Affirm Strategy & Business Model
Affirm’s strategy is to achieve our mission to deliver honest financial products that improve lives. We are building the first two-sided payment network of-its-kind to delight consumers and merchants. As a product and engineering-driven company, we leverage our technology to provide consumers with a flexible and transparent way to pay at their own pace while providing merchants with tools to drive growth.
We are executing on four key priorities as we continue to rapidly grow both sides of our network. This includes expanding our merchant partnerships, increasing our consumer reach and frequency, extending our product offerings, and deepening our technology and underwriting advantages.
Our superior technology, best-in-class risk management and capital markets expertise, and alignment with consumers has helped Affirm become the partner of choice in the industry. With Affirm’s strong unit economics, we believe that we are well-positioned to generate significant cash flow at scale.
Affirm’s success is fundamentally aligned with consumers and merchants as we win when they win. The diversity of our business model is also a key area of strength for Affirm as we earn revenue through five primary channels.
- We generally earn revenue from merchants when we help them facilitate a transaction. This is commonly referred to as our merchant discount rate.
- Affirm generates revenue through the simple interest-bearing loans we facilitate on our platform. The revenue from these transactions are recognized over the life of the loan.
- We earn interchange fees when consumers use our virtual card over established card networks.
- We sell a portion of the assets originated in our platform to third-party investors and recognize a gain or loss on the sale of these loans.
- Lastly, we make money by providing loan services on behalf of third-party investors that have purchased consumer loans from us. Affirm never sells the servicing rights to outstanding consumer balances.
Affirm has positioned itself as a partner of choice for paying over time through our technology, ability to address a wide range of transactions, proprietary underwriting, and fundamental alignment with consumers and merchants.
- Superior technology: Affirm’s technology offers merchants superior scalability, reliability and ease of integration and can provide consumers with customizable payment options within seconds.
- Ability to address a wider range of transactions: Affirm’s terms range from six weeks to five years, and we support purchases as low as $50 up to $17,500. Many buy now, pay later offerings only allow consumers the ability to pay in biweekly installments over six to eight weeks. Our ability to address a wider range of transactions is a key reason why merchants and consumers choose Affirm.
- Product breadth fueled by sophisticated and durable funding model: Affirm maintains diverse funding sources with a wide range of capital partners and market-based programs, which provide flexible and consistent access to capital to fund the business. This enables Affirm to efficiently support consumers and merchants with its access to deep pools of committed capital through warehouse facilities, forward flow arrangements and multiple securitization programs.
- Proprietary underwriting: Affirm underwrites every transaction. Our continuously learning models have been proven to deliver positive credit outcomes and outperform traditional credit models.
- Commitment to transparency and putting people first: Affirm offers consumers a smarter way to pay over time while never charging consumers any late or hidden fees, ever.
Affirm is currently in its “hyper-growth” phase. We are rapidly scaling our large and growing two-sided network of consumers and merchants, while delivering strong unit economics. In this phase, we do not expect to report GAAP operating income on a consistent basis, as we are investing heavily in the technology, marketing and talent to enable us to serve many more consumers and merchants.
Affirm’s primary focus today is driving the network scale that will ultimately allow us to achieve what we expect to be substantial operating leverage and efficiencies from fixed expenses. We are confident that Affirm’s business model will generate significant free cash flow once we reach scale. At our Investor Forum on September 28, 2021, we provided a financial framework illustrating how we plan to operate the business through this period of rapid growth. We have provided these financial targets as a function of our GMV growth rate, rather than on a precise timeline, to allow investors to better understand how our model works as it scales.
As we have further noted, we expect to begin to deliver improving Adjusted Operating Margins in FY 2023 and thereafter.
We define Revenue Less Transaction Costs as GAAP total revenue less transaction costs. We believe that revenue less transaction costs provides a useful financial metric to evaluate the value generated by transactions processed by Affirm and as a measurement of our strong unit economics.
Capital Markets Strategy
Affirm has a diverse and durable funding model with four different channels that position us to efficiently support consumers and merchants.
- Affirm has committed access to warehouse facilities where it borrows against loans held on the balance sheet, and enables us to advance up to more than 85% of the consumer balances.
