Interesting. Overall, I agree with everyone else - Affirm looks like a healthy company.
Major takeaways:
1.5% write-off rate for their jan 2020 vintage is very healthy - comparable to the long-term trend for unsecured superprime consumer debt. Given the (I suspect) lower average creditworthiness of Affirm customers, this is a great number. I'd be curious to see their long-term trend for same-age vintages, however. In consumer credit it's well known that all the stimulus support in 2020 has significantly depressed defaults. It would be interesting to see if this is a fluke, or if this is actually what their charge-off rate actually looks like in a normal environment/part of a bigger trend.
I'm a little skeptical of their claim to use ML & build a data moat for significantly better underwriting decisions. Consumer credit laws in the US so severely restrict what you can use for credit scoring purposes that better underwriting through data is basically a lost cause, absent some specific customer segment that has special credit situations.
Finally, as others have noted, 30% of revenue just from Peloton is an enormous number.
> absent some specific customer segment that has special credit situations
It seems from the S-1 that Affirm has grown it's market quite a lot, but my first and primary exposure to them is in the car scene. Affirm entered this customer segment and dominated pretty quickly as the creditor integration of choice for long time-scale projects with up front costs like custom engine builds. I imagine to some degree they are able to make decisions partly based on the nature of what is being purchased.
Their S-1 indicates this is shifting, but I have historically seen Affirm in places where a more typical online consumer credit organization like PayPal Credit / BillMeLater / etc doesn't play. Affirm seemed to be focused on larger sized purchases which would otherwise be paid on an installment plan, but filling that gap. Exercise equipment like Peloton is a great example, just as engine builds is a similar type of transaction.
When you look at 30% of revenue from Peloton, and that their interest rate revenue is lower than merchant fees, it's basically companies paying to finance larger purchases for their customers because they get to book the full revenue on their books immediately, pay down the interest through merchant fees themselves, get higher numbers on their books, increase their market cap, and for consumers it's a benefit because why not finance it over a period of 39 months than be out of pocket immediately or finance it through a credit card with high interest rates.
So really it's a great way to take advantage of the credit markets and public company comps being extremely high while benefitting the customer.
> Consumer credit laws in the US so severely restrict what you can use for credit scoring purposes that better underwriting through data is basically a lost cause, absent some specific customer segment that has special credit situations.
Can I inquire what your background is or where you found that information? Many companies supplement credit scores with additional data to make these types of decisions.
I’ve worked in credit risk modeling and it is rather strict the predictors that can be used and well documented. Data comes in from a variety of sources and it is favorable to be skilled in established models than to try something obscure that isn’t intuitive. The models have to work across different sets of time and the varying business processes that may have been in place. Fraud modeling is more flexible, but seemed to have fairly similar results although more trendy things like random forests and neural nets would show up.
That is definitely changing in credit risk and underwriting as well. There are several companies like [1] applying deep neural nets to the credit risk problem. This on top of a lot of in house work in the big banks to “supplement” what is available on the open market
There is a big difference between dumping a dataset in the latest hot ML model and building something that offer some actual explainability, deal with intrinsic biases, have some stability over time and recalibration and that will go trough an unprecedented crisis for which you don't have any data to learn from. That mean the model usually has to go trough a lot of internal commities and different external agencies. I highly suspect that an external proprietary solution won't go very far in the credit rating field.
This is definitely a super interesting company/approach - thanks for the link! I'm definitely curious as to whether they're actually using things like neural nets (or any other more-sophisticated technical techniques). The traditional problem is that those models aren't explainable, and potentially have hidden biases in them, so I'd be really curious what their approach is.
Am I right in reading 30% of their rev is coming from Peloton? (Control-F “Peloton”)
“Our top merchant partner, Peloton, represented approximately 28% of our total revenue for the fiscal year ended June 30, 2020 and 30% of our total revenue for the three months ended September 30, 2020. Our top ten merchants in the aggregate represented approximately 35% of our total revenue for the fiscal year ended June 30, 2020 and approximately 37% of our total revenue for the three months ended September 30, 2020.”
“For example, the significance of Peloton in our portfolio has increased as a result of consumer spending trends on home fitness equipment, and there can be no assurance that such trends will continue or that the levels of total revenue and merchant network revenue that we generate from Peloton will continue. The loss of Peloton as a merchant partner, or the loss of any other significant merchant relationships, would materially and adversely affect our business, results of operations, financial condition, and future prospects. In addition, an anticipated material modification in the merchant agreement with a significant merchant partner could affect the results of our operations, financial condition, and future prospects.”
