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

China’s Robinhood

The rise of Retail Investing

Retail Trading has gone ballistic. In the US equities market, Retail Trading accounts for almost as much volume as Mutual Funds and Hedge Fund Trading volumes, combined. The ease (and gamification) of stock investing has opened up a new asset class to many ordinary people and has democratized the process of buying and selling stocks.

Retail Trading accounts for Approx. 25% of total traded volumes

Retail Investing as a Secular Growth Trend

The post-Covid Retail Investor is a new breed of investor that is here to stay. She/He is younger (Median Age 35 years versus 48 for Typical Investor), more optimistic (72% are bullish) and has increasing disposable income to put to work (43% plan to invest more in the stock market). Whilst speculative euphoria may have burnt some new investors, more of these new investors (+70%) are now looking at buy and hold strategies (versus only 56% a year ago). Companies like Robinhood have pioneered this change and with ‘Zero Comission’Trading, the barriers to entry are as low as they have ever been.

Robinhood Trading App – User Growth

Chinese Retail Investing Market

This has got me thinking about where else this sort of rapid disruption in investing could take place. Boasting the second largest aggregate household wealth in the world (after the US), I was surprised to find that Chinese Retail investing pales in comparison to the US. Only 13% of China’s Households invest in equities, compared to over 55% in US.

Burgeoning Middle Class

From 2015-2030, the share of the Chinese Population with ‘High Incomes’ (>$35k/pa) is expected to grow by 5x (from 3% to 15%). Those with incomes greater than ($11k/pa), the ‘Upper-Middle Class’, are expected to grow to 35% of China’s population compared to only 10% in 2015 (all numbers normalized for 2021 Prices).

This rapid rise in income per capita as people move into the middle class, is expected to open up Total Addressable (Retail) Wealth of ~$30tn by 2030, with over 500m Chinese Clients falling into this ‘Upper Middle Class’ Income bracket with money to invest.

China’s burgeoning Middle Class

One further catalyst is that Chinese households have a disproportionate amount of wealth tied up in Physical Property. As per capita wealth increases, this should start to favor Financial Investments as households diversify their holdings (to be more in line with other developed countries).

Chinese Household Wealth Distribution

China’s Demographic Problem

Unfortunately, alongside greater wealth has come a greater willingness to buy unproductive assets (e.g. Louis Vuitton handbags, Tech gadgets and International Travel). Ten years ago, the average Chinese worker saved 39c on every dollar of income. Today, it is 33c and many young Chinese save nothing at all.

Chinese Savings Rate experiencing decline

This depletion in savings is coming at the same time that China is heading towards a demographic nightmare. By 2050, China will have one of the highest ratio of elderly citizens (as a proportion of it’s working population) in the world and a massive pensions deficit to accompany that. Reports estimate that the Chinese Government Run ‘Basic Pensions System’ will deplete all of it’s assets by 2035. The more Chinese wealth that gets squandered away in unproductive assets, the more of a (social and economic) problem this is going to become.

China on track to have record high Old-Age Dependency Ratio

Chinese Retail Investing: Ripe for disruption

In this regard, Chinese Investing Platforms are not just in the business of democratizing finance like their US counterparts, but they are solving an underlying macroeconomic problem; they are creating the right incentives for households to invest.

To put things into perspective, the Shenzen and Shanghai Composite indices contain just 10% of the world’s equity by value (even though China contributes about 16% of Global GDP). Meanwhile in the US, the Nasdaq & NYSE have about 50% of the worlds equity value. Unlike in the US, Retail Holdings (as a % of market cap) inside of China have steadily been decreasing, speaking to a lack of incentives to invest in domestic markets. As a result, it is common for top tier Chinese companies to completely neglect domestic IPO’s in favor of Hong Kong or US listings.

Chinese Domestic Markets do not appeal to the Chinese Retail Investor

Given the scale of the problem, I think the market is not just prone to disruption but if executed well, Chinese investment platforms can ride the tailwinds of (1) have the backing of the Chinese Government to solve a deepening macroeconomic crisis (2) exposure to a rapidly expanding middle class and (3) ride the broader growth trend in Retail Investing taking place in other countries.

China’s Robinhood’s: Futu & Tigr

The top two brokerage firms in China are ‘Tiger Brokers’ (Ticker: Tigr) and ‘Futu Holdings’ (Ticker: Futu). They surpass their competition by a wide margin due to their online only presence, reduced fees and established technology platforms. Both of these companies boast retention rates of approx. 98% and can be seen as the ‘Robinhood’s of China’.

Their three key revenue drivers are:

(1) Brokerage Commissions

(2) Interest Incomes from Margin Lending/Cash Sweeps

(3) IPO’s and Share plan services

Both companies generate over 60% of their revenues through (1) but this has been steadily decreasing this share through diversification into (2) and (3).


