Affirm IPO could prove crucial in the crowded market for point of sale credit

The pandemic has put a severe crimp on the traditional credit card model, leaving an opening for alternatives to rush in.

A public listing would improve Affirm’s competitive position against other point of sale credit providers, which have made recent deals to cement their scale among global merchants. From a branding perspective, it would also place Affirm on a path similar to PayPal — an earlier technology startup established as an alternative payment rival to Visa and Mastercard. As one of PayPal’s founders, Affirm CEO Max Levchin has close ties to both companies and is a notable figure in Silicon Valley.

Affirm has enlisted Goldman Sachs and is planning an IPO that could come before the end of the year and value the company as high as $10 billion, The Wall Street Journal first reported. Affirm would not comment.

Affirm has already moved its buy now/pay later strategy into overdrive, following a merchant-building partnership with Shopify, which has more than 1.2 million sellers on its network and will gain preferential position with Affirm for point of sale credit.

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VC firms such as Founders Fund, Andreessen Horowitz and Khosla Ventures have invested more than $1 billion in Affirm since its founding in 2012, with its current valuation standing at about $3 billion. Affirm got its start with an app that used social media activity and other alternative data such as behavioral analysis to vet potential borrowers.

Affirm launched a virtual card in 2017 that allows consumers to split payments without incurring the accumulated debt of bank-issued cards. Consumers receive approval for the cards and schedule the terms of payment for a one-time purchase, with the PIN disappearing after the payment.

The company followed with an app that allows consumers to predetermine their spending power before approaching the point of sale, and a savings account with Cross River Bank serving as the depository.

The decline in credit card activity due to the pandemic has funneled billions into alternative business models, both within and outside of the card industry. New applications for credit cards have dipped and consumers are reducing balances. At the same time, card networks are lowering limits and tightening underwriting.

That has left an opening for point of sale credit companies such as Klarna, Splitit and Affirm; as well as buy now/pay later installment plans for financial institutions and the card networks. The decline in credit card applications and usage has also pushed the card companies to accelerate their work in services, such as security and analytics.

As the economic crisis became apparent, point of sale credit companies saw huge increases in usage earlier in the spring, setting the stage for a more aggressive strategy moving ahead as the model becomes a habit for consumers and merchants.

“The buy now/pay later market is experiencing tremendous growth, even as overall retail sales decline due to the coronavirus,” said Leslie Parrish, a senior analyst with Aite’s retail banking practice.

Klarna’s valuation passed $5 billion following a $460 million investment in late 2019, and the Swedish company has also considered an IPO as it plots its U.S. expansion.

Klarna recently acquired Moneymour, an Italian company that develops underwriting technology, giving Klarna access to Moneymour’s technology hub in Milan. Klarna this spring attracted additional investment from Chinese e-commerce giant Ant Group, which took an undisclosed stake in Klarna. Ant Group is the Alibaba affiliate that operates Alipay, and that investment provides Klarna’s service access to the Chinese payment company’s global merchant network.

Splitit’s model is different, allowing consumers to use existing credit relationships, which the company says results in higher cart conversion since there’s a preexisting registration. A recent partnership with Mastercard gave Splitit access to the card brand’s global merchant network.

“As consumers become more aware of this option, they seem to be increasing their use as a way to make purchases more affordable while reducing their credit card usage,” Parrish said. “Once this behavior becomes ingrained, the buy now/pay later market could be a threat to this and other more traditional forms of credit — especially cards and loans that are also offered at the point of sale.”