As it continues to grow its payments presence deeper and broader through such channels as digital wallets, buy now, pay later pioneer Affirm says it’s on the verge of getting over a hurdle many fintechs dream about: GAAP profitability. The company says this will happen in the second quarter of 2025, the fourth quarter of the company’s fiscal 2025.
Max Levchin, founder and CEO, said that the company plans “to operate the business while maintaining GAAP profitability thereafter.”
The commitment comes on the heels of Affirm finishing its fiscal 2024 year with positive adjusted operating income for the second year in row. Gross merchandise volume rose 31% in the fourth quarter over the year before. Active Affirm consumers hit 18.7 million by the end of fiscal 2024 and merchants using the company’s services surpassed 300,000.
At the same time, as questions are being asked about the outlook for traditional credit card lending in the face of rising delinquencies and the potential for interest rate cuts, Levchin said he’s quite pleased with how Affirm’s atypical approach to credit management and pricing is working.
Levchin, who was also a founder of PayPal, characterizes the Affirm methodology as lending in a real-time world, a departure from the typical credit card company approach of basing the consumer’s ongoing relationship on a pre-approved card credit line that goes up and down (and can accrue interest) with consumer “revolvers.” Affirm freshly underwrites every extension of credit on the basis not only of what Affirm’s own past experience has been with a consumer, but their state of indebtedness with other lenders at that moment.
During a recent analyst earnings briefing, Levchin and other Affirm officials explored in depth how the company’s underwriting differs from card issuers’ approaches, how the potential for interest rate cuts will affect both Affirm’s underwriting and its pricing, and how the company hopes to grow and to expand the reach of its product through its announced partnership with Apple Pay and Google Wallet. He also explained how all of this dovetails with the company’s relationships with its merchant partners.
Levchin suggested that the time will come when Affirm’s relationship with merchants, who focus on increasing incremental sales, will come to resemble marketers’ purchases of exposure through Google AdWords. He foresees a time when Affirm will present sellers with numerous options for reaching consumers with deals on financed purchases. This is especially interesting given increasing interest in bank-owned retail media solutions, such as Chase Media Solutions.
And Levchin emphasized a point he’s made in the past, even as the company grows larger and serves more consumers and merchants: Affirm has no plans to become a bank.
“We do not need to be a bank to conduct our business in the way that we’d like to conduct it. That is one of the many routes available to us, under the right circumstances, but it is not in any way a requirement, not a thing we are marching towards. The day we’ve decided we’re going to become a bank, we’ll tell all of you.”
— Affirm’s Max Levchin to securities analysts
While Affirm has a developing product called the Affirm Money Card, it doesn’t fund lending from deposits. Instead, it relies on issuing asset-backed securities. Most of those deals carry fixed interest rates.
From the archive: Affirm Goes Big: How It Intends to Go Beyond BNPL to Own Payments
Affirm Adapts to Outlook on Credit Risk
Buy now, pay later has been criticized at times as “phantom debt” and as debt that consumers may not even think of as borrowing in the traditional sense. Levchin stressed that Affirm doesn’t intend to court undue risk and fine-tunes its credit and pricing to produce a specific return in the context of economic circumstances.
The company manages towards a target of revenue, less transaction costs, of 3%-4% of gross merchandise value, according to Levchin, using a blend of decisions about credit and pricing on the consumer side and negotiations with merchants on the business side.
Levchin explained that the business runs best, currently, in that 3%-4% range. Beyond 4% and he says that means Affirm isn’t investing enough into developing future products and markets. On the other hand, falling below 3% makes a less attractive story for shareholders, he added.
“We decide what we want to see,” said Levchin. “Obviously, there is variability, but we have a really short-term exposure. Our consumers don’t borrow money from us for too long. Every transaction is underwritten separately. We are by design and definition in control of our credit outcomes. Every time we plan our credit outcomes, we tell ourselves what it is that we want to see in the delinquencies, and that’s what we typically end up with, plus or minus minor noise.”
Levchin says management consists of “inherently conservative people.” Underlying the process is a focus on applying artificial intelligence to a multitude of data.
“Underwriting is hard. You’ve got to get the data and you’ve got to get it in real time,” said Levchin. “We’ve been at it for 13, 14 years now. That’s our DNA. People talk about AI as if it happened yesterday. We’ve been in what used to be known as AI for a lot longer than it was a thing that people throw around as a reason to lay off their employees.”
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Adapting to Fed Rate Moves — Or Not
The expectation that the Federal Reserve will be cutting rates is not something that is directly factored into Affirm’s decision making. Michael Linford, CFO, explained that rate curve forecasts get wound into capital-raising negotiations, “but we’re not looking out and saying that with two rate cuts on the horizon, let’s go get more aggressive. Instead, we look at our current funding costs and compare them to what we need to generate to be profitable on a transaction basis.”
Levchin said he liked Affirm’s pricing not being set from the get- go, as is common with credit cards.
“This idea that you negotiate your credit card rate, even if it’s floating, kind of once and for all, basically, and the merchant negotiates their acceptance rates once and for all, is foolish. We live in a connected real-time world, why wouldn’t we be negotiating these rates in real time?”