Recently, I went to Peloton dealership to order one bike. They offered 39 months 0% APR. I asked if they can give me some sort of cash discount. Because of lack of cash discount, and availability of 0% APR naturally I financed it. Perhaps, that's how Affirm is getting their business.
Quite the premium Peloton owners are paying in aggregate to subsidize that zero interest rate through merchant fees to Affirm. Peloton gets to immediately recognize the revenue of the sale (versus them carrying the debt themselves), and Affirm gets to show quality vintage from price insensitive prime borrowers.
I am curious, did you end up paying the sticker price, or did it double by the time you checked out?
I'd sold my P already, but back in the day you'd go in, and it would cost 1800 or something, but then you add a (mandatory) subscription cost, (mandatory) delivery and assembly fee, and of course a pair of shoes and a matt, and now you've got yourself an indoor bike for 3k.
Haven’t read the prospectus but I know they sell loans to investors and they are fairly highly rated from a credit perspective. I’m sure they have some debt on their books too though.
Wonder if I'm the only one surprised by their actual revenue model. I had always assumed they made money off loan interest from consumers which they do, but it turns out over half of their 2020 revenue came from merchant fees instead.
I just went through the Peloton flow to see for myself and indeed there's a 0% APR option for 3 years so it's clearly being paid for by Peloton.
It also explains to me why people might choose to use Affirm even if they could afford the upfront cost.
I moved about 5 months ago and purchased a few thousand dollars worth of furniture. I could have paid cash but since it was 0% APR, I used Affirm and set the money aside in an investment account that has paid for ~20% of the total cost. Of course it could have gone the other way, but it was a risk I was willing to take.
If you have the Affirm app on your phone it isn't too surprising! They have a full e-commerce platform setup with numerous brands. I've used Affirm for years to help build my credit with 0 APR and I'm a very happy customer. Excited about their future.
I feel like the retailer side makes sense, even if you do 0% APR. The alternative to Affirm's merchant fee is a credit card merchant fee (say, 2.9%).
Affirm takes what would be a ~$600 or $2000 credit card transaction and turns it into a series of ACH payments. If (cost of ACH + cost of underwriting) < (cost of credit card merchant fee) then the merchant and affirm can split the difference.
The floodgates in 2020 have opened with IPOs of alot of these unicorns, Palantir, doordash, airbnb, affirm, jfrog, snowflake, asana. I wonder why the sudden timeframe to go public. My guess is they want to ride the wave of stimulus money that has been going on during the spring/summer and the 2nd round which has yet to happen.
I don't see it as a problem. Innovation is accelerating with new business models and so on. Adoption curve for new technologies could be occurring quicker as well thanks to social media (easier to "spread the word" about new products/services/technologies).
I don't see it as a problem because all of these companies have legitimate products/services, legitimate customers and legitimate cash flows. This isn't another dot com situation we are in. There are very few companies going IPO with just an idea. ("we're going to use the proceeds from this offering to build an online pets store called pets.com")
It is easy to say "its the stimulus" or "its the fed" but I think there is more going on at a fundamental level.
From a quick glimpse, the business model of Affirm seems to be about letting people get loans for things they would previously have to save for. In other words:
Before: Alice wants to buy a chair that costs $100 from Bob. Alice saves $10 a month and buys a chair. Bob got $100. Alice can buy a new chair every 10 months. She may also conclude after 10 months, that she doesn't want the chair that badly, and would instead save the $100 for retirement, or pay it into the house mortgage, reducing the amortization by a week.
Now: Alice wants to buy a chair from Bob. She gets a loan, paying $10 over 12 months. Bob gets $100, Affirm gets $20. Alice can now buy a chair every 12 months. Affirm's founder buys a supercar.
Slightly later: Alice's job gets cut due to COVID. She can now only pay $5/month. She gets a $100 stimulus check, but instead of paying off the chair, she buys Affirm stock and remortgages the chair to 24 months. Now Affirm gets $40 in interest and $100 in fed money routed through Alice.
Net effect: Alice's purchasing power has reduced 2.4 times, Affirm's founder buys 50 new yachts and starts a company that lets people get loans to buy food.
The "before" was applying for a store-branded credit card at the point of sale, which evaluated your credit risk and (potentially) extended you a revolving credit line equal to what the lender deemed was your appropriate borrowing capacity, potentially far in excess of your purchase amount.
