Buy Now Pay Later Fintech Affirm, which Filed IPO Application, May have Significant Growth Opportunities in the US

Younger investors including Millennials and Gen Z consumers are supporting a change in the idea of paying with credit, and investors might also be able to join this emerging trend in the US markets.

Fintech company Affirm Holdings Inc., which lets users split their purchases into more manageable installment plans, recently submitted an application to conduct an initial public offering (IPO). Affirm’s management confirmed that the Fintech firm intends to list its shares on the Nasdaq. Affirm stated that it plans to streamline or modernize the payments sector by providing options to pay over a period of time without being charged interest (for eligible consumers while providing “simple-interest” loans for other customers).

Affirm can generate revenue off these types of installment plans by taking a certain percentage of the merchant’s end of a transaction. The main idea is that merchants need to be willing to pay Affirm to carry out risk modeling and provide its service so that it can increase conversions. The 0% APR options usually lead to Affirm getting substantial fees from merchants, according to the firm’s prospectus. The Fintech company also provides “simple-interest” loans which allow it to earn from fixed interest payments (which are from the consumer end).

Affirm is notably a part of the booming Buy Now, Pay Later (BNPL) Fintech trend, which has been widely adopted by companies across the globe.

Approximately 20% of consumers based in Australia and Germany have been using BNPL services, according to Worldpay data. However, MSN reports that these types of payment methods represent merely 1% of digital commerce payments made in the United States. This suggests that there might be a lot of opportunity to expand the BNPL services sector in the US and in other parts of the world.

Affirm currently competes for market share with Sweden-based Fintech firm Klarna, which is backed by payments giant Visa. Afterpay from Australia and travel-focused Uplift are also part of the emerging BNPL industry.

Affirm is planning to trade under the AFRM ticker, with the firm’s IPO plans being supported by Morgan Stanley, Goldman Sachs and Allen & Co. Affirm’s management has said that the company intends to secure $100 million in capital, which it confirmed in its initial filing with the US Securities and Exchange Commission (SEC). However, this amount may be changed in future filings.

It’s worth noting that Affirm generates revenue from fees that merchants pay when it assists them with finalizing a sale and also helps with facilitating the payment for the sale. Affirm provides “0% APR financing products” and “simple-interest” alternatives. The simple-interest payment options is where Affirm is able to make money at the consumer end of the interest-bearing transactions. These interest payments are fixed in advance and Affirm claims that it doesn’t require customers to pay more than the amount they’ve agreed on (even if they skip payments).

As confirmed by MSN, merchant network revenue made up only around 50% of Affirm’s revenue during the past financial year, and earnings generated from interest accounted for around 37% of the Fintech firm’s overall revenue.

Affirm also made profits from its loan services, capital gains made on the sale of loans, and its expanding virtual card network.

Affirm also reported that it almost doubled its revenue for the period ending June 2020. The company notably earned $509.5 million during the current fiscal 2020 which is significantly more than the $264.4 million it generated during fiscal 2019. However, Affirm still posted losses of $112.6 million ($120.5 million in losses were reported last year).

Affirm’s prospectus shows that its “0% APR” payment plans accounted for 43% of its total merchandise value handled via its platform during fiscal 2019. Affirm also reported that around 6.2 million customers carried out approximately 17.3 million transactions across over 6,500 supported merchants via its platform.

As reported recently, Affirm teamed up with global payments platform Adyen to support flexible payment plans. In July 2020, Affirm had also partnered with Shopify to offer BNPL plans to customers.

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