- We have forward-flow agreements that facilitate the sale of whole loans to counterparties. These allow Affirm to earn upfront revenue by generating a Gain on Sale, while eliminating the need for equity capital. Affirm never sells servicing rights to loans, so it collects Servicing Income on the loans that it services on behalf of counterparty investors that hold an economic interest in the loan.
- Affirm has two types of securitization programs, in which it bundles outstanding loans into structured credit offerings that receive on-balance sheet and off-balance sheet treatment. The Company’s revolving asset backed security program is held on-balance sheet. This provides stable, fixed-rate funding, and typically at a lower cost of capital and higher leverage ratio compared to warehouse lines. These vehicles fund short term receivables, with cash from consumer repayments being used to purchase new receivables. This enables Affirm to efficiently recycle capital and provide multiples of loan volume capacity versus the capital raised in the deal.
- Affirm’s static asset backed security programs are optimized for funding longer term offerings - 0% APR (“Z” shelf) and recently launched the “X” shelf to fund interest bearing offerings. These static asset backed security programs receive off-balance sheet treatment, which allows Affirm to recognize upfront revenue, similar to the forward-flow arrangements.
The diversity of our capital strategy with 100% of the capital program consisting of fully committed agreements ensures that Affirm is not overly reliant on any single type of funding source. This strategy is designed to enable Affirm to fund the business across cycles, including sustained periods of market dislocation. Affirm is consistently and responsibly adding capacity to support our continued growth and reported over $8.8 billion in funding capacity from a diverse set of capital partners as of December 31, 2021.
Credit Performance and Underwriting
Our continuously learning underwriting models have been trained on billions of data points to assess a consumer’s repayment ability before making a real-time underwriting decision. We underwrite every individual transaction and consider data beyond just traditional credit scores, including transaction history and credit usage, to assess a consumer’s willingness and ability to repay.
Unlike legacy payment and credit systems, we assess and underwrite risk at transaction level vs. extending a single line of revolving credit. This enables Affirm to responsibly expand access to credit to a wide segment of consumers, including those whose traditional credit scores may not fully represent their creditworthiness as a borrower.
Affirm does not treat delinquencies or defaults as an outcome of our business decisions. Instead, we choose acceptable delinquency rates as an input into our decision-making, based upon pricing with customers, macroeconomic conditions, and demand for our solutions.
A loan is charged-off when the contractual principal becomes 120 days past due.
Provision for credit losses consists of amounts charged against income during the period to maintain an allowance for future potential credit losses. Our allowance for credit losses represents our estimate of the credit losses in the loans that are held for investment and are based on a variety of factors. This includes the composition and quality of the portfolio, loan specific information gathered through our collection efforts, current economic conditions, future reasonable and supportable forecasts, and our historical net charge-off and loss experience. These costs are incurred on a per-loan basis.
Shares of our Class A Common Stock trade on the Nasdaq Global Select Market under the trading symbol “AFRM”.
Affirm priced its initial public offering on January 12, 2021, and shares of its Class A Common Stock began trading on the Nasdaq Global Select Market on January 13, 2021. Affirm sold shares to the public at a price of $49 per share in its initial public offering.
Affirm does not issue paper stock certificates representing shares of its Class A Common Stock. All shares of Affirm Class A Common Stock are held in book entry form.
Computershare is Affirm’s transfer agent. You can reach Computershare by one of the ways below:
+1 877-373-6374 (US, Canada, Puerto Rico)
+1 781-575-3100 (everywhere else)
PO Box 505000
Louisville, KY 40233-5000
By overnight delivery:
462 South 4th Street, Suite 1600
Louisville, KY 40202
You can buy shares of our Class A Common Stock through any licensed broker. We do not currently have a direct stock purchase plan.
We do not currently pay dividends on our stock.
Affirm Holdings, Inc. was incorporated in Delaware on June 12, 2019. Prior to our incorporation, we operated under the name Affirm, Inc., our wholly owned subsidiary, which was incorporated in Delaware in 2012.
Deloitte & Touche LLP is our independent registered public accounting firm.
You can reach the Affirm Investor Relations team at firstname.lastname@example.org.
Affirm’s fiscal year ends on June 30.
All IPO lockup restrictions expired in May 2021.