Fintech is reinventing the installment loan

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If you’ve shopped online recently, you might have seen Affirm on the checkout page, alongside the familiar options for paying with a credit or debit card. If not, you’ll likely notice it during the holiday shopping season. Affirm combines the convenience of online payment with the repayment schedule of an installment loan.

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Affirm was founded by


PayPal Credits

(ticker: PYPL) co-founder Max Levchin, along with a co-founder at data mining company Palantir and a data manager at video game publisher Ngmoco.

Still, Levchin says he hasn’t started trying to create a lender. Instead, he wanted to disrupt credit scoring, a closed and opaque system that consistently disadvantages groups like recent immigrants and young people. And credit scores may not even be very good at predicting creditworthiness.

Levchin developed a new way to assess a consumer’s credit risk and began talking with financial institutions about how to use it to make better underwriting decisions.

“It was almost an academic experiment to try to be a better risk assessor and underwriter,” Levchin said. Barrons. The response he received was discouraging: the big banks were not interested.

But then his interest was rekindled when he heard that millennials don’t like to use credit cards because they don’t want to take responsibility and don’t understand how the annual percentage rate, or APR, works. . Levchin decided that if the banks weren’t interested in lending in a fairer and simpler way, he would start a business and do it straight away.

With Affirm, an online shopper browses and purchases as they normally would, entering their email address, address, and other personal information. Nothing is really different until you reach the actual checkout stage. If a merchant has partnered with Affirm, their button appears as an option. If you click on it, you answer a few questions and a few seconds later you are shown a payment plan ranging from a few months to 36 months depending on the purchase, with interest rates ranging from zero to 30% APR.

The company has also rolled out a feature for the holiday season that lets shoppers use its website to see where they can use Affirm and browse special offers.

Affirm does not disclose payment volumes, but claims to have 1,200 merchant partners. Particularly among the select brands where it offers 0% products like Casper mattresses or Flywheel stationary bikes, it can feel like Affirm has incorporated a selection for a younger, but higher-income market. The company has raised a total of $720 million from top venture capital firms like Khosla Ventures, Lightspeed Venture Partners and Founders Fund, which is led by Trump-supporting Facebook executive Peter Thiel. another member of what the people of Silicon Valley call the paypal mafia. (Elon Musk is also a member.)

The idea of ​​point-of-sale financing is of course not new. For years, retailers like department stores offered significantly below-market interest rates to shoppers who signed up at the cash register for the store-brand credit card.

Read more:Why You Should Think Twice Before Signing Up For A Retailer’s Credit Card

Those rates, Levchin notes, were only low because the lender expected a certain percentage of borrowers to fall behind on their payments, in which case huge fees or retroactive compound interest would start to kick in. In other words, real money is made when the borrower falls behind, gets confused, or better yet, both.

It’s partly a testament to how the experience of carrying a balance on a credit card can be opaque, frustrating, and rewarding for so many people that Affirm’s model can be touted as a benefactor project. Yet that is what Levchin does. Instead, Affirm offers a loan with a specific rate that you repay over a specific period of time, and which has no late fees or random service charges.

“We set out to design a product where the product was fundamentally aligned with the consumer,” says Levchin. And it’s quite different from the previous generation of point-of-sale loans, he says: “It’s simple interest; it doesn’t get worse. There are no fees, no late fees. There are no fine print.

Merchants also benefit, Levchin says, because when shoppers feel they understand the credit terms they’re using to make a purchase, they tend to buy more or buy more often, leading retailers to experience a 20-30% increase in sales. , he says.

Affirm isn’t alone in trying to use the installment loan as an alternative to credit cards.

One company providing what appears to be a similar product is Afterpay, an Australian fintech. Like Affirm, Afterpay partners with merchants to be included as an option at the online point of sale.

But how Afterpay makes money is different. Technically, the company doesn’t charge any interest, a distinction that means it’s not subject to a whole set of regulations. Instead, Afterpay makes money from late fees and merchants. Its business model allows it to take advantage of late customer payments. Indeed, late payments represent about a quarter of the company’s income. (The rest comes from merchant fees.) An Afterpay spokesperson said its buy-it-now-pay-later model is cheaper than Affirm if customers pay on time, and can even be cheaper if customers are late.

Variations of the model, although in a much less transparent form, can be found when a telecommunications company sells a new phone by adding a charge to the monthly bill during the term of a wireless contract. More significant may be a deployment limited by


Amazon.co.uk

(AMZN) a monthly payment option for certain product lines.

Levchin says he welcomes a company like Amazon getting into the installment loan business. It’s a sign he’s onto something, he says, and he’s got a head start. The more people exposed to this method of paying for purchases, he says, the better.

Write to Ben Walsh at [email protected]



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