  • Futu has two main investment apps; Futubull and MooMoo.
  • Revenues from Brokerage Fees: Approx. 64%
  • 1.4m Registered Clients, 516k Paying clients
  • Paying Clients Growth: 60%, 84%, 137%, 160%
  • Total Trading Volume: $150bn
  • User median age is 34, mostly affluent Chinese (40% work in technology)
  • To attract clients, Futu has a social networking element, ‘NiuNiu’ community. This allows investors to find new investment ideas (think Wallstreetbets but without the hype). The average user spends 38minutes per day on this in 2020 (versus 25mins in 2019)
  • Founded by an ex Tencent employee. Tencent owns a 30% stake in the company


  • Revenues from Brokerage Fees: Approx. 60%
  • 975k Registered Clients, 215k Paying Clients
  • Paying Clients Growth: 29%, 53%, 76%, 110%
  • Total Trading Volume: $63bn
  • Initial focus is on US equities with international presence
  • 72% of Tigr’s users are under 35 years old.
  • Acquired US baked broker in 2020 to build out in-house clearing functions
  • Interactive Brokers has 8% stake in the business (with Xiamo having 12% stake in the business)


Both Tigr and Futu deserve to be considered explosive high growth stocks, growing revenues at an average of 130-150% over the last few years (alongside paying clients – see above). Importantly, they are both also profitable and have sizeable Free Cash Flows.

On paper, Futu does look like the better business given that it has grown faster and has shown that it can monetize this growth better; with 76% Gross Profit Margins and Net Income Margins at 38% (in 2020). Tigr has Gross Profit margins in the 40% and Net Margins around 12%.

Using analyst expectations for 2021 Revenues, both businesses should grow revenues by over 120% y/y. Assuming a conservative growth rate assumption (Futu 40-55%) and (Tigr 25-40%) over the next five years, adjusting for a 15-20x P/E multiple in 2025 and assuming they can hold Profit Margins in line with where they are now (also conservative given that as businesses see more user growth, they should experience higher margins due to scale), I think both of these stocks are trading at very attractive entry points for new investors with over 100% upside in five years in the most optimistic scenario.

Ticker: FUTU, TIGR
Stock Price (when post published): Futu – $118.89, Tigr – $16.79
Verdict: Moderately Bullish
Timeframe: 5 Years

Sofi: The ‘Amazon’ of digital banking

When I first moved to the US two years ago, it took me three visits and multiple hours to get set up with a local bank. It was a painful process. I haven’t set a foot into my local branch since and a few months ago, it was shut down permanently. This has got me thinking that there must be a better way to do banking; do you really need a physical branch? Why are banking apps so bad? Can I make do with just one bank account? In this article, I look at a publicly traded digital bank which I think has found an answer to those questions.

Retail Banking Today

I’m not the only one who has had the thought of taking all banks online. Digital banks, also commonly referred to as Neobanks, are taking the world by storm. The Neobanking industry is expected to reach a market size of $722bn by 2028, which is a CAGR (Compound Annual Growth Rate) of 47% from 2021[1]. This demand is being driven by people, like me, who value the convenience of digital banking.

Despite this growth projection, retail banking is still dominated by the large incumbents (e.g. Chase, Wells Fargo, BOA etc.). In fact, 50% of us bank with the 10 largest incumbent banks (in the US).

Incumbent banks still retain a large share of the market

Yet despite having such a large percentage of the market, incumbents are not doing everything right. Almost the same percentage (50%) hold more than one bank account and when asked why, 80% of these users cite inadequate one-stop shops as the reason for holding multiple bank accounts.

50% have more than one bank account

A One-stop Shop Bank

This resonates with me. I opened my first bank account in the US with the most popular retail bank (which was also a large incumbent). Over time, as I have wanted to trade stocks, take out a loan, set up a savings account, I have had to open more accounts with competing banks. I don’t think this is sustainable (and it’s a pain to manage logins, passwords and tax docs). The market and users would be much better off if there was a one stop shop for all banking needs.

My stock pick: Sofi

This is where Sofi comes in. Sofi is being taken public (via a merger with Special Purpose Acquisition Company, ‘IPOE’). The reason I like Sofi so much is because their entire business plan revolves around being a one-stop shop bank. In fact, they see the Fintech industry just like the market for food delivery, ride sharing, internet search or e-commerce. Just like Doordash, Uber, Google and Amazon, Sofi aims to be the ‘winner that take’s most’, in the Fintech market.

SoFi’s Business

Sofi’s business model has three different segments; Lending, Technology Platform and Financial Services.

