Affirm, the "buy now, pay later" startup, is going public on Wednesday in one of the most anticipated IPOs this year.
Affirm's IPO, which could value the company at a reported $10 billion, highlights the rapid growth of ecommerce and related payment and lending platforms amid the pandemic, as well as new ways that consumers, particularly younger ones, seek to make purchases: Many are eschewing credit cards to avoid going into debt.
Still, the San Francisco fintech company's debut also turns the spotlight on a trend that one analyst likens to payday loans, a system that makes it easier for consumers to make purchases instantly, but which has also sparked concerns about growing consumer debt in a wobbly economy.
"They don't like to call it a payday loan, but essentially, that's what it is," IDC analyst Jerry Silva told Protocol. "The trend overall is this ability to do better risk management around credit, and then based on that, to start offering products that we've never seen before."
Shares of Affirm opened at $90.90 after pricing at $49, and soared on the Nasdaq, trading at $96.07 as of 2:50 p.m. ET.
Affirm, which launched in 2012, is one of the large players in BNPL — as "buy now, pay later" is known. The system lets consumers make online purchases, such as a piece of furniture, a household appliance or an exercise machine, and pay in monthly installments.
Affirm offers interest-free and interest bearing loans, but says it doesn't charge late or hidden fees. BNPL has taken off mainly among middle-class consumers, including millennials, who are looking for an easier way to make purchases, especially for pricier items. Since the 2008 financial crisis, many millennials don't want to use credit cards, so they have looked at other options, Klarna U.S. head David Sykes said.
Affirm said more than 6.2 million consumers made roughly 17 million transactions on its platform with more than 6,500 merchants from July 2016 to September 2020. That represented total gross merchandise volume, or total sales transactions on the platform, of $10.7 billion.
The startup recorded revenue of about $510 million in its fiscal year that ended in June 2020, up 93% year-over-year.
One of its top rivals, Klarna, which is still private, reported gross merchandise volume of $35 billion for the first nine months of 2020, up 43% year-over-year. The Sweden-based company said it had 11 million U.S. customers and 2 million monthly active app users as of November 2020.
Silva said advances in technology, especially in AI and big data analytics, are driving the BNPL trend. These new tools are providing merchants and banks a faster, in-depth look at consumers' ability to pay their bills.
"What's expanding is credit, and we attribute that to the improved performance of AI-based risk models," he said. "When you think about it, credit all comes down to risk. How likely is this person to pay off whatever loan we're giving them?"
In fact, Affirm and Klarna target consumers with higher credit scores, so their credit risk is relatively low, said Fabrice Grinda, founding partner at FJ Labs, a Klarna investor. Neither company has been significantly affected by the pandemic downturn, he said.
"Affirm and Klarna are catering to people with high credit scores," he told Protocol. "Those people are doing relatively well — lawyers, doctors, bankers, consultants."
Affirm's relatively more affluent customer base was highlighted by one fact it disclosed in its IPO filing. The company said its top merchant partner is exercise bike maker Peloton, which comprised roughly 28% of its revenue in the fiscal year ending June 2020.
Grinda said that even if there were a longer recession that affected this higher-income group, he thinks companies like Affirm and Klarna will be relatively safe.
But the expansion of BNPL companies at a time of lingering uncertainty due to the pandemic is making some analysts and investors nervous.
"It's creating too much credit, which is always a big issue in consumer spending countries like the U.S.," said Kenn So, an investor with Shasta Ventures. He said Affirm appears to be doing a good job managing risks and delinquencies, "but with COVID decimating jobs and dragging the economy, I hope BNPL does not lead to excessive purchase behaviors."
Jonah Crane, a partner at investment firm Klaros Group, said "fraud and chargeback risks loom large" in BNPL.
"The ability of companies like Affirm to manage that risk appropriately is going to be absolutely critical to survive," he told Protocol. This is particularly important in a system in which customers typically are making a one-off transaction: "That's a challenging thing, from a fraud risk perspective, to deal with."
Klarna's Sykes said the company's credit risk is relatively low because Klarna's average order size in the U.S. is $150. "It's not like we target the subprime market," he said.
Joe Floyd, general partner at venture firm Emergence Capital, which isn't an investor in Affirm or Klarna, said investors should probably not be valuing Affirm and similar companies as software companies, but instead as lenders whose business is heavily dependent on transactions and risks.
Affirm, which raised its IPO price range from $33 to $38 to between $41 and $44, is looking to raise roughly $1.1 billion when it begins trading under the ticker AFRM on the Nasdaq Global Market. It's reportedly eyeing a valuation of more than $10 billion.
"There's always risk if you're lending," Floyd said. "If I were a public market investor, I would not want to apply the same multiples as I do to pure software companies."
Update: This article was updated at 8:15 a.m. PT to clarify the types of loans Affirm offers, and again at 11:52 a.m. PT to include its opening stock price.