As Affirm positions itself to reduce losses, the buy now-pay later provider is mulling price increases for both its consumer and merchant customers.
Affirm, founded in 2012, is weighing an increase in the interest rate that consumers pay on its interest-rate loan products and a boost in the amount it charges some merchants, Chief Financial Officer Michael Linford said in a presentation this week.
BNPL services let consumers pay for goods and services over time. Affirm’s loans that are paid back on a bi-weekly basis in four installments are interest-free, but it also offers loans that customers pay back on a monthly basis and some of those loans are interest-bearing.
The company is contemplating the rate increases as Affirm executives attempt to make good on promises to investors that the business will achieve profitability on an adjusted operating income basis by next year (the company operates on a fiscal year ending in June). That task has become more challenging this year as interest rates have climbed, while consumers as well as merchants have become more budget-conscious.
The quest for profits is one shared across the BNPL provider industry because few, if any, have turned a profit. The young companies sopped up venture capital over the past decade as their BNPL businesses grew on soaring consumer demand, but now they’re increasingly under pressure to deliver profits just as the economy turns south.
Affirm, like some of its competitors, has two key ways to increase prices. One is by charging consumers higher interest rates, and the other is charging merchants higher fees for the service of providing their financing. The BNPL services can be delivered through an app or at the point of sale.
Consumers can stomach interest rate increase
Affirm has studied consumers’ tolerance for interest rate increases in recent months and determined that its consumers are unlikely to be bothered by its rates edging up a bit, Linford said.
“You could be talking about 75 cents or $1 a month payment difference, which ends up being just noise in the eyes of the consumer,” Linford said in speaking at the Credit Suisse annual technology conference on Tuesday. “They're not focused on the carrying cost of the obligation.”
Given Affirm doesn’t charge compound interest or late fees and caps its interest, among other features that may be more attractive to consumers, Linford said he expects the company has more flexibility when it comes to annual percentage rates (APRs) for interest on some of its loans.
“We do believe that we have a right to have APRs in excess of revolving credit card APRs in large part because of the nature of our product,” he said at the conference. “Consumers understand that, and they value the control that we give them.”
Affirm’s interest rates and other loan terms vary, depending on consumers and the merchants they purchase from. A spokesman for the company declined to comment on Affirm’s average interest rates, but noted they range from 10% to 36%.
Affirm’s bank partners Cross River Bank and Celtic Bank "generally allow a consumer loan borrower to agree to any annual rate of interest up to 30% or 36%," per federal regulations, Affirm said in its annual filing with the Securities and Exchange Commission.
As interest rates have moved up with the Federal Reserve’s efforts to get a handle on inflation, it has become increasingly necessary for BNPL providers to capture a corresponding increase from loan products.
“A few points of APR here can make up the entirety of the movement in rates in the market,” Linford said. “I feel like it's very actionable, and you will see us addressing that.”
Still, the company aims to be sensitive to its merchants’ consumer relations in evaluating those potential interest rate increases. “There are some partners who do want to be thoughtful about what the consumers see and we do want to make sure that we're being good partners to them through that process,” the Affirm CFO said.
Merchant fee increases possible, too
As for elevating fees for its merchant clients, Affirm is in negotiations with some of them, but not all. For the most part, it’s not discussing such increases with its biggest customers, Linford said. Among Affirm's merchant clients, Peloton accounts for the largest share of its revenue, according to its annual SEC filing, but it also works with retailers Target and Walmart as well as e-commerce marketplaces including Amazon and Shopify.
And for fee increases at some of its other merchant clients, the company isn’t in a rush, Linford suggested. “We're reticent to want to move too quickly and have to touch it twice, and we're also mindful of the state of many of our merchant partners, which we do think need support here as a lot of them are dealing with their own issues in the macro environment,” Linford said, noting the impact of inflation on the cost of goods.
Revenue is just one side of the equation though in achieving its profit targets, so Affirm has its eye on containing costs, too. To that end, the company has slowed the pace of hiring, Linford said. Like some fintech peers, Affirm has trimmed its headcount, according to reports from The Information and LinkedIn. Affirm had 2,552 employees as of the end of June, according to its annual filing.
"In light of the evolving macroeconomic environment and uncertainties, we reallocated resources to focus on our most promising opportunities to drive growth and achieve profitability," Affirm spokesperson Matt Gross said in an emailed statement. "In connection, we made the decision to eliminate a small number of roles.”
Executives at the San Francisco-based company said earlier this month they still expect to keep adding jobs in product, technology, and data analytic areas.
“The operating leverage in this business is mostly through the hiring plan,” Linford said. “The trick is to figure out a way to continue to deliver on our growth, and network-building aspirations, with less human capital addition, and that's the thing we're working pretty hard to get right.”