In the not-so-distant past, Affirm faced a multitude of challenges that cast doubt on its future as a leading point-of-sale lender. Rising interest rates, recession fears, and weakening consumer spending dampened the company’s prospects. The result? A staggering 90% decline in Affirm’s shares in 2022, erasing billions of dollars in market value. Fast forward to 2023, and the narrative has dramatically shifted. Affirm’s stock has soared by a remarkable 430%, outperforming all other U.S. tech companies valued at $5 billion or more. The company’s promising outlook can be attributed to several factors, including the Federal Reserve’s plans for interest rate cuts and the growing number of retailers partnering with Affirm to offer buy now, pay later (BNPL) options. With the once-feared doomsday scenario dissipating, Affirm has regained its footing and positioned itself for success.
Affirm emerged on the financial scene in 2012 as the brainchild of Max Levchin, a co-founder of PayPal. It competes with other BNPL companies like Klarna, Afterpay, and Zip in this rapidly expanding market. BNPL services allow shoppers to divide their purchases into multiple interest-free installments over a few months or up to a year. This option appeals to consumers as it eliminates the burden of immediate full payment and often avoids accruing compounding interest. Lenders like Affirm generate revenue through interest payments and fees charged to merchants for offering their lending services. Retailers benefit from offering BNPL as an additional payment option, reducing sticker shock and decreasing cart abandonment.
Affirm’s journey in the public market began in January 2021, coinciding with the surging adoption of BNPL services during the Covid-19 pandemic. The influx of stimulus checks led to a surge in small loan usage for purchases ranging from clothing to electronics and even Peloton exercise bikes, which accounted for a significant portion of Affirm’s revenue. Online retailers eagerly integrated BNPL options at checkout in response to this growing trend. However, by early 2022, Affirm’s share price plummeted by over 60% from its peak in 2021, marking a challenging period for the company. Soaring interest rates increased borrowing costs for Affirm’s installment loans, resulting in the need to make difficult decisions. In February 2023, Affirm had to reduce its workforce by 19%, and executives anticipated continued hardships due to macroeconomic headwinds and negative consumer sentiment.
Contrary to expectations, Affirm experienced a remarkable turnaround following its fiscal fourth-quarter earnings report in August. The company expanded its merchant partnerships beyond retail, venturing into sectors like travel, wireless services, ticketing, and healthcare. This diversification amid growing new deals contributed to Affirm’s stock surge in the fourth quarter. Additionally, the announcement of Affirm’s collaboration with Walmart to offer BNPL loans at self-checkout kiosks further bolstered its growth potential. Despite this remarkable bounce back, Affirm’s shares remain approximately 70% below their November 2021 high.
As BNPL lenders enter 2024, they face a more optimistic interest rate environment and cooling inflation, which bode well for Affirm. Dan Dolev, the managing director at Mizuho Securities, believes that Affirm is well-positioned to retain its user base. He emphasized the company’s expanding market for BNPL offerings in physical stores and its growing number of merchant partners (over 266,000) and users (16.9 million). Affirm’s plans for international expansion and the launch of its debit card, which allows customers to pay upfront or in installments, further illustrate its determination to evolve into a comprehensive financial services firm.
However, skepticism remains. Tom Hayes, chairman of Great Hill Capital, expresses doubts about Affirm’s ability to compete against established players like PayPal, Block, and credit card companies such as American Express, Citi, and Chase that have ventured into installment loans. Hayes suggests that Affirm’s strategy mirrors that of online lender SoFi, attempting to tackle numerous projects without achieving the same level of success as more established financial institutions.
BNPL lenders, including Affirm, also face increased risks associated with users failing to make timely payments. A report from the Consumer Financial Protection Bureau highlighted the higher levels of credit card debt among BNPL users and their lower credit scores, which often fall within the subprime range. Affirm’s management remains confident in its ability to curtail delinquencies, emphasizing its comprehensive assessment process that considers various data points beyond credit scores. However, regulatory oversight looms on the horizon as regulators closely monitor the growing BNPL space. In September 2022, the CFPB announced increased scrutiny of BNPL, aligning it with regulations governing credit card companies.
Affirm’s journey from adversity to success has been nothing short of extraordinary. The company’s remarkable stock surge in 2023 reflects its ability to adapt and thrive in a challenging market. However, as Affirm continues to carve its path in the BNPL industry, it must navigate potential pitfalls such as fierce competition, the risk of user defaults, and heightened regulatory scrutiny. The coming years will indeed be transformative for Affirm, testing its resilience and determining whether it can solidify its position as a leading force in the evolving world of buy now, pay later financing.
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