The ''buy now, pay later'' (BNPL) sector has received global investor attention, but the innovation is struggling to deliver profits as competition ramps up, and those investors appear to be growing impatient. Affirm (AFRM -1.28%) recently released its fiscal Q3 earnings report, and some of its strong growth was accompanied by backward momentum in one key area -- net losses.

The stock price is currently down about 65% from its highs set back in February, and investors might be questioning the path to earnings as Affirm continues to grow revenue materially, but loses even more money by doing so. It's not alone, though -- Affirm's peers share similar struggles.

frustrated man in front of falling chart

Image source: Getty Images.

Affirm's third-quarter results were mixed

Affirm's core business is financing small transactions for its customers, in what could be described as lending with little or no verification. It does this by integrating its payment system directly into online e-commerce stores, which are happy to host it as the company helps to drive sales by funding purchases. The customer deals directly with Affirm, repaying their loan over three, six, or 12 months, leaving the store with no credit risk.

Since launching in 2012, the company has done quite well acquiring users and building a revenue stream, but it still hasn't turned a profit -- and the signs it will aren't great.

At first glance, the third quarter looked incredibly strong.


Fiscal Q3 2020

Fiscal Q3 2021


Gross merchandise volume

$1.23 billion

$2.26 billion



$138 million

$231 million



3.3 million

5.4 million


Data source: Company filings.

But, looking at the bottom line, the company increased its net loss from $85 million in fiscal Q3 2020 to a whopping $247 million in the fiscal Q3 2021 just ended. Much of this loss was driven by rapidly growing expenses, as the company invested an additional $65 million in technology and data analytics, and spent $115 million more on general administrative costs year over year.

Ultimately, the cost of acquiring that $93 million in revenue growth was an extra $180 million in expense growth. This is not a problem unique to Affirm -- several other companies in the BNPL space have similar financial pictures.

A moat-less business

Affirm's payments technology can hardly be described as one-of-a-kind. Australian BNPL giant Afterpay (AFTP.F), which has a market cap of about $18.5 billion, operates a very similar merchant-integrated business model. The key difference is that it charges its fees to the merchant and not the consumer, with the exception of late payment fees. Its stock price is also down significantly -- about 50% from its all-time highs right now.

Another Australian story, Zip Pay, sought to out-innovate Afterpay by introducing a digital credit card, which morphed the BNPL concept into something consumers could use anywhere, for anything. Although Zip is a much smaller company, its experiment was a success and cemented it clearly in the second-place spot. The digital card is something Affirm plans to release later this year, in the hope that it will boost its customer base and compete more aggressively with credit cards.

Both Afterpay and Zip have delivered enormous losses to investors. Between the first and second half of 2020, Afterpay grew revenue by 90% but grew its net loss by 150%. Zip's performance was even worse. So far, the technology as a whole has struggled to prove its business case, and it might be because it's very easily replicated. Since 2015, at least 20 other BNPL companies have entered the market in Australia alone -- all with a slightly different spin on the concept -- and it's clear it has reached a point of saturation. 

With payment giants like PayPal (PYPL 1.15%) entering the fray -- bringing the power of scale through its tens of millions of existing customers -- it's unclear how Affirm and the other players will find a path to profitability. With Afterpay and Zip eyeing the U.S. market, Affirm will need to innovate quickly to differentiate itself so it's not swallowed up in the growing wave of competition.