Let’s understand, how does Affirm make money. We all have been in the position of wanting, needing, and making a large purchase. But either we don’t have the cash to pay it off in full or don’t want to spend all at once. Of course, you can still charge the item to your credit card and pay it off monthly, but public faith in banks and financial institutions is at an all-time low.
People might instead turn to Affirm, a startup that provides consumers monthly loans at the point of sale. The startup claims that it wants to revolutionize personal credit by allowing customers to break down significant purchases into smaller, monthly payments.
How Does Affirm Make Money?
Before knowing how Affirm makes money, let’s know what is Affirm and how it works.
What is Affirm?
Affirm is a San Francisco-based fintech startup started by PayPal founder Max Levchin. It seeks to provide a rapid, transparent, and more accessible lending alternative to credit cards by allowing customers to take out microloans at the point of sale with partner retailers. The company considers factors beyond a FICO score for determining financial responsibility, such as social media engagement.
The business appeals to millennials because of its lower interest rates and more transparency, merchants prefer that Affirm bears all loan risks. In addition, retail partners enjoy increased sales. Levchin does not want Affirm to profit off the debts of its clients. Instead, Affirm receives a tiny percentage of sales as well as money from loan interest.
How Does Affirm Work?
Each buy-now, pay-later service functions in a somewhat different way. Still, the idea is the same: you have the option of spreading the cost of your purchase over time at the check-out stage, downpayment choices.
After making a small down payment and promising to repay the remaining within a few weeks or months, a short-term loan is granted in seconds.
You are being offered credit by a third-party lender that the merchant has approved on its website, not by the retailer. One of these third-party lenders is Affirm. These loans allow customers to pay for things in numerous monthly payments.
A buyer picks Affirm as their chosen payment option after adding the desired goods to their shopping cart. After that, they decide on a payment schedule. Affirm has three-month to three-year repayment options available. The company publishes the interest rate paid at checkout and maintains fixed interest rates throughout the payment cycle. Finally, clients pay each installment to Affirm directly.
Customers can make payments using a company’s app. Over 3,000 merchants from diverse industries, including fashion, electronics, travel, and automotive, work with the firm. The buyer, not the merchant, pays to Affirm directly. As a result of being liable for loan repayments, the corporation takes the risk of a payment default.
The typical interest rate range is between 0% and 30%. Only a few shops provide 0% interest installment plans. Customers that use Affirm do not have to pay late fees or any other type of service cost while making a payment.
How it makes money?
Affirm makes revenue from two sources: consumers and merchants. On loans they provide, they charge clients an interest rate and merchants a processing fee.
How does Affirm make money from interest rates?
The interest levied on Affirm’s consumer loans, as well as payments made on their behalf by traders, generate revenue for the company.
Affirm hasn’t focused on any other revenue streams thus far. Because the worldwide market for online payments is worth almost $5.5 trillion, a lot of money has to be produced under its existing business model.
The APR ranges from 0% to 30% depending on where you go. Confirm that the average loan amount is about 750 dollars. Customers typically pay back an 18 percent APR in nine months. This equates to a 90-dollar monthly payment and an 807-dollar total order volume.
How does Affirm make money from merchant fees?
While Affirm charges customers an annual percentage rate (APR), there are times when the company offers 0% APR financing. The transaction fee is covered by the merchant in this situation. Affirm does not specify how much it charges for merchant fees. However, it is often assumed to be between 2% and 4%. Fees are calculated based on the merchant’s predicted sales volume, purchase price, and product category.
Affirm funding, valuation, and revenue
Morgan Stanley and other financial institutions have raised over $100 million in debt financing in addition to venture capital funds. They can use the funds to underwrite loans themselves, resulting in larger margins in the long term.
Khosla Ventures, Spark Capital, Lightspeed Venture Partners, Andreessen Horowitz, and Founders Fund were among the investors who contributed $520 million to Affirm. The firm was valued at $800 million after its most recent investment round, a $100 million round in April of last year.
Like other publicly listed firms, Affirm earns money from financial assets, investments, and bank interest. The firm has increased its riches by utilizing its international presence, brand awareness, and merchant alliances.