BNPL is not a new concept; it’s just taken off in recent years and become far more mainstream.
Buy now, pay later lets people do exactly what its name suggests — buy something and pay for it later. The difference between BNPL and credit cards is that rather than charge the full amount of a purchase on a card, consumers can choose to pay for an item in installments.
However, there are some that argue BNPL is just another form of debt, which could lead to a discussion on whether companies that enable it are doing it responsibly. In the case of Affirm, one of the space’s largest players, co-founder Max Levchin (who also founded PayPal) has been vocal about what he describes as a “mission-based” approach.
Ukraine-born Levchin started Affirm in January 2012. The fintech went public in 2021, and while it’s trading considerably lower than its 52-week-high (which stock isn’t?), Affirm is today valued at nearly $9 billion, and its executives remain bullish on the company’s future.
TechCrunch sat down with Libor Michalek, president of technology at Affirm, to understand just how the company differentiates itself from its plethora of competitors, what is unique about its technology and strategy, and why he thinks using BNPL is much better than using a credit card to pay for purchases.
(Editor’s note: This interview has been edited for length and clarity.)
TC: I grew up in the era of layaways, where you could pay in installments for an item but had to wait to take it home. So when I heard about BNPL, I was intrigued. In your view, what makes Affirm stand out?
We have this notion of a vertically integrated stack where we are able to handle the full touchpoint — that really gives us a lot of visibility into the customer, in the transaction, and that lets us underwrite accurately.
Libor Michalek: Our main focus is doing right by the customer. And that really translates into this idea of aligning our interests with that of the customer. So if they get the unexpected or unwanted, then we share in the negative outcomes.
The second pillar for us is building modern technology that enables us to do this. How do you deliver a financial product with no late fees, with no gimmicks and no deferred interest tricks? It’s really the ability to have access to real-time data, deliver it on the phone and do it at e-commerce sites in real time, and then bringing all that together to make real-time decisions and deliver those decisions clearly to the customer.
Another advantage we have is the scale of our merchant network. We work with 170,000 merchants, which enhances our ability to provide access to à la carte credit wherever the customer might want it and need it.
I recently learned that Affirm (and other BNPL players) do charge interest at times, but often at a lower rate than traditional credit card providers. Tell us more about how those decisions are made — how do you decide who is charged interest, and who isn’t?
For us, the most important and biggest difference is that unlike a credit card, the customer knows how much interest in dollars they’re going to pay for that purchase. There’s no way for them to pay more for that purchase, and they will know it upfront before they click.
We’ll communicate it to them obviously, as an interest rate as we’re legally required to, but also in dollars and cents. A lot of times people get surprised when I tell them that a $1,000 purchase at 15% for a year actually translates to $83 because of the amortization schedules. A calculator on our website lets you play with all of those numbers.
I think the transparency part is pretty key, because I feel like with credit cards, you do run that risk of — depending on how long it takes you to pay or what your minimum payments are — how much you pay in interest potentially ranging wildly. With us, it’s a fixed amount that’s communicated to the customer upfront.
And even if they miss a payment, there are no late fees and nothing gets tacked on in any way that would ever result in a different outcome. In fact, if they pay early, the number can be lower, but it won’t ever exceed the figure we give them.
How many people are usually able to use BNPL through Affirm without being charged interest?
For the period ending Dec. 31, 2021, 44% of Affirm loans are 0% APR, or just under half. Our biweekly payment option, Split Pay, is always interest-free. For other loans, Affirm charges an interest rate between 0-30% APR, and payment terms are offered based on the merchant, the purchase and our underwriting process.
How do you determine who is charged interest, and who is not, so quickly? I assume this is where the technology comes in.
It’s actually hundreds of data points. But the primary data points are third-party data like a credit report — credit bureau data about the customer’s finances.
There’s also first-party data. You know, we’ve been around for a while; we’ve got a lot of customers, and so we have a lot of data around how customers behave and perform in their finances.
And then, there’s data that comes from the merchant — about who purchased the item, the items being purchased and the merchant themselves. In some cases, the merchants have the ability to actually subsidize some of that interest monetarily. So all of that comes together for us to be able to produce a price for the customer in real time.
I may not have known that some merchants subsidize some of the interest.
Yes, that’s where zero-percent [interest] can come from. But even in the interest cases, they’re able to partially subsidize it. That’s ultimately because the merchant understands the value of expanding the customer’s purchasing power.
So the customer is getting expanded purchasing power and clarity on how much they can buy and how it will fit into their finances. The merchant ultimately also can meaningfully expand their customer’s purchasing power.
Obviously, merchants that we work with can see the degree to which that is helping their business. I think that probably does empower them to be able to lean into that capability.
It’s quite adaptive, and that’s why certain products, like our short-term or bi-weekly options, always come in at 0% because of the time dimension and the smaller purchase amounts. The longer ones can be subsidized by the merchant.
We always do the underwriting, but in terms of zero-interest purchasing power, sometimes it’s Affirm and sometimes a merchant is contributing.
So, what are your default rates? And what happens if someone can’t make their payments?
As of October 2021, Affirm’s delinquency rates of 30+ days were about 1%, which is a consistent rate throughout the past year. We are currently intentionally loosening the credit box to expand access to more consumers.
If somebody knows that they’re not going to be able to pay, they can call us and actually work with our team on a deferral so that they can responsibly get some time off from their payments. That allows them to get caught back up and have no impact on their future history.
If somebody is late and doesn’t work with us, that will impact their future purchases with us both in terms of interest rates or whether we will extend credit or how much credit we will extend to them. And it will get reported to the credit bureaus. But we make sure to report the full record, including the positive payments they made as well as the delinquent ones.
I’ve seen a number of unique cases of BNPL, like with rent payments, paying contractors, things like that. Overall, what do you think it is about Affirm’s technology that makes it stand out from other players?
We have this notion of a vertically integrated stack where we are able to handle the full touchpoint — from purchase consideration through to purchase, over to repayment and all the way through to the end of the transaction. That really gives us a lot of visibility into the customer, in the transaction, and that lets us underwrite accurately.
I think that’s where a lot of the differentiation from our competitors comes from, where they are using what I would say are last-century techniques for managing their business — you know, all kinds of random fees and interest tricks that sort of juice their business.
I think that translates into just how widely available Affirm is across the merchant network, because the merchants ultimately see that as a positive reflection on their business.
What are the main ways that Affirm generates revenue?
We have multiple ways to generate revenue. There’s interchange fees, merchant fees, affiliate fees and interest.
We allow consumers to create one-time-use virtual cards through our app, enabling them to shop with merchants that are not fully integrated with Affirm. When these virtual cards are used over established card networks, Affirm earns a portion of the interchange fee from the transaction.
We also sell a portion of the assets originated in our platform to third-party investors and recognize a gain or loss on the sale of these loans. And, we earn servicing fees, as we never sell the servicing rights to any loans so we can control the end-to-end consumer experience, even in delinquency.
But the two primary ones are the customer paying interest and the merchant paying transaction fees, which depends on the merchant.
Essentially, we earn a fee when we help them convert a sale and power a payment. Merchant fees depend on the individual arrangement with the merchant and vary based on the terms of the product offering. We can work with them to tailor programs to fit their budgets.
From consumers, we earn interest income on the simple interest loans that we facilitate on our platform.