In Affirm IPO, point of sale credit's immediacy jolts valuations, threatens banks

Companies like Affirm and Klarna have been a beacon for investors, leading to at least one multibillion-dollar planned IPO in support of a point-of-purchase lending model that could set the stage for use cases well beyond credit.

Affirm has filed to go public, an offering that could value the company at more than $10 billion, following fast on the heels of a $500 million fundraise. The enticement for investors is clear, as the San Francisco-based company's prospectus hints at a strategy that provides a range of service and intel for merchants.

"Merchants should expect significantly more value from the payment brands they accept, in the form of more sales, more new customers and a much better understanding of the buyers they serve," Max Levchin, Affirm's founder, wrote in a letter that accompanied the prospectus. Affirm did not provide comment for this story.

Levchin also makes reference to established and new companies that "peddle toxic financial products" — likely an allusion to credit cards and financial offerings with deferred interest that he contends will be in a shrinking minority before long.

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Beyond that assertion is Affirm's report that has 6,500 merchants including Walmart, Expedia and Peloton; 6.2 million consumers, and a 64% rate of epeat consumers. Revenue increased to $510 million in fiscal 2020 from about $260 million in 2019, and losses fell in half to $15 million.

Swedish rival Klarna, which has attracted a series of investments and has a valuation of more than $10 billion, is also considering an IPO over the next year or two. Klarna on Thursday announced it has expanded its payment services to more than 60,000 stores, including H&M, O.N.S. Clothing and The North Face.

Like other firms in the buy now/pay later industry, Klarna and Affirm have benefited from a consumer and merchant shift to alternative credit due to the economic crisis that has accompanied the coronavirus pandemic. Splitit, which earlier this year entered a deal to be Stripe's payments facilitator, recently reported triple digital volume growth. Another firm, Afterpay, added millions of active users in the past year in the U.S., Australia and the U.K.

These hefty valuations are due to the companies' fast growth and the belief among investors that point of sale credit will attract high demand even after the pandemic ebbs.

But there's also value in the large enrolled bases of consumers and merchants. In this way, companies like Klarna and Affirm are making the same play as Google, Apple Card and Railsbank in using existing consumer touchpoints and a stream of payments data to build a lending business.

The advantage point of sale credit companies have is they're extending credit right at the point where it's needed most. Consumers benefit from an instant installment schedule, merchants in theory can sell larger-ticket products, and the point of sale credit provider gains fees from the merchant sale. Affirm's gross merchandise value grew 77% over the past year, from $2.6 billion to $4.6 billion, suggesting the value of the purchases and the number of purchases are both expanding quickly. Affirm also reports it has accumulated data from 7.5 million loans and payments from over six years.

"Once you have an account, you have an enrolled relationship, triggering all the other challenger, fintech and neo-bank plus-one options," said Richard Crone, a payments consultant, adding financial institutions and processors typically do not have this capability in their mobile banking platforms.

Consumers give several reasons for using point of sale credit, mostly related to trying to avoid credit card fees, to challenges accessing other kinds of credit. Affirm's prospectus suggests younger consumers such as Gen Z and millennials born between 1981 and 2012 are driving the rapid growth in e-commerce and have a spending power of $2.5 trillion, with Affirm citing data from YPulse.

That youthful demographic also could help the IPO, as Affirm could attract investors through fractional investing via apps such as Robinhood, which could then become customers, given the overlap in demographics.

Fractional investing played a large role in attracting new investors to recent technology IPOs such as Spotify and Dropbox.

"Raising money raises awareness; it's just as valuable as the capital," Crone said. "They use the product and invest in it, leveraging social buzz."