Business Breakdowns
· Fraser
When we think about these credit businesses, it's not like a credit card portfolio, where you have a whole bunch of people sitting on a revolving balance, paying the minimums every month, with balances that are compounding on variable rates, so that when interest rates rise, they were paying 15% on their revolving balance and now it's 25%. And so all of a sudden you have this huge washout of credit losses. With Affirm, the mechanism by which it impacts the P&L and the business is different, and we think healthier and lower risk than what you would see in these credit card businesses. Which is why — and we can talk about valuation — the network effects alone make the business more like an American Express than a Capital One or a Synchrony, but also just how the credit hits the P&L and what happens in these downturns also makes Affirm a better business than the Capital Ones and the Synchronies. Now, the fair argument is that obviously Amex has a very affluent customer base. Affirm is called the average American. Arguably, there's some sort of trade-off there between different customer base, but operating in a faster-growth part of payments, in the sense that we've talked about BNPL taking share of e-commerce, which is taking share of retail. And so you've got this big tailwind behind you relative to Amex, which is that more traditional card network.
· S0
[00:00:00] S0: So we've covered now the economics, the moats, underwriting models, the team, the funding, the mechanisms behind it, and I want to talk about where it goes from here. Management has been pretty aggressive and has laid out a plan to roughly double the business to $100 billion in GMV. Maybe lay out where the different levers are to get there — where you feel the most conviction and maybe the most skeptical.
· Fraser
[00:00:00] S1: If I start at the highest level of the TAM, and then we can drill into the next few years, the stats are somewhat overwhelming. In the US alone, there's about $1.3 trillion of credit card balances outstanding, versus Affirm's total loan book, on balance sheet and off balance sheet, of about $20 billion. Affirm is a speck relative to the US credit card ecosystem. Even if you look at GMV, where Affirm processed $50 billion — if you added up Visa, Mastercard, and Amex's credit card volumes, it's about $13 trillion each year. So Affirm is still tiny relative to the overall opportunity. Not suggesting it's ever going to be as big as Visa, Mastercard, or Amex, but there's still a lot of room to grow. Even if we were to just pick Capital One, Capital One processes over 15 times Affirm's GMV each year. So Affirm is large in the sense it processes $50 billion of GMV and is integrated with some of the biggest merchants in America, but there's still a very long way to go. And I think when you speak to Max and when you hear Max on podcasts and earnings calls, you get that sense that they are still very early and he's very ambitious about where he wants to take this business. These medium-term milestones they set themselves at these investor forums every few years are the stepping stones along the way. It's not a final endpoint where investors should assume the business hits the wall at $100 billion of GMV and never grows from there, or grows at industry card volume from there. So if we're then to drill into that medium-term framework — as I mentioned, they have a June year-end, but they delivered about $50 billion of GMV to June of this year. They're targeting $100 billion, greater than 25% annual growth on that path. So it works out they'll get there within a few years, in theory. And when they communicate to the market, they are very explicit about what is in that guidance and what is not in that guidance. And so what is in that growth target is the core US business plus the card plus international. Edge, which is their white-label offering for US banks, and agentic commerce sit on top of that. So if those two products were to be successful, we would expect that $100 billion of GMV to actually end up being higher. So if we focus on very quickly running through those three pillars — core, card, international — we've talked about the core.
· Fraser
E-commerce is still taking share of US retail at a touch over 20% share. BNPL can still triple its share of US e-commerce if you look at benchmarks elsewhere in the world. And Affirm is about 50% market share of BNPL and expanding. So you've got the triple tailwind in that core business. The added context is only 75 of the top 250 US merchants actually use Affirm or have Affirm integrated today. So that core business should continue growing very nicely through the future. The second big lever is the card product. Again, this isn't a product that's being advertised widely with very high CACs, like a lot of other card products that are out there. It's purely for the consumers that are already coming through that core customer acquisition funnel, and it allows consumers to pay now, pay later, pay now and decide later, and spend in-store and with online merchants without a direct Affirm integration. It's already, call it, 20% of users and GMV, growing very, very quickly, and has been hugely successful and delivers great unit economics to Affirm at roughly the same rates as the overall broader business, potentially actually a little bit higher. There is the obvious downside from card — you're not getting the product-level data from the merchant integrations. What's interesting is that hasn't seemed to have hurt underwriting outcomes. What Affirm would say is it just makes personalizing offers a lot harder. So when you're integrated with a merchant, you're getting all this really rich data — from what you've clicked on, what you added to the basket, what you took out of the basket, all the way through. You can imagine all the data points. And so ultimately what offers you're showing can be personalized not only to the user and their history of repayment and the offers they've selected, but also the types of things in the basket. So that's the card. The third piece — and this is more nascent, and the company would suggest is a smaller driver of growth — is the international piece. There's a range of perspectives on international. You can imagine — we've just mentioned that BNPL is already reasonably saturated in a lot of overseas markets, when you think about Europe or places like Australia and New Zealand.
· Fraser
And, recognition where it's due, Klarna has a much stronger international business with a very large merchant and consumer base, and they've built a great payments network in this international region. But what's interesting is Affirm is getting pulled into these international markets by its existing US merchants, whether that's Shopify or Costco. Some of their largest partners, I think, see the value of the broader suite of credit products and want to bring them into places like Canada, the UK, and Australia. The international business in and of itself is interesting just as a driver of growth in its own right, but it's actually, in our minds, strategically very important to continue winning businesses with US merchants. There are examples of merchants with global footprints — and I'll pick on an Airbnb or eBay — that actually went with Klarna globally because they just wanted one button to hit a global customer base. And today Affirm can't really do that. Over time, as Affirm opens in more regions, we think that head-to-head on Klarna for some of those merchants actually gets stronger, so that there's no reason why anyone shouldn't go with Affirm. Because you can imagine, at the end of the day, if you're a US-only merchant, Affirm — the network effect is basically subject to the economics not being wildly different. You generally prefer to pick the platform with the most users, because it's going to result in the most transactions. The same is true globally. So if you're a global business, it's hard not to pick Klarna today, because there's so many regions where they have a large customer base and are going to result in more transactions. Over time, we think that'll change, but that's why the international business is important to build, even though I think some investors would be skeptical that that market is saturated and maybe there's no point going after those markets. Those three buckets are what's in the actual greater-than-25% growth, $100 billion of GMV. The business was then very deliberate and specific that Affirm Edge and agentic commerce were incremental products to that growth. And so Edge is the white label for regional banks, and then agentic commerce will involve a myriad of things, from personalized offers through to direct integrations with personal agents, as well as AI more broadly through the business.
· S0
[00:00:00] S0: When you speak to skeptics of Affirm, what are they most worried about? Is it mostly just around the concentration risk, which seems to have been mitigated to some extent, even when you lose a player like Walmart? And maybe they had high volume, but it wasn't super profitable, so it didn't make such an impact to the business. But in general, I think the numbers are pretty concentrated across the top five, and then even Amazon being the number one, which is over 20% of the business. How much of it is just around concentration risk? Obviously interest rates have an impact too, but we covered that. Maybe hit on concentration risk and any other significant risks to the business.