The $150 million single tranche sale was followed by three other transactions in less than 12 months. But the San Francisco-headquartered tech firm “does not look at ABS as a north star,” according to Geoff Kott, Affirm’s chief capital officer. “This is really about having a full toolkit to scale our business efficiently,” he says. “We are not overly indexed on any single funding channel, which provides us with a significant source of both strength and flexibility.”
The 2020 economic crash and rapid recovery was deeply disruptive for the capital markets. But for a cutting-edge tech firm out to redefine payments and commerce, disruption is second nature. Even highly experienced issuers were not bringing deals to market in the beginning stages of the pandemic. Affirm’s inaugural transaction, in what was likely a market first, was an entirely virtual affair without a single face-to-face meeting. The leading payment network saw this as another problem to solve. “After all we’re a technology firm first,” says Kott.
Innovative technology is one of the key reasons Affirm became the first buy now, pay later provider to tap the ABS market. “What we are able to do is first and foremost because of our technology, which allows us to bring innovative solutions and value to both sides of our network - consumers and merchants,” says Kott. Affirm can accommodate all types and sizes of transactions, whether 0% APR or interest-bearing and in store or online. With a focus on responsibly expanding access to credit, Affirm never charges any late or hidden fees and the company is incentivized to only approve consumers who are willing and able to repay.
Consumers have rewarded the company in the form of repayments, a 78 net promoter score, and repeat purchases. Approximately two-thirds of transactions during Affirm’s 2020 fiscal year came from repeat users. Merchants can be formally integrated or not, and retention rates on a dollar basis have been north of 100%. All this ties into Affirm’s strength as an ABS proposition, as does the fact that the weighted average life of the assets is approximately six months.
“We have been able to generate high-quality assets at scale that deliver consistent performance and are short in duration, meaning they’re not asked to withstand multiple credit cycles,” says Kott. “Our performance during Covid-19 highlighted the durability of our model and capabilities of our risk management and underwriting approach. At the same time we are providing consumers with a better and more flexible way to pay over time for goods and services. This helps businesses of all sizes drive growth by reaching new customers and increasing conversion, average order values and repeat purchase rates.”
Affirm’s model has resonated with investors as it has added more than $2 billion in committed capital over the last year, attracting banks, pension funds, regional institutions and multilaterals. The firm’s first ABS issuance consisted of long-term, no interest collateral designed for static deals. A second more complicated programme allowed the firm to combine long and short duration assets, including both zero-percent and interest bearing loans, in a revolving shelf. Buyers welcomed the transactions with open arms, and Affirm’s most recent ABS deal had north of 50 unique investors.
“Our mission to deliver honest financial products that improve lives is a rallying cry for all of us at Affirm,” says Kott. “We are pleased that more consumers, merchants and capital partners are recognizing and supporting our mission. We’re proud of all that we have achieved over the last year, but we are mindful that we are really just getting started and see substantial opportunities ahead.”
Industry tailwinds are blowing firmly in the company’s favour. Buy now, pay later is the fastest growing e-commerce payment method, and yet its penetration in the US is still under 2%.
Younger generations are increasingly prioritizing debit over credit and adopting innovative digital payment solutions. Affirm continues to partner with major organisations - most recently expanding its partnership with Shopify.
Kott says the ABS market will remain an important part of the company’s diverse funding strategy. Based on the results over the past year, it appears investor appetite will remain strong. GC
