Affirm Business Model | How Does Affirm Make Money?

Affirm is a fintech company founded by Max Levchin in 2012. Affirm is a platform for credit and “Buy Now, Pay Later” purchases. Clients worldwide rely on it for payment integration services.

Affirm partners with some of the biggest names in e-commerce, including Shopify,  WooCommerce, and Walmart.

Affirm Business Model

The Affirm Business Model aims to provide simple payment and online checkout options to consumers.

Affirm earns money by charging interest on purchasers’ “pay later” transactions. Furthermore, it receives compensation from its merchant partners for providing payment processing services.

According to the most recent published financial statements, there were 242 million outstanding shares of this NASDAQ-listed company. According to its latest revenue estimate for the fiscal year 2021, the company will earn $ 780 million.

What is Affirm?

Affirm is a FinTech company that provides point-of-sale loans to consumers. Through partnerships with retailers such as Walmart or Shopify, it offers short-term loans up to six months in length. 

Customers of Affirm transact directly with the company through its website or mobile app.

Affirm earns money by charging customers interest on their loans. The company has an average annual percentage rate of 18 percent. 

Affirm Business Model

Affirm also charges merchants a percentage of the item’s sale price to handle payments and assumes default risk.

Since its founding in 2012, Affirm has grown into one of the world’s most prominent consumer lending startups. 

The company now has more than six million customers and works with over 3,000 merchants across the United States.

Corporate Profile

Firm NameAffirm Holding Inc.
Year Founded2012
FounderMax Levchin
HeadquarterSan Francisco, California, US.
Key PeopleMax Levchin, Libor Michalik, Michael Linford.
Business ModelFintech – Pay Over Time
ProductsPayment Solutions, Checkouts, Saving Accounts, and Cards.
CompetitorsVISA, Mastercard, Discover, PayPal, etc.
Revenue$230.7 million for Q3 2021

How Does Affirm Work?

Each provider of buy now, pay later services operates slightly differently. Still, the premise is generally the same: At the check-out stage, under payment options, you are given the option of spreading the cost of your purchase over time.

A short-term loan is approved in seconds after making a small down payment and agreeing to repay the remainder within a few weeks or months.

You are not being offered credit by the merchant but by a third-party lender that the merchant has authorized on its website (and paying a service fee). Affirm is one of these third-party lenders.

Customers can pay for products in several monthly installments with these loans. When you purchase a product through Affirm, the following happens:

  • A customer adds the desired products to their shopping cart and selects Affirm as their preferred payment method.
  • Then they choose a payment schedule. Affirm offers installment plans that range from three months to three years. During the payment cycle, the company discloses the interest rate charged at checkout and maintains fixed interest rates.
  • Finally, customers pay to Affirm directly for each installment. A company’s app lets customers make payments.

The company collaborates with over 3,000 merchants in various industries, including fashion, electronics, travel, and automotive. A few examples of merchant partners are Peloton, Adidas, StockX, Eventbrite, and Walmart.

The customer pays Affirm directly, not the merchant. Thus, the company assumes the risk of payment default due to being responsible for loan repayments.

The usual interest rate range is between 0% and 30%. 0% installments are available only from a few merchants.

Affirm offers customers the benefit of not paying late fees or any kind of service fee when making a payment.

While Affirm will run a soft credit check on its customers to ensure that they can repay the loan, it will not run a hard credit check. It may be necessary to pay a down payment in some cases.

Affirms, on the other hand, offer numerous benefits to merchants. In addition, if a merchant adds Affirm as a checkout option, the annual order volume can increase by 85 percent and repeat purchases by 20 percent.

Customers can access Affirm directly through the company’s website or download an app from the Google Play Store or App Store.

How Does Affirm Make Money?

Affirm makes money by setting interest rates on its consumer loans and charging merchants fees for processing payments.

Affirm earns the majority of its revenue by charging online consumers flexible repayment plans with interest. The service enables online shoppers to pay for transactions in a series of installments for up to 36 months. The APR for such transactions ranges between  10% and 30%.

Moreover, Affirm earns money by charging merchants to integrate their payment solutions. The company now has approximately 8000 merchant partners and more than 4.5 million global users.

Affirm generates revenue through financial holdings, investments, and bank interest, just as other publicly traded companies do. The company has grown its wealth by leveraging the strength of its international presence, brand recognition, and partnerships with merchants.

