Business Breakdowns
· 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.
· Fraser, S0
Affirm is very happy providing the credit in a white-label fashion to things like digital wallets. So Shop Pay is the canonical example. Shop Pay Installments is essentially a white-label version of Affirm. We would anticipate that as agents want to build wallets into their businesses, Affirm will build the credit aspect of those and share economics with them in the same way they have done that to date with businesses like Shopify. [00:00:00] S0: Maybe a naive question, but assuming that you can see multiple options at checkout — whether it's Affirm or Klarna or Afterpay or one of the smaller players — why would Affirm be so much better for an average consumer?
· Fraser
[00:00:00] S1: The key distinction — without being too dismissive of Afterpay; obviously I'm an Australian, I have an emotional affinity for Afterpay — but in the US really today, the two main competitors are Klarna and Affirm, albeit Affirm is 2x the size plus of Klarna in the US. The key distinction is the types of products and the types of loans they offer. Affirm has always, or historically, gravitated to higher-ticket-size, interest-bearing, longer-term loans. Much harder problem to solve — if you are lending someone $500 over 12 months, as Max would say, there's 12 times that consumer can decide they don't want to pay you back. Klarna has more typically gravitated to the $100 pair of jeans, pay-in-3, pay-in-4 short-term loans, and they have very different credit underwriting outcomes. Affirm has shown, on their monthly installment plans, your cohorts typically have a loss rate of about 3.5%. On those more traditional BNPL, short-term, low-ticket-size loans, the loss rates are more like 1%. Now, why do I highlight that? Affirm offers, and has a long history of offering, the full suite of credit products, from those pay-in-3, pay-in-4, 0% loans through to — many listeners may remember, the biggest part of their business when they listed was actually financing Peloton bikes on 24-, 36-month-type timeframes. They can service a much broader selection of merchants and products, or they have experience servicing a much larger set of products and merchants than Klarna has historically. Klarna is moving into these longer-term loans, but still, when you look at their business, the vast, vast majority is the Pay in X–style product. And so when you are an agent and you're on a merchant's website, Affirm is generally going to have the broader suite of options, and Affirm is also committed to things like no late fees, no penalties, whereas Klarna still does make money on those sorts of mechanisms. So there's some nuances and quirks in the terms and conditions, but fundamentally we would say Affirm has taken the time to solve the hardest problem of big loans over long periods of time and has backfilled the easier loans, whereas Klarna started on the easier loans and is now trying to figure out how to do the harder loans.
· Fraser, S0
And so today when you see the results, Affirm is larger, growing faster, on more merchant websites in the US, and there's less head-to-head where both buttons coexist than people probably think. [00:00:00] S0: What were some of the reasons that Australia — and that's specifically Afterpay — and then Klarna specifically in Sweden and other countries in Europe, why were they the pioneers of this specific technology? This seems like it would normally come out of Silicon Valley. And you said Affirm is a San Francisco company, yet Klarna, I think, started in 2006. Affirm didn't start until 2012. Talk about what were some of the ingredients for this starting in Europe, in Australia?
· Fraser
[00:00:00] S1: Klarna had been around for a long time. Affirm had been around for a long time. But the product-market fit moment of really these — I'll call them pay in X, pay in 4, whatever it might be — these shorter-term loans didn't happen until the late 2010s. But the big moment occurred in the US when COVID hit and BNPL volumes 3x'd in a year through that 2020 period. And what was interesting is at that time, Affirm had been doing these longer-term interest-bearing loans, or monthly installment loans, with businesses like Peloton, but the pay-in-4-type phenomenon hadn't really hit the US, because Afterpay had started in Australia and Klarna had started in Europe. When COVID hit, it was actually those shorter-term loans that all of a sudden took off. Affirm actually went from being the biggest business to being one of three, and the market shares were probably actually going against them. And again, it's interesting talking to Max about that period of time, because we cast our mind back and think that must have been pretty nerve-wracking. You were the first mover in the US, but very quickly these international players started taking share. But he reflects on that point I spoke about earlier, where his philosophy was always starting with this really hard problem and then backfilling with the easier problem rather than trying to go the other way. And so while you had this big product-market-fit usage explosion in COVID in the US, since then you've seen Max and Affirm's philosophy of "we want to be able to offer everything to merchants and customers" actually come to fruition. And they ended up signing Amazon and Shopify and Costco and a bunch of these super large merchants. I think the founders just happened to be there when the business model was created.
· S0
[00:00:00] S0: And in terms of penetration, getting the US and Affirm specifically — agentic commerce may be one tailwind that will help them close the gap in terms of penetration, where in Sweden, in Europe, it's 20%. Australia might be 15%. It's much larger than what it is here in the US. So what are some of the levers or tailwinds that Affirm can ride in terms of closing the gap and growing overall penetration?