In its second fiscal quarter of 2023 (the three-month period at the very end of 2022), the buy now, pay later company Affirm (AFRM 1.27%) reported disappointing results that led to a sell-off of the stock.
CEO Max Levchin noted in a letter to shareholders that the company saw a slowdown in certain discretionary consumer spending categories, which is part of the reason gross merchandise volume (GMV) at the company came in lighter than expected.
As consumer prices have soared and savings have been spent, consumers have shifted their spending to consumer staples. Affirm eventually wants to be able to capture this spending, which is why the company is making a big bet on its Debit+ card.
Capturing more consumer spending
Affirm's flagship products are various buy now, pay later (BNPL) loans that enable consumers to purchase something with no money down and pay it off in multiple installments. Some of these products have zero interest, while others have an annual percentage rate of 36%.
Currently, people are using Affirm's BNPL products to mainly purchase items bought through e-commerce such as electronics, workout equipment, beauty products, and general merchandise. Affirm's largest partner is Amazon.
But as consumers tighten their belts, discretionary items are starting to take a back seat. For instance, Levchin said on Affirm's most recent earnings call that electronics sales were down roughly 11% at the company, while housewares and sports equipment dropped by the high 30s percentages in the quarter.
Affirm wants to be able to capture more spending on goods and services that people are buying every week. And 80% of all spending is not done through e-commerce, using traditional financial products like a debit card.
This is where Affirm's Debit+ card comes into play. Debit+ can link to a traditional checking account and make purchases like a normal debit card. But the debit card will also offer the option to very easily turn certain purchases into BNPL loans.
While select users have been testing out the Debit+ card since 2021, Affirm has been constantly working on improving it. That's because certain transactions weren't always profitable, and Affirm has viewed the card as a way to enhance the company's margins and profitability.
But Levchin said that after a lot of work by the company, all transactions made through the card are now profitable. He added that the card has proved to be very sticky so far, with consumers using it to make multiple purchases every week.
He also announced that instead of being its own application, Debit+ will be integrated into the Affirm app.
A lot is riding on Debit+
With BNPL facing a lot of scrutiny over the last year and Affirm's guidance for the full 2023 fiscal year disappointing analysts, Debit+ is important for the company's future. The good news is that Affirm's guidance doesn't include any impact from Debit+, so if the card is a success, it could change how analysts and investors view the stock.
On one hand, I could see Debit+ helping Affirm drive volume because once consumers have the card, it makes the process of getting a BNPL loan that much easier -- and that much more tempting if a person is already using the card regularly.
But on the other hand, consumers are going to have to be well educated on BNPL to get the card in the first place because I don't see any other advantages of it besides the BNPL option. And the card will still need to drive BNPL loans because the only other revenue the company might get is from the interchange fees -- and you really need a lot of volume to make card interchange fees a material contributor to revenue.
Either way, I'll certainly be paying close attention to Affirm's Debit+ card and how it progresses, since the product could really make or break the company this year and beyond.