Affirm is just a "micro-transaction" take on that very large and lucrative market. They extend a fixed term, one-time line of credit equal to your transaction amount and no more. Want to use Affirm for another transaction? That'll be an entirely independent line of credit for that transaction, subject to its own application/approval process.
There are a lot of somewhat novel aspects to Affirm's approach, but the core premise of Affirm itself one of them. For better or worse, making it easy for consumers to over-extend themselves by dangling a credit line at the point of sale was widespread and lucrative long before Affirm entered the market.
Your description sounds like the definition of financing.
Yes, with financing there’s a trade off. In exchange for paying interest, you have the item that much sooner.
Slightly tongue-in-cheek, but this is missing in your before example:
Alice has to sit on the floor because she doesn’t have a chair. After 10 months of doing this, she has terrible posture and joint pain from sitting on the floor all the time. Despite her pleas, doctors say that her increased purchasing power won’t cure her ailments.
>Yes, with financing there’s a trade off. In exchange for paying interest, you have the item that much sooner.
Except then you want your next item and can't buy it because your credit limit is maxed out. So you have moved your "item queue" forward once or maybe twice, and now have one more rent to pay. You still have to wait for the next item, it's just instead of waiting for your savings to reach $100, you wait for your debt to drop to N - $100 where N is your credit limit.
It makes sense for strategic items, like a house or a car. But doing it on a daily basis is just poor financial planning.
>Alice has to sit on the floor because she doesn’t have a chair.
Motivated Alice should go around garage sales and find a used chair for $5. Or research how to make a makeshift one from whatever she has. Or borrow it from a friend. Or read in a library and eat cheaper food for 2 weeks, and save $100 right away.
All these are problem-solving and prioritization skills, and they are crucial to one's long-term success. And the difference in life quality between America and Zimbabwe is because the previous generations of Americans possessed these skills and applied them wisely. Except now the big players realized that they can make more money off people without these skills, so the popular culture is instead praising impulsive decisions over carefully weighed plans, and pushing people deeper into poverty.
> And the difference in life quality between America and Zimbabwe is because the previous generations of Americans possessed these skills and applied them wisely.
The grossly misrepresents what's happened in Zimbabwe.
I believe your intention was to suggest that by corrupting certain skills or values around finance or thriftiness or learning to build, etc etc, that the USA is on course for a significant decline in quality of life?
However, Zimbabwe's problems are rooted in a different, and much more pernicious, sort od corruption.
Based on my experience, the skill of persistently studying for your GMAT evening after evening highly correlates with the skill of persistently saving a fraction of your income month after month. Delayed gratification and everything.
So a more realistic scenario is that first she won't study in a library because she doesn't have a chair. Then, having a loan on the chair she won't study because the old phone is too slow. Then, having a loan on both chair and the new iPhone, she won't study it because it's just too hard and going to the pub with the friends is more fun. So she will end up with another loan for a liberal arts degree, and will then wonder how to pay it off from a Starbucks salary.
Sorry, like it or not, people appreciate hard-earned things more than something that comes seemingly for free. The best example is that 70% of lottery winners go bankrupt within the next few years [0].
yeah its probably this, market caps on some of these money losers is stratospheric. I think alot of people forgot the lessons of 2000. Take Palantir, a company that is 11 years old and for the past 3 years has lost 600M a year. What monopoly will this company carve out for itself to achieve this lofty valuation?
Or lets look at doordash [1] despite the pandemic and most of its workers not being employees(low paid gig workers) it is still losing money at an astounding rate: $533M last year and with a pandemic bump of only a 149M loss this year so far(it expects orders to slow alot after the pandemic).
I feel like I am Michael Burry in the big short playing my drums pointing out the obviousness of the huge crash that is coming with alot of these companies. What is scary is alot of americans and foreigners for that matter have their retirement savings(401k) tied up into these mini-titanics. When the fed's tap gets turned off, expect a reckoning.
What makes you think the fed's tap will ever get turned off?
What preconditions do you think we have to see before it happens?
In the past, every time I thought "the Fed will have to tighten soon" something happens which somehow, magically, always requires more easy money to solve.
Example: Easy money caused a housing bubble that burst? Now we need easy money to fix unemployment and keep the markets from seizing up.
It seems that politicians have now decided that the easy-money solution is always the easiest one, with the least traceable future negative ramifications.
It could happen with this Biden presidency, although most likely with whoever comes after him. If you think about easy money and interest rates, with Obama the lowering of interest rates made sense, the country was coming out of a long protracted recession and the money was needed to grease the gears of the economy so to speak.
