Business Breakdowns
· Fraser
[00:00:00] S1: So I'll make the distinction between Mastercard and Visa and American Express. All three are payment networks, but as most listeners will know, Mastercard and Visa are purely the rails, and then the card issuers sitting on top extend the credit. And so they've disaggregated the credit from the payment network. American Express vertically integrates, and so they have the payment network, because they're directly integrated with merchants around the world, as well as extending the credit. American Express is a wonderful business and is very well covered by news media, but it has always traded at a multiple discount to Visa and Mastercard because there is a credit component to it. And so that's why when we talk payment network, we very specifically talk American Express, because Affirm has also integrated the payment network in terms of having direct integrations with merchants — albeit online instead of the cafe down the road or the restaurant down the road — but also having the credit sit on top. Proof of that network effect, when we just think at the highest level, is that Affirm today processes over $50 billion of GMV, still growing over 30% a year. And that's actually growing faster than it was a few years ago, despite the business now being two to three times the size. And so rather than seeing an asymptoting growth rate as the business scales, it's actually been able to maintain or accelerate growth at scale, which is a good indication that the network effects are very real. So Affirm benefits from all the same network effects that are well studied for a business like American Express. As more merchants integrate the Affirm button, it's available in more places for consumers to adopt. And then as more consumers become Affirm customers, it becomes more interesting for more merchants, because there's a larger consumer base to drive more revenue. And if you are a merchant assessing which BNPL button to install, you're generally going to gravitate to the one with the largest customer base, because it's generally going to drive the highest amount of purchase volume. That network effect also feeds through other parts of the business. For example, since IPO, the average user has increased their usage from two transactions a year to seven transactions per year because the product is available in more places.
· Fraser
Existing customers are seeing Affirm and using it even more. And what's also interesting is in any given quarter, about 95% of transactions are from existing customers. And so the flywheel is working both in terms of acquiring customers, but also in how frequently they're using the product. And that translates to things like sales and marketing — cash spend is very low and has barely moved in dollar terms since 2021, because you have this very efficient customer acquisition flywheel where most customers, the vast majority, are signing up when they see an offer that is attractive to them on a merchant's website. And so Affirm is not pouring money into Instagram ads or World Cup sponsorships to expensively acquire customers. They have this very neat flywheel, but these network effects are really important. There's a lot of apps out there, and they've been very successful and they're growing quickly and they're good businesses, but you go into the app, apply for a loan, and it loads it onto the account or onto a virtual card, and you then go spend it in the world however you want. That process doesn't have the network effects that Affirm does. And so those other products, we wouldn't call those payment networks; we would call those lending businesses. Whereas Affirm has vertically integrated the lending and the credit and the payments network. And that's why it looks more like the internet's version of American Express, whereas the credit loaded onto a mobile app or a virtual card looks more like the historical credit card ecosystem. And so we think Affirm will grow larger, faster, for longer because of the network effects and deserves to trade at a premium multiple because of that flywheel.
· S0, Fraser
[00:00:00] S0: I heard that their CAC is actually negative. [00:00:00] S1: Yeah. So if a customer signs up on a merchant's website, Affirm makes money on that loan and they've just won a customer. It's negative CAC for customers that come through that channel. If I was being really picky, when they originally signed the deals with Shopify and Amazon, they did issue equity to those players. So if you incorporate the amount of equity they issued to those two merchants in particular, there is a cost to the CAC of customers that come through those two channels. But generally, for the average merchant, the negative CAC piece is very real. [00:00:00] S0: Affirm also has these two double tailwinds, this Pac-Man effect of — we have e-commerce eating more and more of retail. E-commerce is, let's say, a trillion plus, and retail is a multiple of that, $7 or $8 trillion. So both of those numbers are probably going to continue to grow, and e-commerce is going to eat more and more of retail. At the same time, you have BNPL, buy now, pay later, eating more and more of e-commerce. So I'd love for you to describe some of these tailwinds.
