Affirm IPO shines a light on the “Buy now, pay later” sector

The Covid-19-fueled e-commerce boom has also spurred the ‘now, pay later’ (BNPL) industry, which has synergistically benefited by making high-value purchases more immediately affordable amid the surge. Online purchases. By spreading payments over time, BNPL offers payment options, without resorting to credit, to millions of consumers who have faced economic uncertainty over the past year. Merchants who accept some sort of BNPL integration benefit from increased sales conversions and a higher cart value. The big players in space, To affirm, Klarna, After payment and Pay Pal, offer BNPL options to tens of thousands of merchants spanning categories ranging from makeup to high-end exercise equipment. In total, BNPL accounted for $ 24 billion in spending in 2020 in the United States alone. BNPL’s global spending is expected to reach $ 347 billion by 2025.

For retailers, BNPL is integrated into the checkout flow through a custom API or directed through channels such as Shopify and Woo Commerce. Consumers discover BNPL options either at checkout or through one of the providers’ apps. If a merchant does not offer a BNPL option, some providers will provide a single-use virtual card to use during payment. Many of the leading BNPL solutions charge zero or minimal interest because the retailer bears the processing fee rather than the consumer, like a credit card.

To affirm (Nasdaq: AFRM), which postponed its IPO until Q4 2020 to avoid the kind of market pop that occurred during the debut of DoorDash’s IPO (Nasdaq: DASH) and Airbnb (Nasdaq: ABNB), jumped more than 90% in day one trading. Affirm stock opened at $ 90.90 and climbed to $ 96.07 in late trades after being valued at $ 49 a share, nearly doubling its valuation to around $ 24 billion. Over the past few weeks, the stock has climbed to $ 137.98. At the time of posting, it was trading around 115, up more than 5% for the day.

Some question the company’s vulnerability given that its success has been linked to the buying behavior of consumers during the pandemic (revenue increased 93% in the fiscal year ending June 30, 2020 and 98% for the quarter ending September 2020). Although its customer base is strongly anchored in e-commerce and 30% of sales come from Peleton, it provides services to many travel companies, an industry that is sure to boom when the pandemic is over.

The valuations of two of Affirm’s main rivals, Klarna and Afterpay, have also skyrocketed during the pandemic and in the midst of the announcement of Affirm’s IPO. Some see BNPL as a three-way race between these companies. Swedish firm Klarna, which is still privately owned, said gross cargo volume of $ 35 billion for the first nine months of 2020, up 43% year-on-year. The company had 11 million US customers and 2 million monthly active app users as of November 2020. Australian shares of Afterpay listed on ASX rallied behind announcement of Affirm’s market debut , bringing the company’s valuation to $ 24.7 billion (USD).

With all of this comes growing concerns about people buying things they cannot afford and falling into the debt trap. Some critics liken BNPL to the predatory lending practices of payday loans. I do not agree. In fact, I see BNPL as a viable alternative to payday loans, which charge up to $ 15 for every $ 100 borrowed, totaling an APR of 400% for a two week loan.

There are also concerns about BNPL’s effects on the future creditworthiness of the millennial user base, which has been particularly hard hit economically by the pandemic. BNPL approval does not affect users’ credit rating, as it is a “soft check” to determine creditworthiness. However, in some cases the repayment will be reported to the agencies and can potentially increase credit scores. Late fees vary by company and can be collected as a flat fee or as a percentage of the purchase price. Late payments and defaults are reported to credit agencies. Currently, there are no regulations controlling BNPL companies, unlike credit cards. With that in mind, users should do their research before deciding if instant gratification is really worth it.

Skepticism is mounting over the future of BNPL due to uncertainty over whether e-commerce will continue to grow at the current rate. Home gym equipment makes up a large portion of BNPL’s purchases – it remains to be seen whether people will return to gyms or continue to work out at home. However, if a user can responsibly handle all of their payments on one app, pay little or no interest or credit card fees, and have instant gratification, I see BNPL capable of disrupting traditional card networks and to succeed.

Disclosure: My firm, Moor Insights & Strategy, like all research and analysis firms, provides or has provided research, analysis, advice and / or advice to many high-tech companies in the industry. I do not own any participation in the companies mentioned in this column.