With the Trump presidency he made his north star be the stock market(and keeping it high) and its why he heavily pressured the Fed to keep interest rates extremely low to supercharge the economy(and make him look good).
If a vaccine comes quickly and is highly effective long term and covid is eradicated by late spring/summer I expect a big jump in the stock market and a red hot housing market, this would be a time to slowly increase the interest rates, wall street won't like it but at some point it will have to happen.
There is a bigger macro trend here - public investors are clamoring to get in early on the next $ZM, $AMZN, $GOOGL, etc. even if they place bets on 5 of these companies and 1 pans out, it'll far exceed the SP500.
I have a friend who works for the big four in M&A. He said there's a rush of deals with explicit EOY deadlines because of the tax environment uncertainty. I can't imagine this doesn't play a major role in all of the IPOs happening before EOY as well.
There is something fishy about selling a product with 0% APR - it means as a consumer you're actually WORSE off if you DON'T get the loan (since you would earn interest on the cash in your account). Forcing people to borrow when they don't have to is a strange way to make money off fees?
Totally. For consumers who can afford cash, it simply inflates the cost of the bike. Consumers see 0% and think free, but in reality the cost of the loan has already been priced into the cost of the bike. There's no free lunch.
> Our agreement with one of our originating bank partners, Cross River Bank, which has originated the substantial majority of loans facilitated through our platform to date, is non-exclusive, short-term in duration and subject to termination by Cross River Bank upon the occurrence of certain events, including our failure to comply with applicable regulatory requirements. If that agreement is terminated, and we are unable to replace the commitments of Cross River Bank, our business, results of operations, financial condition, and future prospects would be materially and adversely affected.
Affirm is effectively a broker for loans issued by Cross River Bank
affirm is one of those things that was pretty interesting. Coming from a country where micro-installments at PoS was standard, i always thought it was really interesting the US didn't have it.
Good for them, I'll be buying shortly after their IPO.
This one is also interesting. I might not be old enough to remember something like this, even old times circa 1990s installments would let you have the item immediately, but be paid over time.
The PoS thing i am talking about was even before ecommerce was common was mostly decentralized through the seller. Overtime, banks started getting into this niche, and when you were paying with credit card, they offered you installments usually at 0% apr for few months. Eventually this moved to e-commerce with websites offering similar payments.
I also sort of remember in the US some credit cards (probably chase?) offered installments after you pay for the item - you'd login into your account, and pick a purchase to pay over time.
Instead of relying on your credit card, you use the vendor (or someone else) credit, to pay over time.
Looks like in some cases, they integrated in the vendor website, so when paying you can directly select Affirm.
I did the test with Dyson, it redirected me to the Dyson website, and Dyson does already offers payment installments at 0% APR (12 months).
Looks like Affirm does the math for you, if there is an APR, so you know the true cost. And it keeps all your debt nicely listed in the mobile app. So, you know what you owe every month. Hopefully Affirm helps you not overstretch...
This could help people who do not fully grasp the true cost of those credits, and hopefully help them manage their debt.
It didn't happen to credit card companies in 60 years. They still charge merchants 2,9%. It's like a giant duopoly and fixed pricing. But in a real market, ofc you would be right. Maybe congress should look at VISA, Mastercard, AMEX instead.
Wow, kind of amazing that they're not losing tons of money through sales + marketing like every other IPO lately who lose 50% there. (they are losing money though). A little scary though, how much money they lose through bad credit write-offs, and what's the item about a huge loss for loan purchase commitments, both years?
Aside from those, they could be a really attractive business.
> As of September 30, 2020, we had over $4.2 billion in funding capacity from a diverse set of capital partners, and we have funded approximately $10.7 billion of purchases since July 1, 2016.
Major takeaways:
1.5% write-off rate for their jan 2020 vintage is very healthy - comparable to the long-term trend for unsecured superprime consumer debt. Given the (I suspect) lower average creditworthiness of Affirm customers, this is a great number. I'd be curious to see their long-term trend for same-age vintages, however. In consumer credit it's well known that all the stimulus support in 2020 has significantly depressed defaults. It would be interesting to see if this is a fluke, or if this is actually what their charge-off rate actually looks like in a normal environment/part of a bigger trend.
I'm a little skeptical of their claim to use ML & build a data moat for significantly better underwriting decisions. Consumer credit laws in the US so severely restrict what you can use for credit scoring purposes that better underwriting through data is basically a lost cause, absent some specific customer segment that has special credit situations.
Finally, as others have noted, 30% of revenue just from Peloton is an enormous number.