Every day there is a new IPO for an interesting software company with a marketplace angle. Airbnb’s S-1 is the obvious example. But Affirm, which filed to go public last week has marketplace aspirations as well. There are plenty of great articles on the Affirm S-1 (see here and here). As a result, I’m going to focus on just a few surprising aspects of the S-1. Let’s start with a bit of background on the market first.
The Buy Now, Pay Later (BNPL) Market
Over the years, I’ve been so busy helping B2B suppliers get paid faster, that I have never paid much attention to helping consumers buy on credit. That is exactly what Affirm, Klarna, and Afterpay (which is public in Australia -AFTPY) do. To oversimplify, these BNPL companies help consumers extend the terms by which they pay the merchant, beyond what a typical credit card would offer. Affirm dominates the US, Klarna is headquartered in Europe, and Afterpay started in the ANZ market. (If you really want to assess Affirm’s upcoming valuation you should do a deep dive to compare it to Afterpay’s valuation. I’m interested, but not that interested!)
The BNPL Market is also expanding to b2B buyers–that is extending payment terms to small buyers buying from big suppliers. Examples include Splitit (also public in Australia) and Cloudfloat which offer installment payment plans to businesses. Both of these B2B BNPL companies are still very small.)
Because Affirm is the only BNPL companies public in the US, its financial disclosures are the most robust.
Affirm: Diversified Revenue Sources
Affirm extends credit to online shoppers, so I expected to read about its interest income and its superior ability to assess credit default risk. After all, lending businesses are about figuring out how to acquire capital cheaply, lend at a higher rate, and assess the risks of this lending better than the competition. As the charts below show, Affirm did not disappoint on this account.
What I did not expect from the Affirm S-1 was the number of different ways and parties from which Affirm derives revenue:
- Merchant Network Revenue. Retailers pay Affirm to drive consumers to their site and to increase Average Order Value (AOV). For the three months ended September 2020, these merchant fees were 54% of income. (Merchants pay higher fees on true 0% APR loans which represented 46% of GMV last quarter.)
- Interest income. Interest income, which I expected to be the #1 source of revenue, came in a distant second at 31% of revenue. This revenue is from the simple interest loans Affirm’s bank partner helps them make.
- Gain (Loss) on sales of Loans. Affirm sells some of the loans it originates (with its banking partner) to third-party investors on its platform. In that sense, Affirm is also an investor marketplace. For the latest quarter, these gains represented almost 9.5% of revenue.
- Virtual Card Network Revenue. Affirm earns part of the interchange its issuer/processor partner receives for issuing virtual cards to consumers who want to buy from merchants not integrated into the Affirm platform. V-card fees represented about 3% of Affirm revenues last quarter.
- Servicing Income. Even if Affirm sells a loan, it still receives fees for managing loan portfolios for third-party investors. These fees amounted to 3% of revenue in the last quarter.
To summarize, Affirm is paid by merchants, consumers, issuer/processors, and third-party investors!
A Robust Billing and Payments Platform
As I mentioned in my last post on DoorDash, if you are going to build a platform with several sources of revenue, as Affirm has, you are going to end up building a complex billing and payments system. Affirm is no exception, connecting to consumers, merchants, and banks as the chart below shows. (NB: this chart does not even include the flow with third-party investors.)
And Now a Marketplace
Part of the strategy of the BNPL providers is to become a marketplace consumers look to before heading to the websites of brands/merchants. This “customer journey” will allow the BNPL operator to orchestrate merchant promotions to consumers first and then drive consumers to the merchants. In this way, BNPL providers become gateways and earn even more merchant fees. Affirm added a marketplace in 2019. In 2020, the company even added an FDIC-insured interest-bearing savings account to the application to make it more of a destination. To an old guy who loves his Mileage Plus Visa Rewards, it’s all getting a little hard to fathom, but I’m assured that to Gen Z, this all makes sense!
Finally, A Flywheel
Flywheels are everywhere, Affirm, of course, has a flywheel in its S-1, which I will not reproduce here since I have already inundated you with graphics. But the more interesting flywheel in the S-1 relates, unexpectedly, to Peloton bikes. It turns out that Peloton represented 30% of Affirm’s revenue in the latest quarter. (And this is a company that has Walmart as a merchant!) Not surprisingly, Peloton bikes are selling well during the pandemic and so is buying them on the installment plan! It’s not until next summer that we will be going back to gyms, but when that ends, could two flywheels?