So far, the firm has not pursued additional revenue streams. The global market for online payments approaches $5.5 trillion, making Affirm’s current business model an excellent opportunity to make money.

Here is a closer look at each of the two revenue streams.

Interest Rates on Consumer Loan

Affirm earns money from the loans it makes to consumers. One of Affirm’s highlights is its zero-fee policy (it does not charge late fees, for example) and its transparent interest rates.

You can get rates between 0% and 30% APR. As per Affirm, the average monthly loan amount is around $700. The customer typically repays it within nine months at a rate of 18% APR. As a result, you will be paying $90 per month, with order volumes totaling $807.

Furthermore, the company has also obtained over $100 million of debt financing from Morgan Stanley and other financial institutions. Their cash allows them to perform self-underwriting of loans, which leads to higher margins in the long run.

Affirm’s credit assessment algorithms consider over 80 factors to minimize risk. The following are some examples of data points:

  • An individual’s behavior on social media.
  • Previously, payments such as rent and loans were made on time.
  • Report on education, employment, and income in the United States.
  • An analysis of the types of purchases a customer makes, especially about their financial resources.

CEO Levchin reports that the company’s loans are repaid almost all of the time. To date, no detailed information has been provided.

The company offers financing sometimes at 0% interest rates. While the company does not earn interest, it does earn income from merchant fees, which we will discuss next.

Merchant Fees

In addition to its platform fees, Affirm charges a percentage of each sale made through it. Although the company does not disclose its fee structure publicly, it is believed to range between 2% and 3%.

Actual fees are determined by the expected sales volume, the purchase price, and the type of goods sold.

Merchants pay to Affirm a fee for their services, including handling all payment aspects and carrying the default risk.

Affirm also claims that merchants who work with them experience an 85 percent increase in order volume and a 20 percent increase in repeat business.

Success Story of Affirm

Max Levchin, one of the co-founders of PayPal, founded the company in 2012. Seeing a gap in the consumer credit market, he decided to take advantage of it. 

He founded Affirm to provide online consumers with simple and flexible payment terms that others lacked.

The use of credit cards often leads to unauthorized charges for consumers. 

The compound interest rate formula contributes significantly to the complexity of credit cards. Many consumers are confused by the idea of hidden fees and a never-ending cycle of compound interest.

Affirm launched the checkout feature in 2013. Affirm’s first significant business partnership was with  Peloton in 2015, followed by Expedia in 2016. 

While struggling in the past, the company did take the initiative in 2018, once it partnered with Walmart. The company has partnered with over 8,000 merchants worldwide, including well-known brands like Walmart, Shopify, and WooCommerce.

As part of Affirm’s strategy for attracting online shoppers, it offers a transparent commission fee structure. These plans advocate allowing consumers to make flexible payments without charging exorbitant interest rates.

AFFIRMED has expanded its offerings to consumers and merchants alike since its inception. Using its “split” pay option, online shoppers making smaller payments than $250 had a fixed payment option. 

As part of its expanded marketing capabilities, Affirm has extended its reach to merchants. Its primary objective is to ensure financial compliance to regulatory standards for merchants through marketing solutions.

“Save” offers consumers the option of opening a digital savings account. 

It is available as a mobile application for the iOS and Android operating systems. It has an average annual percentage rate of 0.65 percent, and there is no minimum balance requirement. Additionally, Affirm plans to offer its online customers their credit cards.

Affirm Business Model

Affirm provides consumers with a “Pay Over Time” solution. The company could accomplish this by offering its merchant partners a transparent fee structure. 

The annual percentage rate (APR) on online payments charged by Affirm is low, with no hidden fees.

Affirm offers “split” or “pay over time.” Its annual percentage ranges from 0% to 10% to 30%, depending on the amount and duration of repayments. You can choose repayment terms of up to 36 months. 

With Affirm’s repayment plans, you don’t need to provide collateral like you would with a loan. The consumer should still determine whether they are eligible for a repayment loan before applying. 

However, there is no impact on credit score associated with checking prequalification criteria.

Affirm’s business model revolves around providing checkout payment solutions to consumers. Additionally, it offers merchants comparable solutions. 

Online payment solutions from Affirm are available to both consumers and merchants concurrently.

As a result of Affirm’s technology, merchants can retain more of their customers. The insights it provides its merchant partners into consumer purchasing behavior are valuable. 

