As of 25th Aug 2020
Exec Summary (<50 words)
- Installment loan lender betting on millennial wanting more credit card alternatives
- Secret sauce is the ML based underwriting that's much better than FICO Score
- Riding secular growth wave of affordability option at checkout increasing cart size, and higher conversion for retailers
- Next big trend of merging marketing spend for giving customers 0% interest financing at checkout
- Re-bundling - offering more financial products to inc customer engagement in the future (Debit cards, checking account, credit line etc)
Baseball Stats
Founded: 2012
Employees: 950
Total Raised: $1.1B (incl debt)
Valuation: >$3B
Funding
Key Investors
- Baillie Gifford
- Fidelity
- Moore Asset
- Sound Ventures
- Thrive Capital
- Wellington
- Battery Ventures
- Caffeinated Capital
- GGV Capital
- GIC
- Ribbit Capital
- Founders Fund
- Andreessen Horowitz
- Jefferies
- OpenTable
- Silicon Valley Bank
- Spark Capital
- Khosla Ventures
- Lightspeed
- Nyca Partners
- Charles Songhurst
- Peter Thiel
Company Overview
- Online installment loan provider as an alt to traditional credit cards
- Uses ML to underwrite with own proprietary score and gives loans with no fees (yes, no late fees, no interest compounding etc)
- Recent big wins with Walmart, Shopify integration make Affirm the ubiquitous offering for installment loans
Market (TAM) / Competition / Moat
Customer behavior is changing -> millennials like CCs lesser but want instant gratification still -> hence switching to installment plans (fastest growing category in unsecured finance in US). Market TAM is at $110B in US and growing fast at >20% rates. In next 10 years, pre-approved credit lines convertible to ‘installments on-demand’ basis will be the norm – will it be done by card networks, or banks, or fintechs is still undecided (Preference of post-purchase decision vs pre-purchase enablement may carry the winner). But payment processors can play an important role in accelerating it and differentiating themselves from the rest.
Customer Need
- Millennials dislike CC debt more than ever
- Home ownership by people under 45 fell from 24% (pre ’08) to 14% today
- Student debt increased to $1.6Tr in 2019 (vs x in 2008, vs y in 2019)
- Credit Card now being used more as form factor for payments vs holding revolver credit (data – xx)
- Clear benefits from POS financing for merchants
- Higher avg ticket size for purchase due to affordability (+33%)
- Higher conversion, less drop-off (25%)
- Higher repeats by upto 25%
- Merchants anyways pay 3% for PG, incremental cost of financing <300bps. 0% APR for customer.
- Current trends show customers using it for smaller ticket purchases ($200-300), shorter tenure too (~4-6 weeks)
- One quarter of POS financing was for lower ticket items (even Jeans etc); Paypal lowered bar for 0% financing from $99 to $30 for customers
- ~0% APR plans (~50% market) subsidized by merchants pulling in prime customers too (an extremely successful trend being replicated from EMs like India)
- Smaller ticket loans (<$500) form ~10-15% of market today, but growing at ~40-50% vs overall market at ~20%
- Convenient application, availability of financing pre-purchase increasing likelihood by 2-3x
Competitor landscape
Market Landscape
- Large TAM ($1.7tr), growing fastest +20%, to reach $2.2Tr in 2021
- Outstanding POS balances - $49B in ’15 -> $94B in ’18 -> $160B in’ 21E
- ~11% penetration in 2021E of total unsecured financing ~1.4Tr
- Larger merchants also coming in to the fold e.g. Walmart integrating with Affirm
- Emerging markets leading the way in innovation due to higher need for affordability to drive sales
- Brazil at 50% penetration, Mexico – 40-50%, Turkey/Greece/Argentina ~50% of ecommerce is installments
- Banks are waking up now, though slowly
- JPM launched MyChasePlan to convert CC balance to fixed term loan (doesn’t serve non-carded customers, post-purchase decisioning – doesn’t yield to upselling, only for txns >$500 and needs extra effort from consumer)
- Amex already launched ‘Pay it, Plan it’ program to convert txns to intallments post purchase on app. Citi launched Flex Loan to copy Amex
- Citizens bank handles all iPhone financing for Apple direct sales (o/w 50% goes to own book, remaining to marketplace). Went from 0 to $1B book in 4 years, more than 50% iPhone buyers prefer financing.
- Greensky -> Home improvement finance public company grew to $4B book fast (was on the block for sale)
- Amazon (via Synchrony Bank) offers pay later option on its own co-branded CC
- Synchrony is also piloting a point of sale approach called SetPay; Goldman launched MarcusPay with Jetblue
- Visa/Mastercard also want to enable this market
- Visa want to offer option to split in to EMI at POS itself - already investor in Klarna, Afterpay and working with Affirm also
- New age processors/PGs have already started working on it
- Square launched Installment plans, but the customer needs to apply on app first, and then shop. Not available at POS yet to give the nudge. No 0% APR schemes available yet. Final payment via Marqeta virtual card.
- Paypal offers 0% schemes for $99 and above purchases already (thinking of lowering it to $30). Sold its B2B loan portfolio to Synchrony but underwrites these consumer loans on its own books.
Market Landscape
Early
- Quadpay
- 4x fortnightly installments, 0% APR, 6 weeks repayment. Any website. Late fee - $7. Soft FICO check
- Total raised $15m. Seed in 2018.
- Sezzle
- 4x fortnightly installments, 0% APR. Late fee - $10 per order. Soft FICO check. 1Mn Users
- Australian listed co, raised $30M in 2019 IPO on exchange
- Divido – UK based company - raised $15M A from Amex/Mastercard in ’18 (total raised - $22M).
- ~1,000 merchant partners, enabling them to offer B2C and B2B finance at checkout
- Divido notably does not provide the line of credit itself or work with a single lender, instead operating as a marketplace model. Lenders compete to offer the most suitable credit
- Selling its SaaS to both lenders and merchants. Integrates with major ecom providers like Shopify too.