Affirm’s big business for 2018 is marketing

Affirm may identify as a lending startup and encroaching on the payments space, but its core business is all marketing. The San Francisco company, led by PayPal co-founder Max Levchin, began with a product that would displace credit cards, a short-term personal loan dressed up as everyday payments transactions, which shoppers repay in three, six or 12 months. It’s part of the growing “purchase financing” space Affirm is helping grow with other players like Klarna, Vyze and Bread. With that loan product, Affirm sees every transaction at the point of sale -- who is buying, what they’re buying and where -- and underwrites them separately. It’s unsurprising then that in 2018 it’s going to focus on providing more merchants with even more services to help them read their customers, according to Ryan Metcalf, Affirm’s director of international markets. “We are becoming very much intertwined [with retail] because we’re not just seen as a payment method anymore,” Metcalf said. “We are a marketing lever that provides a lot of data and analytics about how people buy.” For consumers, purchase financing products offer the price transparency that’s so attractive to people but has been missing from most of their financial services. They make it simple to know exactly how much customers will pay for a particular item over the repayment period in dollars and as a percentage of APR -- instead of losing them in the credit card statement shuffle with items. Plus, the loan is issued in real time. Affirm said it takes less than 30 seconds and happens simply and seamlessly at checkout. In the age of Yahoo breaches and Equifax hacks, that’s a much more appealing process than entering some credit card information into the interwebs. Today, people are worried the safety and privacy of their data and skeptical of new ideas for lending to the larger portion of the U.S. consumer base, said Mike Landau, payments analyst at PwC. While many are chipping at away at how to engage with consumers in contextual or relevant ways, Affirm is wrapping that lending experience in a payment and shopping action. “You wouldn't really say that for any other loan you would try to get,” Landau said. “To buy a house, you would get it preapproved. Student loans, too -- any other loan requires some separate action you need to take. That doesn't mean this is ripe for a hockey stick kind of adoption” in 2018. Affirm’s loan product has grown four times in loan origination volume on a year-over-year basis for four years. In April, Affirm announced its 1 millionth loan and is well beyond 1.5 million loans today. In 2017, it did $1 billion in originations. The average order is about $750 now, Metcalf said, and Affirm provides a conversion rate of 20 percent or more on average, according to more than 20 company case studies across verticals spanning furniture to traveling and ticketing. At least 1,200 merchants have integrated Affirm at the point of sale. “The benefit it provides merchants is pretty phenomenal,” said Metcalf, adding that it helps them with “everything they care about: how to get people to increase their average order value or basket size, how to get people to convert more from time they land on website to when they check out, how to increase revenue per user.” The company recently launched an email marketing program -- where merchants send a newsletter to customers alerting them about the new payment option -- that could help retailers recover people that abandon carts. In 2017, 77.3 percent of online shopping carts were abandoned instead of purchased, which is where Affirm wants to step in and help those merchants use their dollars more wisely when it comes to customer acquisition costs and cross-promotional spending, among other analytical services that many merchants just don’t have in-house. “Either they’re fast-growing startups like Peloton or Casper, or they’re more sophisticated like Wayfair and have other sources,” Metcalf said. “There’s a whole segment of merchants that we want to provide additional services to that our competitors don’t.” Its successful merchant partners send emails every few weeks to reintroduce the partnership with Affirm, which also suggests merchants keep static banners at the bottom of other emails to highlight the partnership. It also encourages merchants to add on-site marketing components to the product page, cart page, payment method selection area, homepage and even a dedicated landing page that explains the relationship between the merchant and Affirm and details the loan and payment process. “Affirm has done a great job of putting itself front and center along with its partner firms," said Geoffrey Kott, head of finance and corporate strategy at Cross River Bank, which counts Affirm among its customers. "For example, Casper has made a concerted effort to announce the Affirm relationship, which will benefit both brands in the end." Affirm’s approach is a departure from the way credit is underwritten today, where lenders have no idea why borrowers need the money or how they’ll actually end up using it. And it’s going to bring the retail and financial services industries even closer together, which was sort of a theme of 2017. Mobile payments’ adoption has been “underwhelming to date by nearly every objective standard,” said Goldman Sachs analysts in a recent client report, while retail chains have invested more in their customer apps to provide value beyond the payment. Similarly, bank branches, which are seeing their digital and mobile strategies come together, are now looking to other types of retailers for physical branch strategy and inspiration. “We’re not worried about Amazon,” Metcalf said. “We certainly watch what they do, but we look at ourselves as providing services for all the retailers that aren't necessarily Amazon. In 2018, you’ll see us with big-box retailers fighting that out.”