As of 25th Aug 2020

Exec Summary (<50 words)

  1. Installment loan lender betting on millennial wanting more credit card alternatives
  2. Secret sauce is the ML based underwriting that's much better than FICO Score
  3. Riding secular growth wave of affordability option at checkout increasing cart size, and higher conversion for retailers
  4. Next big trend of merging marketing spend for giving customers 0% interest financing at checkout
  5. 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

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Key Investors

  1. Baillie Gifford
  2. Fidelity
  3. Moore Asset
  4. Sound Ventures
  5. Thrive Capital
  6. Wellington
  7. Battery Ventures
  8. Caffeinated Capital
  9. GGV Capital
  10. GIC
  11. Ribbit Capital
  12. Founders Fund
  13. Andreessen Horowitz
  14. Jefferies
  15. OpenTable
  16. Silicon Valley Bank
  17. Spark Capital
  18. Khosla Ventures
  19. Lightspeed
  20. Nyca Partners
  21. Charles Songhurst
  22. Peter Thiel

Company Overview

  1. Online installment loan provider as an alt to traditional credit cards
  2. Uses ML to underwrite with own proprietary score and gives loans with no fees (yes, no late fees, no interest compounding etc)
  3. 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

  1. Millennials dislike CC debt more than ever
    1. Home ownership by people under 45 fell from 24% (pre ’08) to 14% today
    2. Student debt increased to $1.6Tr in 2019 (vs x in 2008, vs y in 2019)
    3. Credit Card now being used more as form factor for payments vs holding revolver credit (data – xx)
  2. Clear benefits from POS financing for merchants
    1. Higher avg ticket size for purchase due to affordability (+33%)
    2. Higher conversion, less drop-off (25%)
    3. Higher repeats by upto 25%
    4. Merchants anyways pay 3% for PG, incremental cost of financing <300bps. 0% APR for customer.
  3. Current trends show customers using it for smaller ticket purchases ($200-300), shorter tenure too (~4-6 weeks)
    1. 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
    2. ~0% APR plans (~50% market) subsidized by merchants pulling in prime customers too (an extremely successful trend being replicated from EMs like India)
    3. Smaller ticket loans (<$500) form ~10-15% of market today, but growing at ~40-50% vs overall market at ~20%
    4. Convenient application, availability of financing pre-purchase increasing likelihood by 2-3x

Competitor landscape

Market Landscape

  1. Large TAM ($1.7tr), growing fastest +20%, to reach $2.2Tr in 2021
    1. Outstanding POS balances - $49B in ’15 -> $94B in ’18 -> $160B in’ 21E
    2. ~11% penetration in 2021E of total unsecured financing ~1.4Tr
    3. Larger merchants also coming in to the fold e.g. Walmart integrating with Affirm
  2. Emerging markets leading the way in innovation due to higher need for affordability to drive sales
    1. Brazil at 50% penetration, Mexico – 40-50%, Turkey/Greece/Argentina ~50% of ecommerce is installments
  3. Banks are waking up now, though slowly
    1. 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)
    2. Amex already launched ‘Pay it, Plan it’ program to convert txns to intallments post purchase on app. Citi launched Flex Loan to copy Amex
    3. 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.
    4. Greensky -> Home improvement finance public company grew to $4B book fast (was on the block for sale)
    5. Amazon (via Synchrony Bank) offers pay later option on its own co-branded CC
    6. Synchrony is also piloting a point of sale approach called SetPay; Goldman launched MarcusPay with Jetblue
  4. Visa/Mastercard also want to enable this market
    1. Visa want to offer option to split in to EMI at POS itself - already investor in Klarna, Afterpay and working with Affirm also
  5. New age processors/PGs have already started working on it
    1. 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.
    2. 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

  1. Quadpay
    1. 4x fortnightly installments, 0% APR, 6 weeks repayment. Any website. Late fee - $7. Soft FICO check
    2. Total raised $15m. Seed in 2018.
  2. Sezzle
    1. 4x fortnightly installments, 0% APR. Late fee - $10 per order. Soft FICO check. 1Mn Users
    2. Australian listed co, raised $30M in 2019 IPO on exchange
  3. Divido – UK based company - raised $15M A from Amex/Mastercard in ’18 (total raised - $22M).
    1. ~1,000 merchant partners, enabling them to offer B2C and B2B finance at checkout
    2. 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
    3. Selling its SaaS to both lenders and merchants. Integrates with major ecom providers like Shopify too.