Today Affirm is going public. It’s the next step in the company’s journey, and the culmination of many years of hard work. It’s also an exciting day for us at Lightspeed, having co-led their first institutional round of financing back in 2013.
From the beginning, Max has been clear in his desire to build a financial institution that succeeded only when consumers and merchants succeeded, or as Affirm’s mission statement says, “to build honest financial products that improve lives”.
That meant not charging late fees or penalty interest rates. These could create adverse incentives to lend money to people who may not be able to repay on time in the future.
It meant creating transparency in pricing — showing people exactly how much they would pay for their loan, in dollars. For many people, quoting an APR or an interest rate can be hard to translate into payments. It meant never asking them to pay a penny more than what they agreed to upfront.
And it meant forming a proprietary judgement about peoples’ willingness and ability to repay loans, using all the data available. Relying on FICO as the industry standard could disadvantage immigrants, recent grads and others new to credit.
Money is a commodity. It’s impossible to charge higher than industry interest rates. So to build a strong business model, a fintech needs to tackle at least two of the four big cost line-items; bad debt (credit), marketing, cost of capital and servicing. Affirm chose to focus on building strength in the first two.
Credit is the heart of lending. Applying the best practices of Machine Learning and Big Data through technology can meaningfully improve credit decisions. But doing it well is difficult.
Technology is at the heart of Affirm. The background of the people who built Affirm’s underwriting ranges from Paypal to Palantir, Cap One to Google. They brought the best of technology and banking to custom-build Affirm’s proprietary models. These models have held up extremely well through both the boom times of the last decade and the incredible stress of the COVID-19 pandemic that we are still living through.
Marketing is a cost center for most fintechs. It’s expensive to acquire new users. Early on, Affirm found a different way to acquire users, by partnering with retailers to offer a loan at point of sale. This helped consumers make their purchases more affordable — instead of having to pay for their new exercise bike from Peloton or mattress from Purple or iPhone from Walmart upfront, they could split their purchase into several monthly payments. This is the core of what is now called Buy Now Pay Later (BNPL).
Affirm also helps retailers; to reach new customers and to increase cart conversion, repeat purchase rates and cart sizes. Retailers are happy to pay Affirm to facilitate the sale because it’s a powerful revenue accelerator. It’s a win-win-win.
Today Affirm is much more than a point of sale lender. It offers consumers a way to shop at virtually any retailer through its app. It offers savings accounts with no fees or minimums. It makes loans directly to existing customers. It even directs customers to deals and discounts on future purchases. It is building a beloved financial institution (NPS is 78! Apple’s is 72) because it is living up to its mission, to build honest financial products that improve lives.
We are grateful to have been along for the ride.
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