Business Breakdowns
· 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.
· Fraser
[00:00:00] S1: We're not strictly bank investors. We're more founder-led growth investors. When we speak to our network, the number one thing people worry about is that they're just not comfortable with credit businesses — that it's just too hard, requires too much work, not in their circle of competence. The issue is not so much firm-specific as it is just where they play. I think there's also a lot of misconceptions. We speak to a lot of investors that still say, "Oh, they're just lending to subprime customers that can't otherwise get credit cards. It's a hypercompetitive industry. What's the competitive advantage?" And what's interesting is it was very similar with Afterpay in Australia. The investor community was generally very dismissive of Afterpay when it was listed here because, again, their personal experience, our personal experience, is very different to the types of customers that use Affirm. We're typically not sitting on revolving credit card balances, and we're typically optimizing for points and travel and airport lounge access. And so the counterposition of Affirm versus a credit card isn't obvious to us in the same way it is obvious to the average American, who actually just wants to get a great offer and not end up trapped in a credit card debt spiral. The pushback is actually normally based on some of those aspects. The concentration piece we've talked about — it can be offset. It obviously hurts the customer acquisition flywheel if an Amazon or a Shopify were to churn. No doubt there are very long-term agreements in place with both of those companies. You can imagine — Max and Tobi, I understand, are reasonably close. There's reasons why those partnerships have been very successful for all the players. So it would surprise us if those relationships were to end, but it obviously is a risk. We've talked about the capital markets side and interest rates. You just see it in the stock price very clearly. Anytime there's a Wall Street Journal article that private credit are gating funds and potentially imploding, the stock is down. I think it's one of those businesses where, when things are going well, you get a lot of growth investors involved. When things are going not so well, all the bank guys turn up. And so there's this constant tension of: should it trade on ten times P/E? Should it trade on 20 times P/E?
· Fraser
The growth investors haven't necessarily done a whole lot of work to get really comfortable with the credit. And so anytime there's a risk, they're straight out. But similarly, the bank guys don't necessarily value a founder-led, tech-native business — those aspects of the culture and the organization — the same way the growth guys do. So in the same way people were arguing for many years, "Is Amazon a retailer or a tech business?" I think people today argue, "Is Affirm a lender or a tech business?" And the answer is both, and it's important to understand both aspects of the business. There's all the games of how quickly do consensus estimates come down and all those sorts of things, but really, during a really, really bad interest rate hike cycle, it was one quarter where you would've looked at each other — "Is this business about to implode?" And then the next quarter it got better, and by the following quarter you were back. So when you look through the history and study how the business self-healed through that process, I think you can get comfort on the credit. Not to say the share price won't get hurt if there's major interest rate hikes, but it's not an existential risk, I think, the way some people would otherwise think of it.