Buy now, pay later (BNPL) has exploded in popularity, transforming short-term credit into a seamless checkout option built into many of your favorite e-commerce websites and digital wallets. Consumers, especially younger consumers, are shifting away from high-interest revolving debt such as credit cards, and opting for BNPL because it is easier to access and use.
BNPL enables consumers to bridge the gap between paychecks and is increasingly used for everyday items such as groceries and utilities. Last year, roughly 90 million Americans used this service, with average monthly spend per user rising to $244.
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More than half of Gen Z and millennials report using BNPL more than credit cards, and rising BNPL usage is a tailwind for companies like Affirm (AFRM +4.11%), a leading BNPL operator in the United States that went public in early 2021. If you are noticing the growth in BNPL and want to capitalize on it, here's why a $500 investment in Affirm is worth considering.
How Affirm differentiates itself from credit cards
Affirm is a leading BNPL company that enables consumers to spread payments over time through short-term installment loans called "Pay in 4." These short-term loans are generally interest-free, with payments made every two weeks over a six- to eight-week period.
The average order value on these short-term products is $100, but customers can use this funding for purchases ranging from $35 to $1,000. Because Affirm doesn't charge interest or have hidden fees on these short-term loans, it primarily earns fees from merchants (the merchant discount rate) in exchange for helping retailers convert sales and increase order sizes.
In addition, Affirm offers longer-term loans ranging from three to 60 months, with interest rates from 0% to 36% annual percentage rate (APR). However, these loans differ from traditional credit cards because they use simple interest, meaning that interest charges are only on the original amount you borrowed.
NASDAQ: AFRM
Key Data Points
This contrasts with credit cards, which use compound interest, where interest is charged on both the original balance and any unpaid interest. As a result, credit card debt can accumulate quickly as interest compounds on unpaid interest and principal.
Partnerships with leading e-commerce platforms and digital wallets have driven significant growth
Since 2023, Affirm's gross merchandise volume (GMV) has grown from $20.2 billion to $36.7 billion, surging 38% last year alone. Affirm has benefited from rising BNPL adoption and has taken steps to support the industry's growth. Consumers are drawn to its no-interest loans because they enable them to purchase more, while merchants appreciate that they help convert sales and increase average sale size. In its first quarter (ending Sept. 30 for Affirm), no-interest loans grew 74%.
Additionally, Affirm has established partnerships with major e-commerce platforms, including Amazon and Shopify, to integrate its payment options directly into their platforms. It has also integrated its payment option into digital wallets, resulting in a 70% increase in total partner volume over the last year.
How President Trump's proposed 10% interest rate cap may impact it
One topic of discussion recently is President Donald Trump's proposal to cap interest rates on credit card balances at 10% for the next year. While many question the feasibility or legality of such a move, it could be a huge tailwind for Affirm and other BNPL providers. That's because banks may scale back lending to near-prime or subprime borrowers, creating an opportunity for Affirm to fill the void.
According to Evercore's Washington policy team, the credit card interest rate cap is "highly unlikely" because it would require legislation, given that the National Bank Act permits credit card companies to charge interest at the maximum rates permitted by state law. However, if banks voluntarily lower their interest rates due to pressure, it could still push marginal borrowers toward BNPL options.
Affirm is riding the BNPL adoption wave higher
Regardless of what happens with the credit card interest rate proposal, Affirm is growing at a steady pace and riding the wave of BNPL adoption. Its GMV continues to climb as merchants and wallets make its simple payment options readily available, and younger consumers are adopting this payment method at an increasing rate.
Affirm is growing well and has cut its operating loss down from $1.2 billion in 2023 to $87 million last year. It showed further progress in the first quarter, posting an operating income of $63.7 million and achieving its first profitable quarter on a GAAP basis.
The company projects GMV of $47.5 billion for its 2026 fiscal year, with operating margins of 7.5%. If you're optimistic about BNPL growth, Affirm's partnerships and recent pivot to profitability make it an attractive stock to consider today.
