Business Breakdowns
· 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?
· Fraser
[00:00:00] S1: So interestingly, only 75 of the top 250 US merchants are on the Affirm platform or have the Affirm button integrated into their checkout. So there's still a lot of growth just from the enterprise sales motion of turning up to these merchants and getting Affirm integrated. Affirm now does offer a card to those customers that effectively come through the core funnel. So this is someone that has signed up for an Affirm loan through an integrated merchant. They've used the app, they've repaid a loan, and Affirm now offers this card. And the card can basically toggle between debit and credit using the Visa network. The customer can either pay now, pay later, or pay now and decide later, as they like to say. And that card lets Affirm reach in-store payments and the online merchants that aren't integrated with Affirm. So you can be shopping for furniture in store and still take advantage of a multi-month interest-bearing loan from Affirm, and that product has been very popular. So about 20% of users and GMV now comes from card, and it's still growing over 100% year on year. The mechanism is kind of the same, in the sense that Affirm is still underwriting every transaction, and interestingly, they still maintain very strong unit economics, because the card fees they earn are basically the same as what they would otherwise get on these interest-bearing loans with an integrated merchant. But what's interesting is Affirm now has all this data of where their customers shop at merchants that aren't integrated with Affirm. And so it's a great sales tactic when you walk into a new merchant and say, "Hey, our customers are already spending X million dollars with your business. We think we can drive an uplift of Y dollars to your revenue if you were to integrate us directly into your e-commerce site." That flywheel is also spinning to help that core engine of the core payments network with the direct merchant integrations.
· S0
[00:00:00] S0: Why do you think penetration isn't higher on the enterprise side? It's kind of a win-win solution. The merchant knows that conversion rates will be higher; maybe average orders will be higher too. And then consumers are also obviously happy — they're able to pay over time and have these various options. There's flexibility to it. Why hasn't penetration necessarily been higher?