Beyond Credit Scores: Affirm Launches Deferred And Installment Credit for Online Sales

Transactional credit providers have been few and far between. Bill Me Later launched 14 years ago and was snapped up by eBay Inc. in 2008. BillFloat Inc. started up four years ago and has changed its name to Better Finance Inc. It’s a challenging business requiring close attention to funding costs and their impact on startup balance sheets.

Now comes Affirm Inc. The 2-year-old San Francisco company launched its commercial deferred-payment service for e-commerce earlier this month and in two weeks will introduce an installment-credit product that will let consumers buy online and then make equal monthly payments.

Affirm has a lot riding on the upcoming service, which it calls Split Pay. “There’s really nothing out there like it,” Brad Selby, the company’s chief revenue officer, tells Digital Transactions News. “That’s what we’re focusing on.”

It helps that Affirm, which is run by chief executive Max Levchin and a handful of other executives whose experience includes time at PayPal Inc. in its early days, has raised $45 million so far from venture firms Khosla Ventures, Lightspeed Venture Partners, and Nyca Partners.

The problem the startup says it’s addressing is the consumer who has been left behind by traditional credit-vetting tools, such as FICO scores. Selby says Affirm is convinced there are thousands of consumers with good credit whose scores tanked when they made a few late mortgage payments in 2008 or later. But he’s tightlipped about what data Affirm looks at to measure risk. “We tend not to talk too much about specific databases,” he says.

Users can sign up for Affirm at checkout by filling in a few bits of information, including name, mobile number, and date of birth. Affirm pays Web retailers in full when consumers check out, then lets the consumers pay the balance 60 or 90 days later. Interest in most cases starts at 6%, while merchants pay a transaction fee of 2% to 3% of the sale amount. “We keep [the merchant fee] at what they’re used to from interchange,” Selby says, though lower rates may be coming.

“We certainly find interchange is a sore subject,” Selby says. “We have aspirations of driving that rate down significantly.”

Split Pay will work similarly, except that consumers will have the option of making three to four equal monthly payments to pay off the balance. Later this year, Affirm will begin offering terms as long as six to 12 months, Selby says.

Affirm is targeting small online merchants selling larger-ticket or aspirational items where readily available credit might yield higher conversion rates. Target categories include furniture, home improvement, sporting goods, and apparel.

So far, between 40 and 50 merchants have signed up to accept Affirm payments, but the company hasn’t set any goals, Selby says. “We’ve been pretty cautious about establishing goals,” he says. “We’ve just started to sign people. The next tranche of merchants will help us understand the velocity at which we’ll sign merchants.” The startup has been signing consumers, as well, though how many so far is unknown.

Online merchants are likely to give Affirm a warm welcome, but only if it can deliver on its promise of higher conversion rates and average order values, says Adil Moussa, principal at AdilConsulting, an Omaha, Neb.-based consultancy focused on merchant acquiring. Not all consumers have cards, Moussa points out, and not all small merchants can offer private-label credit, so a spot-credit program could have powerful appeal.

Also, the company’s transaction pricing may mimic card interchange, a sore point with most merchants, but it likely won’t be an issue if the service delivers incremental sales, Moussa tells Digital Transactions News.

But the profusion of alternative-payments providers in recent years has left many online retailers skeptical. “After a while, you just have to show the [return on investment],” he says.

Much also depends on how Affirm chooses to distribute its service. If it uses gateways or other acquirers, it may broaden its reach dramatically but will face cost challenges. “You have to get on the agenda of the acquirers,” says Moussa. “You have to buy your way onto their agenda, and that takes a lot of money.”

For now, the company is dealing directly with merchants, which integrate its application programming interface. It’s also distributing its service through e-commerce platforms, including Celery, Magento, and Spree Commerce.