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What is Affirm's competitive advantage and what are the market mechanics that would prove or disprove that advantage?
Hello and thank you for your request for information about Affirm and its competitive advantage in the market. I've searched industry sites, corporate sites, and other trusted media sites, and the short answer is that Affirm may have some competitive disadvantages with Klarna and PayPal credit, while it may have competitive advantages with FinanceIt and Bread. Below is a deep dive of my findings.
OVERVIEW
Affirm offers monthly payment plan loans at point-of-sale through merchants. According to a survey by Researchscape, 47% of respondents want an instant finance option when shopping online. This type of financing is attractive to millennials, who tend to be leery of traditional credit, with 64% not owning any credit cards. The increase in mobile phone usage could increase interest in these types of programs, as some offer much more quick and easy checkout than typing in credit card and other extensive information on mobile devices.
Currently, these types of companies have better technology to make financed online buying easier, but traditional lenders will likely bridge that gap within a few years. It is also unclear how well these types of businesses will perform in an economic downturn. Alyson Clarke, an analyst with Forrester, thinks that the typical business model of these companies, with financing often targeted to subprime buyers and a dependence on penalties paid for defaults, is not a sustainable approach, and is also not necessarily ethical. She stated, “'That sort of stuff can be dangerous in an economic downturn when people are defaulting... It should start to catch the attention of the regulators, because if they’re preying on subprime consumers who are likely to not pay in three months and are paying higher interest rates than credit cards, to me this starts to look and feel not so good, and maybe even start to be a little like payday lending.'”
Given these factors, a company that focuses on more than just the subprime market, and delivers the financing quickly and without the need for too much data input from shoppers, would probably gain somewhat of a market advantage. Because these services depend on merchant partnerships to reach shoppers, companies with more of those partnerships probably have an advantage over those who have fewer. The market is getting crowded, so companies that have something unique to offer in the space would also likely gain an advantage. Below are summaries of Affirm and several competitors, taking into account these and other factors, including funding and current market share when available, to compare Affirm to its competitors.
AFFIRM
Affirm was founded by former PayPal founder Max Levchin in 2012. Their funding to date is $420 million. Estimated 2017 revenue is $20.228 million. They are currently partnered with 1,000 merchants, which falls in the middle of the companies I've looked at. They have a checkout/application process that is moderately cumbersome, requiring standard personal information as well as a response to a text. They seem to target the subprime sector somewhat, with interest rates from 10% to 30%, higher than many of its competitors. I was not able to find any particularly unique element in their service. Affirm has grown quickly, but according to SimilarTech.com, "Despite its recent growth, Affirm is still behind Klarna in all market share segments."
BREAD
Bread was founded in 2014, and current funding stands at $140.3 million. Currently they have only about 100 small company partners, but are seeking to add more large companies. Their application/checkout procedure is similar to Affirm's, although it requires a soft credit pull, whereas Affirm's does not. Based on interest rates from 0% to 29.99%, they target the subprime market somewhat, but do seek customers who can qualify for no-interest financing. Payments can be spread over a period up to 48 months.
According to Zirra, "Based on funding and employee numbers, Bread …will need to create some sort of differentiating factor in order to reach the likes of Klarna and, maybe someday, PayPal." However, they do have one hypothetical differentiating factor. Unlike Affirm or most of the other companies I looked at, Bread offers their financing platform for retailers to brand as their own on their sites, rather than appearing as the Bread brand. A look at a few of their merchant partners' sites, though, showed that this doesn't seem to be happening; they have something unique, but it isn't being utilized.
FINANCEIT
2017 estimated revenue is $11.2 million. They currently have 6,300 merchant partners, the second-highest of the companies I looked at. They have a traditional application process and sometimes require proof of income, making their process the most cumbersome of these companies. Their rates average 6.99% to 12.99%, They do have one unique offering: payments can be spread out as long as 15 years, with high-dollar purchases, like boats, eligible for financing.
KLARNA
Klarna is a Swedish financing company that started in 2005. Funding is currently at $622 million, with 2017 estimated revenue of $300 million. They have 70,000 merchant partners and 60 million customers worldwide, and have gained 3 million US customers since 2015. They are the only one of these companies to have a banking license, currently only in Sweden. Klarna has by far the simplest application/checkout process, which uses AI to assess credit worthiness from just an email address entry. They also offer pay after delivery and direct pay, and based on the variety of finance options they offer, they do not target the subprime market; 40% of Sweden's online transactions are processed by Klarna. According to Northzone's Hans Otterling, these companies are competing in "... a huge market, and there won't be one winner-takes-all... There will be multiple players, and Klarna will be one of them."
PAYPAL CREDIT
PayPal is somewhat in its own class. It is the most well-known payment processor, with PayPal as a whole (including PayPal Credit) having over 203 million active accounts (15) and 771,989 partner merchants. However, it is not clear how many of these offer PayPal credit. I was not able to separate PayPal Credit's revenue or other relevant data from PayPal itself, but it's safe to assume, they are likely larger than any of the other companies listed here. However, they do tend to target the subprime segment, with an interest rate of 19.99%. PayPal has had a multitude of lawsuits and other issues relating to how they process users' funds, including improper holds, and issues with fraud.
CONCLUSION
I have given a brief summary of Affirm and several of its competitors, including information that might be helpful in investing decisions. Klarna seems to have an edge in multiple factors, including revenue, number of merchants, ease of use, and unique elements, but there are many other factors one might consider which I could not adequately address, as I am not a finance or investment professional.
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