— Max Levchin, Affirm
One aspect of pricing in this way is that some consumers who might be approved in one rate scenario might not make the cut in a higher-rate atmosphere, Levchin conceded. The pricing could be higher than Affirm wants to be known for (in an interest-bearing installment loan relationship). Levchin noted that Affirm will not exceed the rate ceiling set by the Military Lending Act, for example.
During the briefing, analyst Robert Wildhack of Autonomous wondered if rates have fallen substantially from today’s levels by Spring 2025, if that would increase approvals under Affirm’s approach.
CFO Linford tempered his response: “With one caveat. If the reason why rates are being cut is because we’re in a perfect economic scenario, then yes. But of course, we’re mindful of the fact that a thing that’s probably happening in that scenario is some pressure on the labor market, which has been very, very tight. If it begins to loosen, we, of course, would need to take that into account as we think about where we set approvals.”
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Merchants Pay for Consumers’ BNPL Advantages to Gain Sales
Another factor going into the pricing of Affirm’s credit offers is the willingness of merchants to commit to paying towards the cost of offering buy now, pay later at 0% to the borrowing consumer, and other deals.
Levchin has long criticized traditional credit card interest charges, especially interest on interest that results when revolving charges ride the books. He sees what Affirm brings consumers as more meaningful than cashback, points or other rewards.
Instead of “tired credit card tricks,” he said, “we’re going to give consumers access to credit on extraordinary terms, with no APR at all or really low subsidized APR that’s going to matter to a certain consumer in a really big way.”
The merchant generally pays for that. The Affirm philosophy is to dangle additional, incremental sales in exchange for handing over major slices of the merchants’ sales margins.
To Levchin, this is what makes buy now, pay later unusual from the merchant viewpoint: “The ability to, in real time, transfer part of the margin the merchant is willing to invest in a transaction to the consumer in a form of benefit. Having a real-time network of hundreds of thousands of merchants that do that willingly because they’ve measured incrementality is really powerful.”
Read more: CFPB’s Rule, Plus Inflation, Will Make Buy Now, Pay Later Mainstream
How Digital Wallet Expansions Could Influence Merchant Relationships
Affirm has struck deals with multiple wallet providers, including Apple Pay and Google Wallet, to include Affirm as a BNPL and installment plan financer. (This is separate from the Affirm Card, which the consumer having one could load on their own, as it functions as a Visa debit card.) [Update: Affirm’s presence in Apple Pay has gone live and can be explored here.]
Analysts pressed to find out how much the new relationships would add to results in fiscal 2025, but Linford stressed that the companies haven’t set up the wallet relationships yet. Affirm is not expecting them to produce significant additions to results in the fiscal year ahead. The company expects its services to be integrated into four digital wallets in North America by the end of calendar 2024. (Two are in the can: Affirm is already integrated in Amazon Pay and Shopify’s Shop Pay.)
In Affirm’s shareholder letter the possibilities are detailed. In calendar 2023, digital wallets processed over $700 billion in payments in all of North America, according to the letter. Less than 1% of that involved Affirm and that makes the pending expansions an expected source of significant potential growth.
A key element of the wallet partnerships will be to make it easier for merchants to work with Affirm on deals that can be offered to consumers.
Officials explained that integrating Affirm services into a merchant’s payments functions can be “a lift,” whereas offering access for consumers through wallets eliminates that initial big lift to participate in BNPL and other options. (Beyond traditional pay in four plans, Affirm now also offers alternatives such as pay in two and purchases structured as longer-term installment credit plans, often bearing interest.)
Read more: Customer Data Is Banks’ Secret Weapon for Entering Buy Now, Pay Later Fray
Hopes for the Affirm Card and the Family of Channels
In time, adding Affirm to the digital wallets is expected to come on stream along with the traditional merchant-based deals, presented at checkout, and with purchases made using the Affirm Card.
The latter has grown substantially, reaching nearly 1.2 million active cardholders at the end of the company’s fiscal fourth quarter. Levchin said that the optimal cardholder base should be around 20 million active cards.
In terms of usage, Affirm indicates that cardholders spend an average of $3,000 annually with the card. Levchin said that he wants to push this to $7,500, more than doubling it.
Levchin said that Affirm will be rolling out promotional features in the fiscal year ahead to appeal to specific segments among cardholders. He said they will appeal “to different segments in fairly different ways.” (Some offers have been presented to various consumer types experimentally.)
“You’ll see 0% deals available to folks that we know really respond to those,” said Levchin. “We will offer longer [terms] for clients to pay to those who really need that.”
Such special features will be offered to merchants so they can extend offers in the moment to Affirm Card users.
This ties in with Levchin’s hopes for new ways for merchants to partner with Affirm overall.
“At some point there will be full automation for merchants who can just say, ‘Hey, let me give you X dollars and just get me as much conversion as you possibly can’,” said Levchin. “That’s my vision for the Nirvana of merchant spend — almost like buying AdWords.”