· Fraser, S0
[00:00:00] S1: This is the growth, or the TAM thesis, perfectly articulated. You've essentially got e-commerce taking share of retail, and the US leads a lot of Western countries on this front, with e-commerce representing about 20% of sales. But the reason that perhaps — and listeners may be wondering why there's an Australian talking about an American payments business — the reason Australians and Australian investors are generally interested in these business models is BNPL adoption in the US is actually very early, and the countries and regions that adopted it the earliest and the fastest were actually places like Australia and Sweden and Europe, because Afterpay and Klarna were born in those regions. So today BNPL is about 6% of e-commerce in the US. That number is about 15 to 25% depending on if you picked Australia or Sweden or other European countries. So we think BNPL — and we use that term loosely; what we actually mean are these merchant-integrated payment options, so Afterpay, Klarna, Affirm — in America can triple in terms of its penetration of e-commerce, and then e-commerce is also going to take share of retail. So you've got these double tailwinds at the industry level. And then Affirm itself is the market share leader. It has about 50% market share, and it's actually gaining share. It's growing the fastest. [00:00:00] S0: In the US?
· S0, Fraser
[00:00:00] S0: In the US? [00:00:00] S1: In the US specifically, not international. So it's got about 50% market share in the US. And it's gaining share, and it's actually growing faster at its larger scale than both Klarna and Afterpay. And so again, when we think about network effects, typically once you have that escape velocity, it's very hard to catch the market leader. And it's a good segue into agentic commerce, because we think agentic commerce only accelerates those two industry-level tailwinds we talked about, in the sense that agentic commerce is only going to result in more retail happening online, and agents are going to be great at figuring out what the best credit and payment options are when you're checking out. And Affirm — we can get into the specifics of how it does it — is an exceptionally good option for a very large chunk of consumers that are actually optimizing for the best financing offer, not just where they get the most points. [00:00:00] S0: Could we walk through an example with agentic commerce? Because I actually think the stock had dipped on the news of Muse and maybe even Instinct and Groq Bots, and you have now Dots. Maybe there's a lot of uncertainty — everyone in payments is a little uncertain at the moment about how these things are going to impact it. It certainly seems exciting on one side, but it could also be a little scary on the other. Can you maybe articulate a little bit more about the potential upside, and maybe why the stock had dropped a bit and some of the concerns that agentic commerce presents?
· Fraser
[00:00:00] S1: So I think all of financial services and lending and payments dropped on the idea that agents will be better at comparing and contrasting offers, which is right. But the important thing when we think about Affirm is it's directly integrated at the checkout, at the point of sale, and they personalize the offers that a customer is seeing, in the sense that there are multiple options and they are tailored specifically for that transaction and that user, particularly when that user is already an Affirm customer. And so when you are buying that couch from Target for $250, the credit card — paying a high interest rate, the revolving balance, the terms and conditions — doesn't necessarily stack up that well against something like Affirm, where there's multiple options. Affirm — and we can get into the founding story — there are no late fees, there's no hidden terms, there's no "junk or gunk," as Max Levchin would describe it. What you see is what you get. And then the other thing that helps a lot is often the merchants are actually subsidizing the Affirm loans. So if I give the example of the 0% loans that Affirm offers, the merchant is actually subsidizing that. So you buy your $250 couch, you may get an offer for a six- or 12-month 0% loan. No credit card or credit app can compete with that type of offer. And so you can imagine when Instinct or Muse is doing your shopping for you and you go, "Great, I'm ready to check out, that's what I want," it goes, "Just so you know, there's a 0% offer from Affirm here. We think that's actually going to be better for you to use rather than your high-interest credit card." And you go, "Fantastic, can you fill it out for me and get it done?" And of course it's got your name and mobile number and email address and potentially last four numbers of the Social Security number. And so it can fill it all out for you. So there's actually less friction than there is as a human to sign up for one of those offers. The Affirm product is built for e-commerce. It is e-commerce native, and it's only going to be better in a world of agents, or more rational, less emotional decisions on what the best credit option is. I'd also say — we haven't talked about Max and the team, but this is a San Francisco business, highly technical, and you already see it today in the integrations they have.