Affirm now finances small-ticket items, signaling growing competition in payments

Affirm, the lending startup that provides short-term personal loans dressed up as everyday payment transactions, expanded its product Thursday to cover smaller purchases paid off in three interest-free installments. The company will continue issuing loans for larger purchases, between $100 and $10,000, with repayment terms ranging between three and 36 months. The average purchase is about $750, Ryan Metcalf, Affirm’s director of international markets, recently told Tearsheet. Interest on Affirm loans can get pretty high, up to 30 percent, based on shoppers’ credit. The company is riding on people's craving for simplicity and transparency -- of the repayment terms in this case -- to get more people to take out more loans for things many would argue they shouldn't be borrowing money for, like fashion and apparel, sectors where Affirm is making a big pitch based on consumer spending habits. Merchants pay a merchant discount rate to let customers spread out their repayment. The expansion comes the day after Visa and Mastercard said they planned to collaborate on creating a shared single payment button to remove the customer confusion caused by having so many dedicated payment buttons like those for Visa Checkout and Mastercard Masterpass as well as others from companies like PayPal and Affirm. The shift in strategy is evidence of the growing competition among payment companies for customer attention. It’s early days, but that competition is sure to enter customers’ mobile wallets as well, according to Mike Landau, a payments analyst at PwC. Affirm has worked closely with merchant partners on how they can market Affirm to shoppers and recently created a standalone app to offer the ability to use Affirm at more merchants. Going forward, mobile wallets like Apple Pay that integrate purchase financing tools could even the playing field between companies like Affirm and credit cards by delivering a similar experience for using both. “The creation of a familiar context for consumers to choose between cards and other alternatives should signal a reset in how issuers view their competitive landscape long before meaningful share shifts in volume take place,” Landau said in a PwC DeNovo ReCon note. “An evaluation of card features” like rates and rewards “should incorporate an understanding of the value proposition of card alternatives because consumers are likely to be able to choose a top-of-wallet option from a selection of credentials that includes more than just credit cards.” Affirm is a big player in the growing market of companies offering loans for purchases at the point of sale, which includes Klarna, Bread, Vyze and GreenSky, which, earlier this month, announced a forthcoming $1 billion IPO. Its loan product has grown four times in loan origination volume on a year-over-year basis for four years. A year ago it passed its 1 millionth loan and has done well beyond 1.5 million loans today. In 2017, it did $1 billion in originations. Typically, Affirm provides a conversion rate of 20 percent or more to merchants. Fashion and apparel brands typically see a 51 percent increase in cart size and a 96 percent increase in repeat purchases when shoppers use Affirm versus credit cards, Pfeifer said. Those sectors are currently facing a number of challenges, he added, including the pitfalls of selling through a third-party merchant: brand erosion and discounting. “We’re seeing a number of brands move toward a direct-to-consumer model, and Affirm is a partner to them in attracting and converting shoppers on their own sites,” Pfeifer said. “Affirm has strong performance on mobile, where apparel sales are most common.” Already, more than 75 percent of Affirm transactions take place on mobile, according to Rob Pfeifer, the company’s chief revenue officer. Tamara Mellon, Rebecca Minkoff, Paul Evans and Shinola are among its more than 1,200 merchant partners. With the new capabilities, Affirm can also scale across price points, from luxury to casual. Founder Max Levchin said the future of credit is “an app or digital tool that gives consumers flexibility in terms of spending wherever and whenever they want and complete transparency into the true cost of a purchase.” Research out of his company shows average U.S. customers understand why they need credit but are generally unhappy with the credit terms, lack of control or visibility into interest and fees that come with traditional credit cards, which people largely accept they need in order to build credit. Major companies are already addressing that tacit agreement between everyday people and credit cards. On Wednesday, Mastercard partnered with fintech startup Elevate to create a credit product designed to provide financial opportunities for U.S. consumers with low or no credit. Rather than targeting credit card customers generally, Affirm is going after a particular niche segment of millennials that have eschewed credit cards in general, Celent analyst Alenka Grealish noted. However, there’s no reason it or its merchant partners couldn’t offer something attractive to shoppers that “breaks the rewards ceiling.” "The average credit card transaction is 90-something dollars, debit is 40-something,” she said. “If affirm truly wants to be an e-commerce payments type — and it can serve because a borrower can pay right away and not accrue interest — it can basically be a transaction service and not necessarily a credit service. The moment you make yourself a transaction service, there are just more addressable markets.”