Fintech

Affirm takes 'buy now, pay later' public today. Investors may balk at the risk.

The San Francisco startup's rise highlights the rapid growth of payment and lending platforms, especially among millennials.

Affirm takes 'buy now, pay later' public today. Investors may balk at the risk.

Affirm CEO Max Levchin will take the company public.

Photo: Affirm

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.

Fintech

Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep Reading Show less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep Reading Show less
FTA
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.
Enterprise

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep Reading Show less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep Reading Show less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.

Enterprise

Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep Reading Show less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of RedTailMedia.org and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories
Bulletins