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Affirm’s new deal with Shopify bakes it into Shop Pay Installments

  • The partnership gives Affirm a new distribution route with access to 1.7 million merchants.
  • A Barclays report says investors are underappreciating the partnership but that there’s no need.
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Affirm’s new deal with Shopify bakes it into Shop Pay Installments

With the official launch of Shop Pay Installments, the Shopify-Affirm partnership is finally reaping dividends. 

Earlier this month, Affirm and Shopify announced that they were bringing Shop Pay Installments, a custom-built BNPL solution for the e-commerce platform, to all of Shopify’s U.S. merchants. Affirm benefits from the partnership with a native integration that gives it access to 1.7 million Shopify merchants and millions more in customers. 

Affirm hasn’t had a terribly rough year -- GMV and active consumers grew 83 percent and 60 percent year-over-year, respectively. Affirm also more than doubled merchant volume on its platform from last year -- 141 percent growth, according to its third quarter results. However, its position in the market has been shaken quite a bit. In Q42018, Affirm accounted for 78 percent of all top BNPL app downloads in the U.S. -- by Q12021, Afterpay and Klarna made up a combined 60 percent of BNPL downloads and reduced Affirm to just 16 percent. 

As such, the launch of Shop Pay Installments couldn’t have come at a better time. 

Powered by Affirm, Shop Pay Installments allows buyers on Shopify to split their payments into four installments across six weeks. Shopify says that the feature leads to higher conversion rates and order values. 

Since Daniel Shim, CEO of ethical apparel company ONDO, activated Shop Pay Installments, ONDO was able to improve its online conversion rate by 28 percent. The BNPL solution also allowed ONDO customers to buy larger sock bundles, which meant ONDO was able to double its average cart size compared to regular checkout.

“I've always thought about installment payments for luxury goods or higher priced products,” says Shim in a conversation with Shopify. “But I didn't think people would use it to buy it for daily apparel like socks.”

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Moreover, with Shop Pay Installments, buyers are not sent offsite to complete BNPL transactions, which minimizes the risks of abandoned carts. Case in point, Shopify merchants who activated Shop Pay Installments saw checkout abandonment decrease by 28 percent compared to a third-party BNPL method, according to a Shopify press release.

BNPLs typically partner with big retail brands and e-commerce platforms but most of these partnerships are not exclusive. For example, Afterpay is offered as a third-party BNPL solution to merchants on Shopify. By powering a custom, native BNPL solution, Affirm is baked into the platform’s infrastructure as a default BNPL option for merchants, especially new merchants, for whom the feature will be auto-enabled when they activate Shopify Payments, Shopify’s payments offering for merchants. Ultimately, the partnership gives Affirm access to Shopify’s 1.7 million merchants.

Adam Davis, director of client services at challenger consultancy 11:FS, says that Shop Pay Installments diversifies Affirm’s existing portfolio that is heavily pegged to a few customers like Peloton, which accounted for over 30 percent of Affirm’s revenues in 2020. 

“The move represents another route to distribution,” says Davis. “[It] brings a highly engaged and significant ecosystem to Affirm within one partnership.” 

Davis says as the BNPL space becomes more crowded with new players, new exclusive distribution models will become more valuable -- especially with platforms that serve multiple businesses with multiple customers, all of whom can be accessed through one partnership.

In that regard, the partnership will likely increase the size of Affirm’s loan book significantly. However, because loans only apply on purchases between $50 to $1000, Davis says Affirm will have to scale quickly, especially if it’s going to keep up with revenues in 2020 -- up over 90 percent from 2019. The company is currently functioning on a net loss of about $112 million on revenues over $500 million.

A Barclays analyst report submits that Affirm investors are underappreciating the Shopify partnership because Affirm may have more price competition in the low average order volume space. However, the report suggests that price competition may not be an issue given that Shopify’s SMB merchants are relatively smaller than those onboarded with Afterpay and Klarna, implying that these firms are more likely to take up with Affirm.

“Given the relative size of each individual merchant, the ease of integration to enable Shop Pay Installments, and the merchants’ existing relationships with Shopify, we think it should be relatively easy for [Affirm] to rapidly market to and onboard a large number of merchants that otherwise would likely be unable to offer any type of installment program,” reads the report.

Shopify is no loser in the deal, either.

“For Shopify, they get two things -- one is a capability that clearly they don’t see as a core competency,” says Davis, who adds that the second significant stroke is that Shopify was given Affirm stock warrants as part of the deal that equate to over 8 percent of Affirm.

“They have already made a reported $2 billion,” says Davis.

Affirm and Shopify first began to work together on Shop Pay Installments in July of last year. After rolling out early access in September 2020, Shopify had 100 merchants signed on by February 2021 for its beta phase. That figure ballooned to 12,500 merchants in May and now the service is available to all eligible merchants in the U.S. 

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