retention will require further downstream integration

Affirm is up against two large competitors; Klarna and Afterpay, in the BNPL market. So for continued hyper-growth, Affirm will need to achieve high levels of user retention on its platform.

So far, Affirm has done well on this front, boasting a dollar-based merchant expansion rate that has consistently exceeded 100% since 2016. In order to continue to achieve this however, Affirm will need to integrate with downstream retail functions and banking needs (e.g. returns, debit cards, savings products).

In 2021, Affirm completed the acquisitions of PayBright (Canada’s leading buy-now-pay-later provider) and Returnly (a leader in online return experiences and post-purchase payment). Per management, “PayBright’s complimentary merchant relationships and first-mover advantage in Canada will enable it to expand its scale and reach across North America’. As for Returnly, 8m people have used this successfully to date.

In February 2021, Affirm announced plans for the Affirm Card, the first U.S. debit card that will allow customers to make installment payments on any purchase at any merchant. Management expects that “as it launches unique new offerings such as Affirm Debit+ and activates exciting new merchant partnerships, it sees a very bright long-term future for Affirm.”

Additionally, Affirm has launched a Savings Product for customers (in 2021) which has raised deposits of $300m without any promotion so far, allowing the business into the broader Fintech market.

Affirm Retention Rate


Affirm is NOT a cheap stock. Most promising growth stocks never are but the valuation is clearly already baking in a lot of growth.

Using management estimates for 2022E Revenues and assuming the business continues to grow (revenues) at 20-30% CAGR over the following four years (also from mgt estimates), pegging long term (optimized) margins of 20-30% and assuming the company is valued at a multiple of 25-30x earnings, I struggle to get excited about Affirm at current levels.

Arguably, the biggest upside risk to the below forecasts will be Affirms integration with Amazon, which management has not accounted for in any of their financial projections.


The BNPL is a growing space and Affirm has a proven track record. Not only is this business a first mover in this market, but it has also shown that it can execute exceedingly well at striking long term partnerships with the largest retailers in the US and cementing a business moat via integration with other retail and banking functions. Yet despite this, the stock is valued dearly on the back of this proven success and I will be waiting for a pull-back to more attractive levels (< $130) before starting a position.


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Ticker: AFRM
Stock Price (when post published): $164.23
Verdict: Neutral at Current Price
Timeframe: +5 Years

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