Affirm Holdings (AFRM 9.98%) is a different type of credit company. Instead of using complicated interest rate structures and minimum payments that barely make a dent in the principal balance, Affirm allows consumers to spread their purchases into a set number of installment payments quickly and easily.
In this Fool Live video clip recorded on Jan. 25, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser spoke about this recent fintech IPO and what investors need to know about it.
Jason Moser: Affirm Holdings is another company you have on your radar. Recent IPO as well, just went public at the beginning of the year. It's a business we've talked about a little bit before, together. It's certainly one that is starting to get a little bit more exposure here in our foolish universe. We get a lot of questions regarding that buy now, pay later opportunity. Questions regarding Visa and MasterCard, is there something that investors in those businesses should be concerned about? But let's talk a little bit about Affirm. It just went public. This is closing in on a $30 billion market cap. The market is receiving this company very well. I do understand to a degree why. I think we're still learning about the buy now, pay later market and exactly how big of an opportunity that really is. But let's talk a little bit about Affirm. What does this company do and how does it make money?
Matt Frankel: Affirm's goal is to make the credit process transparent, easy, and fair. A lot of people have used Affirm's services without knowing it, especially if you're a Peloton customer. They do buy now, pay later financing, which is basically a fancy way of saying installment plans. If you go to checkout on, say, Walmart.com or Target.com or any of those big websites, you might see a button that says pay X amount a month for six months instead of paying full today. A lot of times, that's Affirm. That's what they do. They offer that option to merchants. It could be zero-interest financing. In some cases, they have to pay interest. It depends on the particular partnership. But they offer by now pay later plans. Peloton is by far their biggest customer, 28% of their revenue.
Frankel: A lot of that has to do with, we mentioned, 2020 was not normal. Everybody in the world was buying a Peloton bike. It was like a Sega Genesis when I was younger. Every household wanted one of those in their house. I bet on the left or right of that piano behind you, there is a Peloton somewhere.
Moser: No, no, no. There is no Peloton in this house, Matt. But if there were, it would be downstairs. My wife's into pilates, so we have a lot of that equipment. We have a treadmill downstairs. I think we're about tapped on exercise equipment now though.
Frankel: Fair enough. But Peloton could not keep up with sales in 2020. The point is that that is a big risk going forward to have 28% of your revenue tied to a company who just had a fantastic year because of the pandemic. The big unanswered question is what happens after the pandemic?
Frankel: Affirm has a lot -- they have 6,500 partners including Walmart, Target, Best Buy. There's a lot of big companies that partner with Affirm to offer this option because a lot of buyers want that. A lot of buyers don't want a credit card that's going to charge them 20% interest. There is a big, big market for people who don't want to pay all the money upfront but also don't want to pay a ton of interest. That's a big market.
Matt Frankel: They've had a lot of success with this and that's why the market is so excited. They make money through their merchant partnerships. They're not doing this for Peloton out of the goodness of their hearts.
Frankel: Peloton is paying them.
Moser: Yeah. That's what I saw. They earn money from the merchant. They get that fee when they convert the sale. They get the interest income on some interest loans. But like you said, it's not necessarily always going to be some form of high-interest debt. That's really what they're trying to steer away from in order to offer folks an alternative to higher interest credit cards.
Frankel: Right now I could go apply for a credit card that had 0% interest for 18 months or something like that.
Frankel: But that's an extra step. It's a little confusing. The payments are tougher to keep track of. If I want to buy a TV at Best Buy right now, and wanted one at 0% interest, I can either open Citibank's website, apply for a new credit card, wait for the credit card to come in the mail then buy the TV. Or I could just go to my Best Buy shopping cart and click on the "pay over six months" button and be done with it.
Moser: Well, and so to your point there in regard to the market opportunity, it really does feel like this is a service that is really geared toward younger consumers. I think that's a good thing. Particularly when I see the data, it really is clear that younger consumers, and we're talking about folks between 18 and 34 years old, these are consumers who are really more willing to trust their financial services with tech-related companies as opposed to the old bank relationship that perhaps we grew up on. It's changing a little bit. You're getting these tech companies, these fintech companies that are partnering with banks in order to be able to offer these types of financial services, and consumers are feeling more trusting of those types of tech companies feeling like maybe they're looking out more for their best interest. It feels like, to me, a lot of these companies, whether it's Affirm or even Lemonade, they are really homing in on that trust factor. Knowing that they have that in with that younger consumer, and it really is all about doing the right thing for their demographic.
Frankel: Millennials, of which I am one of the older examples, millennials are people like my agent, like 10 years younger than me. There are a few things that investors should know about the millennial generation, like you said, they don't trust traditional banks. There are exceptions, but in a lot of cases, they don't trust the established financial institutions. This is why Robinhood and things like that are such big deals.
Frankel: There are companies made by millennials for millennials am looking out for their interest. Millennials are anti-fee, they don't want to pay fees or interests, any of that they want their money to go toward purchases that are going to go into their pockets. They're willing to pay $2,000 for a Peloton bike. But that's all they want to pay. They're not willing to put hundreds of dollars in their credit card company's pocket to do it.
Frankel: Number 3, millennials want things to be easy. They don't want that, like I said, I could get a credit card that has 0% interest for 18 months right now. But it's extra steps, it makes the process hard. They want things to be easy. If I could click a button and finance a purchase over six months, why am I going to go through the trouble of opening a new credit card to do it?
Frankel: Those three factors really are resonating with the millennial generation. No offense to the Gen-Xers like yourself. [laughs]
Moser: [laughs] None taken.
Frankel: I know you're a tech-savvy Gen Xer.
Moser: Well, yeah, maybe, but part of that I guess, has to do with my job. But I think you're on to something there in regard to millennials and I think that's also something that carries on over to, what? Gen Z. Maybe millennials or Gen Z. No, it's not Gen Z.
Frankel: No. Gen Z's after millennials, but millennials are key because we're entering our prime earning years right now. Millennials, I don't want to quote the exact age range, but I know it ends at 38 because that's what I am. I want to say it's 28-38 is the millennial age range right now. They are entering the prime years of their career and they have money to spend. That's why American Express's Platinum card has been such a big hit because of benefits like the Uber credits. Right now, they're doing a Goldbelly credit to get food delivered, which I just used, it was really nice.
Frankel: But things like that are really resonating with the millennial generation who has the money to spend and doesn't want to wait, doesn't want to pay fees, and doesn't really trust the establishment.
Moser: Yeah, it makes sense. It certainly seems like they're on to something and that's whenever you see a business, they really find that market opportunity, that target demographic and really cater to that demographic, and then you have to believe that younger generations to follow, that will be the standard that's set. I think that with Affirm, they definitely are on to something, and we're seeing clearly with companies like MasterCard and Visa, the language in their calls. They are talking about this space as well. They are introducing these types of features into their business models as well. This is certainly something that a lot of companies are out there pursuing, and it feels like Affirm is really one of the prime companies blazing that trail, I guess.
Frankel: Yeah. They are a leader, but before we move on, it's important to note that they are not the only one in this space. They were founded by one of PayPal's co-founders, which I thought Jason would like about this company. But PayPal is launching its own buy now, pay later service, which could be a problem.
Moser: Square offers that to their merchants as well. Square offers that feature to their merchant customers.
Frankel: Afterpay is another big one in that space. They're not alone. It's a big market opportunity, but with any big market opportunity, they are not going to let one company have all the fun.
Frankel: You're going to see a lot of the established players like the PayPals and Squares of the world try to get it on the action.