A multi-step consumer journey model that covers all stages, from awareness to consideration to conversion.

What are the Unique Selling Propositions of Affirm?

The most prominent selling point of Affirm for online shoppers is its frictionless checkout process.

The business model of Affirm is appealing to both individuals and businesses.

One of the key ways Affirm differentiates itself from its peers is its repayment plans for online shoppers. Alternatively, customers can choose a “split” payment plan that includes fixed monthly payments.

You’ll receive a prequalification letter with repayment plans ranging from 10% to 30% APR without hidden fees.

Merchant clients of Affirms receive the same high-quality services. The company offers unique services like seamless checkout, mobile payment, and marketplaces.

The company’s mission is to provide financially sound financial and marketing services to its clients.

Frequently Asked Questions About Affirm’s Business Model

Are Affirm payments automatically divided into four installments?

You get an option to divide your payment into four installments with most point-of-sale loans. An initial down payment plus three additional payments are required at the time of purchase.

Affirm allows you to choose your payment method. Then, you may be able to divide the purchase into three, six, or twelve payments.

Are there any minimum purchase requirements for Affirm?

Affirm’s consumer site does not specify a minimum purchase amount. It is up to Affirm’s partner merchants to set minimum purchase thresholds, not Affirm. According to the business website, a minimum $50 deposit is required.

What is the purchase limit with Affirm?

According to Affirm’s website, the maximum purchase amount is $17,500.3. However, the actual amount you can finance with an Affirm point of sale installment loan varies by merchant.

When do products bought on Affirm ship?

As per Affirm’s Help Center, merchants complete orders and prepare them for shipping immediately after checkout.

If your order has been confirmed and is ready for shipping, you will receive a notification from Affirm. Occasionally, Affirm-ordered items may not ship immediately.

Can you pay your bills with Affirm?

Affirm provides financing for purchases made at merchant partners. Some short-term installment loan platforms also offer bill payment and money transfer services, but Affirm does not.

Is there a credit limit with Affirm?

There is no minimum or maximum credit limit on Affirm. Although the maximum purchase limit is $17,500, your specific credit limit will depend on factors such as:

  • An overview of your credit history.
  • Affirm payments history.
  • Your tenure with Affirm.
  • The interest rate charged by the merchant.

Affirm allows you to apply for multiple loans from multiple merchants at the same time.

Moreover, Affirm points out that it considers the current economic conditions, so you might not receive an approval or credit limit based on your financial history alone.

What is the best way to increase my Affirm credit limit?

You can do a few things if you are approved for Affirm loans but wish you had a higher credit limit.

You can start by repaying your current Affirm loan on time. As mentioned previously, Affirm considers your current loan management before approving your new buy now, pay later arrangement.

You can then work on improving your credit score in general. If you’re trying to obtain a higher credit limit with Affirm or another lender, paying your bills on time, reducing your debt balances, and limiting your credit applications may all work in your favor.

Does Affirm Affect My Credit Score?

It’s essential to consider the impact on your credit history when applying for financing. There are two factors to consider: your credit check and how the credit bureaus view your credit activity.

Is there a minimum credit score to use Affirm?

There is no minimum credit score needed to apply to Affirm. You are qualified based on your credit history, your relationship with Affirm, and the current economic climate. However, a higher credit score increases your probability of approval for a point of sale installment loan.

Can I get Affirm without a credit card? 

To use Affirm, you do not need a credit card. If you applied for a loan and are thinking, “why did Affirm not approve me?” then you may not have a credit card.

You may be denied if your credit file is thin, you have poor credit, or you fail to meet any requirements set by the merchant.

Does Affirm Charge Fees?

No, Affirm does not charge late fees, prepayment fees, service fees, or other hidden fees.

Is Affirm Safe to use?

Affirm takes several security measures to protect your personal information. It includes encrypting data and screening every employee’s background.

From a financial standpoint, there are some risks associated with Affirm.

Affirm’s website promotes itself as a bill-free payment option. However, using this service still binds you financially into debt. After all, a point of sale installment loan is still a loan.

Even if you don’t pay interest, you’re still borrowing money, which you have to pay back. You may fall behind on your payments if you take out too many Affirm loans. When applying for buy-now, pay-later financing, it is essential to consider your financial situation.

What retailers and stores accept Affirm?