Sofi Business Segments

Sofi’s business strategy is focused on what they refer to as “FSPL” which is just a fancy way of saying that they try to get customers on their platform, offer them superior products and then keep customers using their services for all their banking needs. In order to do this effectively as a start-up, Sofi has had to be extremely innovative. Over the last couple years, we can see they have added a significant number of new products to keep in pace with user demand.

Sofi has rapidly developed new product offerings

The virtuous cycle

I think this is very neat. Banks spend a lot of money trying to get new customers on their platforms (referred to as a “Cost of customer acquisition”). However, if Sofi can organically drive this growth by cross selling products to their existing members, Sofi can save these acquisition costs to then re-invest that into superior product offerings or cheaper products. Over time, this becomes a self-fulfilling cycle, as more users decide to stay on the platform in order to get better products, which means Sofi can invest in better products, which means more people stay on the platform…. you get the point.

We can see how effective this is by looking at one of Sofi’s case studies. If they were able to cross-sell a personal loan to an existing user with just a basic checkings account, this would result in an almost 80% improvement in the bottom line for Sofi, on that user (compared to selling both products to two different new customers). Not to mention that by cross selling products to members, Sofi can also focus on customers which it knows are credit worthy and have a built-up history with the bank.

Cross Selling drives an 80% improvement in bottom line (per user)

Is this strategy working?

This strategy seems to be working for SoFi. Over the last couple years, Sofi has grown members rapidly, and a large share of these members have gone on to purchase more than one product. In fact, Sofi is expecting 75% growth in total users but 95% growth in multi-product members (users who hold more than one product) over the next 12 months.

75% Member Growth
95% Multi Product Member Growth

What is truly remarkable to me is that 24% of Sofi’s product sales come from existing customers and for their more profitable segments, like Home Loans, this figure is even higher (69% of Home Loan sales come from cross sales).

% Product Sales from existing users

The Financials

This is having a real impact on Sofi’s bottom line. The company expects to post its first positive EBITDA in 2021. This is remarkable as most Neobanks struggle to make any money, particularly in their early years (and most remain loss making today)[2].

Sofi expecting positive EBITDA in 2021

Outside of cross selling, Sofi can also fall back on very strong margins for its core business.

(i) Lending: 58% Gross Margin

Sofi is 100% origination only for their lending business. This means that they do not buy outstanding debt obligations from other banks to turn a margin. Instead, they sell loans directly to end users, and then put these on their balance sheet before trying to sell these debt obligations to third parties (at a lower interest rate than they collect from their customer). This is the highest margin form of lending.

(ii) Technology Platform: 62% Gross Margin

Sofi also purchased Galileo, a leading fintech platform, for $1.2bn in 2020 and uses this to host not just its own tech infrastructure, but also outsources this to other Neobanks such as Robinhood, Chime, Moneylion and Revolut. This was a very smart move as this has effectively converted a traditional cost center for Sofi, into an income centre (the same way AWS has been for Amazon). Galileo de-risks Sofi as it captures the growth in the Neobanking industry. In 2020, Galileo was handling more than 90% of account creation amongst all Neobanks in the US.

(iii) Financial Services: Loss Making

The third and smallest part of Sofi’s current business (2% of total revenues) is their Financial Services Platform (which includes investing services for stocks, ETF’s and crypto). This is currently loss making but Sofi does expect this to start turning a profit and this is becoming increasingly likely as users transition away from apps such as Robinhood due to reputational issues.

Ultimately, this will allow Sofi to diversify its revenue base from primarily being a lender, to being diversified across these three segments which support high margins.

Is this a good time to BUY Sofi?

As mentioned above, Sofi is being taken public by SPAC. Investors in IPOE will get a 9.3% stake in the business.

Based on IPOE’s market capitalization as of the close on 5th Feb 2021, this implied the following valuation or Sofi:

40x Price/2025 Projected Earnings

6.8 Price/2025 Project Sales

Whilst this is by no means cheap, those ratios do not account for improvements to Sofi’s bottom line as a result a faster than expected transition to profitability in its Financial Services segment or Sofi obtaining a Banking Charter (which should add 25% to Sofi’s bottom line as it would allow it to borrow at cheaper rates).


Banking is an industry prone for disruption and I do fundamentally believe that this is a ‘winner takes most’ type of industry. The incumbents have failed to do this well and Sofi is pioneering the digitalization of one stop shop banking. They have a proven ability to cross sell, have a developed technology platform and have very defendable margins across two of their three key business segments. The stock is not cheap but with positive developments on the horizon, I will be looking to average in to my position at current prices.

Stock Price (when blog published): $23.10
Verdict: Bullish
Timeframe: 5-7 Years