Affirm's deal to offer buy now, pay later services for Amazon customers is a big boost for Affirm in the fiercely competitive sector. It's also indicative of a broader change in ecommerce, as Affirm and other buy now, pay later competitors seek to go direct to consumers for all manner of purchases, both online and offline.
The deal, struck last week, was the latest big move in the industry: Square's recent deal to acquire Afterpay for $29 billion indicates how the payments giant views buy now, pay later as key to its merchant and consumer businesses. Apple has also been rumored to be preparing to launch its own buy now, pay later offering with Goldman Sachs. And Visa, Amex and Citi are also jumping in with their own services—as younger consumers seek to use credit cards less.
Buy now, pay later has become "table stakes" for any ecommerce or payments company, says Tom Seo, a fintech venture capitalist at Dash Fund. "Something is wrong if you don't have it."
The agreement will make Affirm deals available to Amazon's customers at checkout to split any purchases worth $50 or more into monthly payments. The two companies have already been testing the feature and will now roll it out over time to all customers.
For Affirm, this will mean an influx of new business from the ecommerce giant's customers. Some portion of those trying out Affirm for the first time on Amazon will likely become repeat Affirm customers. In its fiscal year ending in June 2020, 64% of Affirm's transactions were made by repeat users, the company said.
The deal is "transformative for Affirm, and perhaps represents one of the only merchant deals that could shift the balance of power in BNPL so dramatically," said Matt Harris, partner at Bain Capital Ventures.
Investors were bullish on the news, with Affirm's stock jumping 46% on Monday.
Amazon is just the latest in a string of big partnership deals for Affirm. It also recently announced an exclusive deal with Shopify to run Shop Pay Installments. During its early access period, 1 in 4 merchants saw 50% higher average order volume compared to other methods. Affirm also has merchant deals with Walmart, Priceline and Peloton.
However, the deal is probably not exclusive in the long term and the merchant discount rate, or fee that Amazon pays Affirm, is likely "quite low and maybe even unprofitable. Amazon is not known to make fortunes for its partners," Harris said.
Amazon has already been offering buy now, pay later in some contexts. It works with Zip in Australia, and offers Amazon Pay Later in India with partner banks, reaching 2 million users since launch in 2020.
The retail giant struck a partnership with Citi for certain Citi cardholders to charge their card and then pay over time at a lower interest rate. Consumers who have the Amazon.com Store Card and Amazon Rewards Visa also could pay in installments. Amazon also had made interest-free buy now, pay later options available for years for customers buying some Amazon devices such as Kindles and Fire tablets—devices which bring in more revenue through digital purchases.
But the Affirm deal makes buy now, pay later a much bigger part of Amazon's checkout process, and a standard option.
It also signals that Amazon felt it needed to move into buy now, pay later quickly — without taking the time to build something itself— given the rapid growth in the market.
Through its partnerships with household-name retailers, Affirm wants to connect directly with customers. But that also means it increasingly competes with those buy now, pay later partners for the attention of those customers.
Affirm already has its own app where consumers can purchase installment deals from a range of merchants. It includes deals where Affirm has a partnership with merchants, as well as where it doesn't. At those merchants where it doesn't have deals, it uses a one-time virtual card at the point of sale. (This virtual card can also be used with Apple Pay and Google Pay, which means it can be used in brick-and-mortar stores.)
Affirm says that one-third of its transactions in its most recent quarter were made directly from its app, indicating that Affirm is driving customers to merchants, not just acting as a boost to purchases on merchant websites.
Should Affirm get traction with consumers, Amazon and Shopify are bound to notice. It's always possible Amazon or Shopify could eventually switch to their own BNPL product.
But for now, Affirm's goal is to build up brand affinity with customers as quickly as possible. Amazon, where many customers buy everything from household staples to bigger ticket items, could help do that. While Affirm reported an average of two transactions per consumer in the first 12 months of new customer use as of last June, this deal could boost that much higher to perhaps 10 times per year, Harris said.
"That kind of frequency dramatically increases their consumer relevance, and gives them more of a running chance to build a direct-to-consumer business," Harris said.
Becoming a ubiquitous payment option is one thing, but Affirm's bigger and broader goal is to become a go-to shopping destination for consumers.
Amazon didn't indicate why it selected Affirm over other rivals in the market such as Klarna or Afterpay. Affirm already is large in the U.S. whereas Klarna was originally strong in Europe, though it's growing fast in the U.S. and Afterpay was just acquired by Square. But one reason may be that Affirm does more large installment deals than competitors.
These larger deals are more complex and require more intricate underwriting and capital markets experience, says Jeremy Liew, an early Affirm investor. "Customers want the ability to buy now, pay later not just for the little stuff but for everything," Liew said, which is why larger deals are important.
