Affirm Says High Interest Rates Drive Demand for BNPL

Buy now, pay later (BNPL) company Affirm expects an increase in demand for its short-term consumer loans if interest rates remain high for an extended period.

Affirm’s product is perceived differently by consumers compared to traditional loans, Michael Linford, the company’s chief financial officer, told The Wall Street Journal (WSJ) in an interview published Tuesday (Nov. 14). Consumers focus more on the monthly payment amount rather than the interest rates, he said.

In addition, Affirm’s nonrevolving accounts simplify the decision-making process for consumers, as they only need to consider the cost of the item and the associated interest, Linford said. He added that even in a higher interest-rate environment, the impact on consumers’ monthly payment amounts is minimal, which is why he expects demand to increase.

Affirm experienced rapid expansion during the early days of the pandemic, driven by the rise in eCommerce, according to the report. However, it had to cut costs earlier this year, including laying off 19% of its workforce, due to higher interest rates impacting consumer spending.

Despite these challenges, Affirm’s financial position has improved, the report said. In the quarter ended Sept. 30, the company reported a 28% increase in gross merchandise volume, reaching $5.6 billion compared to the previous year. Revenue also increased by 37% to $496.5 million, while the net loss narrowed to $171.8 million from $251.3 million. Additionally, credit performance improved, with the share of delinquent customers falling from 2.7% to 2.4%.

Linford attributed these improvements to the company’s proactive approach in managing credit performance, per the report. Affirm has the advantage of being a transaction-level underwriter, allowing them to make informed decisions for every transaction. They also rely on their own credit models, which they believe are superior to traditional banks’ reliance on FICO scores. Moreover, Affirm’s short-duration and transaction-level approval process prevents consumers from accumulating high balances when they are financially stressed.

Linford also highlighted the high repeat rates among Affirm’s existing users, according to the report. He expressed optimism about the company’s outlook on consumer credit, emphasizing the strength of the fully employed consumer base. Linford believes that employed consumers will continue to consume and require credit, and Affirm is positioned to meet their needs.

PYMNTS Intelligence has found that protracted inflation and the burden of credit cards have made BNPL an increasingly sought-after alternative for consumers seeking financial flexibility. Nearly half of American consumers have already embraced the payment method, according to “Buy Now, Analyze Later: A Deep Dive Into BNPL’s Disruption of Retail Payments,” a PYMNTS and Sezzle collaboration.