Thousands of merchants and retailers in the apparel, travel, electronics, home, and fitness categories accept affirm. Several brands accept Affirm’s point of sale installment loans, including:

  • Best Buy
  • Expedia Hotels
  • Peloton E-Commerce
  • Pottery Barn
  • Adidas
  • Delta Vacations
  • CheapOair
  • Williams Sonoma

How to Use Affirm Online for Payments?

You can use Affirm to purchase online or through a mobile app.

You can use Affirm to make the following purchases:

  • Partner stores’ websites.
  • Through the website
  • Affirm’s mobile application.

All you have to do is browse and add items to your cart. When you’re ready to pay, you’ll choose Affirm as your payment method at the checkout page.

Affirm will then let you select your payment terms and process the transaction.

How do I use Affirm in stores?

To make purchases in-store with Affirm, you need a virtual Affirm card. Affirm is a buy now, pay later company that offers you the option of adding funds to a virtual Visa card that functions exactly like a debit or credit card. You can either access your card through the Affirm app, Apple Pay or Google Pay to access it in-store.

What is the Affirm return policy?

When a customer has a problem with a purchase or wishes to return an item, Affirm recommends contacting the merchant directly. You would then be required to adhere to the store’s return policy.

The following are possible outcomes for your Affirm loan after a repayment. Affirm may altogether cancel your loan if the merchant has completed the return. Affirm may return you the excess payment if you have received payment above what you owe. 

In some instances, the merchant may only issue a partial refund or issue store credit instead of a refund. Any remaining due balance on your Affirm loan remains your responsibility, regardless of whether the item was returned. 

You can file a dispute with Affirm if you cannot resolve a return or refund dispute with the merchant. Affirm will refund your entire purchase price, including any interest you paid if you prevail in your dispute with the merchant. 

It would still be your responsibility to repay your Affirm loan in full, even if the merchant wins the dispute.

How Can I Pay Affirm?

You can pay at or with the Affirm app. The payment method you choose will be determined based on the purchase you wish to schedule a payment, the payment amount, and the due date.

What can I use to pay Affirm?

I think that’s an important question. Currently, Affirm accepts the following payment methods:

  • Debit card.
  • Savings account.
  • Mailing a paper check.

Some merchants allow you to use your credit card to make down payments or installment payments for certain purchases.

What Happens If I Fail to Pay Affirm?

The information about your installment loan account activity may be provided to Experian by Affirm. A late payment or nonpayment can appear on your Experian credit report, lowering your credit score.

Affirm may also make it challenging to obtain a new loan in the future.

Affirm Business Models Highlights

  • Affirm’s primary goal is to make the world of loans and pay later solutions as transparent as possible in a field characterized by opaque profit margins and hidden costs.
  • With Affirm, consumers can pay later at the point of sale, and they can also use a suite of other apps designed for consumers and merchants.
  • According to Affirm’s website, the company’s technology combines proprietary applications and machine learning models to predict consumer ability to repay loans (since Affirm does not hold collateral), provide consumers with a score of merchant trust, and provide them with a set of other tools.
  • When consumers choose Affirm’s pay-later option, Affirm earns most of its revenue from merchant fees. Moreover, Affirm earns interest from the originating bank when it repurchases the consumer’s loan.
  • The company scales its operations with the help of data networks, merchant partnerships, and brand recognition.

What is the Funding and Valuation of Affirm?

Crunchbase reports that Affirm has raised $1.5 billion in venture capital funding over nine rounds. Spark Capital, Wellington Management, Founders Fund, Lightspeed Venture Partners, Khosla Ventures, and Andreessen Horowitz are among the company’s notable investors.

The company raised $500 million in its last round of financing in September 2020. Its valuation grew to $2.9 billion after its previous Series F round was announced in April 2019.

The stock of Affirms is traded on the NASDAQ under the ticker symbol AFRM. The share price of Affirm at the time of writing is $72.90. The company’s market capitalization currently stands at $ 16.80 billion with 242 million outstanding shares.

Also read, How Does Uber Eats Make Money?

What is the Revenue of Affirm?

The company’s financial statements show that revenue for the fiscal year 2021 was $780 million,  up from $760 million the previous year. Its primary sources of revenue are interest charged to online purchasers via installment payment plans and commissions charged to merchant partners.

The company can grow its global presence through the launch of its Fintech products and card services. As a result, we can estimate the company’s growth in market capitalization and stature in the future.

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