Affirm's $20B BNPL empire built on shaky ground

Today I'm digging into Affirm, the "buy now, pay later" company that just hit its first profitable quarter after burning through billions.

Here's what caught my eye:

• BNPL is a tough business - Affirm lost Walmart to Klarna this year, Apple jumped in then bailed, and now every bank is launching copycat products. When your main differentiator is "we don't charge late fees," you're one policy change away from trouble.

• Partnership dependence is their Achilles heel - Sure, having Shopify own 6.8% of your company sounds great... until they decide to build their own solution. Same with Amazon going non-exclusive. When 100K+ merchants drive your growth but could switch providers tomorrow, you're building on quicksand.

• Regulatory hammer incoming - CFPB just classified BNPL as credit cards, meaning all those "we're not a credit company" advantages disappear. Affirm built their business while walking the fine line regarding regulations that are now catching up.

The fascinating part? Their ML underwriting actually IS impressive. They analyze the specific purchase, not just the person. But in a race to the bottom on pricing with giants like PayPal and banks entering the space, does superior technology even matter?

Full deep dive below. The key lesson: when your moat depends on partners who could become competitors and regulations you're trying to avoid, you're playing a dangerous game.

With that, I'll talk to you tomorrow.

Nick

The 30,000-Foot View

What they do: Affirm lets shoppers split purchases into installment payments at checkout, both online and in-store. Think credit cards, with a bit more transparency and lower "gotcha" fee potential.

Business model: Affirm makes money two ways. First, merchants pay them 4-6% commission on each transaction (network revenue). Second, they earn interest from consumer loans with rates from 0-36% APR based on creditworthiness.

Revenue breakdown: Interest income dominates at ~51% of revenue, followed by merchant fees at ~34%, with smaller chunks from loan sales, card revenue, and servicing income.

Key stats (TTM as of mid-2025):

• Market cap: ~$21.75 billion (varies by source)

• Revenue: $3.0 billion, up 43% year-over-year

• Gross margin: ~46-48%

• Net income: Recently turned profitable with $2.8M in latest quarter

• Employees: ~2,000

• Industry: Fintech / Consumer Finance

Company History

2012: Max Levchin spins Affirm out of his data exploration company HVF, aiming to build transparent lending tech.

2013-2016: Quietly builds merchant network and refines machine learning underwriting models while competitors chase headlines.

2020: Files for IPO in November as BNPL market explodes during pandemic shopping.

2021: Goes public on NASDAQ, raising $1.2 billion. Stock doubles on first day. Partners with Amazon as exclusive BNPL provider.

2022: CFPB opens inquiry into BNPL practices. Interest rates rise, squeezing margins. Emerges as largest U.S. BNPL provider.

2023: Lays off 19% of workforce, shuts crypto unit. Launches Affirm Card and savings account to diversify beyond merchant partnerships.

2024: Integrates with Apple Pay and Google Pay. Processes $28 billion in gross merchandise volume. Expands into medical financing. Data breach hits partner bank (not Affirm systems).

2025: Loses Walmart exclusivity to Klarna. Expands Shopify partnership internationally. Partners with FIS to power bank-issued cards. Now serves 22 million users across 358,000 merchants.

Show Me the Money

Stand-out financial features:

• Recent profitability: Latest quarter posted $2.8M net profit after years of losses

• Recurring customers: ~94% of transactions from repeat users

• Heavy R&D spending: ~$256M in stock-based compensation last quarter

• Path to profitability: Targeting GAAP profitability by Q4 2025

Financial Data

The N.O.O.B. Nine — Competitive Powers

The Nerd Out on Business Nine is made up of Hamliton Helmer's famous "7 Powers" of competitive advantage (Scale Economies, Network Economies, Counter-Positioning, Switching Costs, Branding, Cornered Resource, and Process Power) combined with two of my own (Data Flywheel and Distribution Advantage).

Average Score: 3.1/5 - Strong technology and network effects, weakened by low switching costs and partnership dependence.

Memorable Marketing

Affirm's marketing lives on one simple premise: we're the anti-credit card. Their voice is educational rather than flashy, focusing on transparency and merchant co-marketing rather than splashy consumer campaigns.

"Seize Prime Day" (2022)

• Hook: Educated Amazon shoppers about paying over time without late fees

• Channels: Amazon homepage hero ads, branded boxes, Fire tablet screens

• Why it worked: Educational content with shoppable products and dynamic APR calculator removed purchase friction

• Result: "Groundbreaking success" per Amazon case study

Merchant Co-Marketing Programs (ongoing)

• Tactic: Provides ready-to-use marketing assets for email, social, and on-site placements

• Channels: Email marketing, homepage banners, product page messaging

• Why it worked: Chrono24's deployment brought 38% more Affirm sales volume vs previous year

• Result: 74% of approved buyers accepted financing when properly marketed

Apple Pay Integration Launch (2024)

• Hook: Choose pay-later at Apple Pay checkout

• Channels: Digital, in-app, Apple's ecosystem

• Why it worked: Borrowed Apple's trust and reached users at point of purchase

• Result: Usage spikes during holiday shopping, 115% YoY growth in card users

Tactical Takeaways:

1. Let merchants do your marketing — provide tools, not just payment rails

2. Lead with transparency — highlight total cost upfront vs competitor gotchas

3. Place financing early in customer journey (homepage/product pages), not just checkout

4. Use dynamic calculators to show exact payment amounts and remove friction

5. Partner for peak moments — co-branded campaigns during high-intent shopping periods

AI Uses & Opportunities

Current uses:

• ML-powered underwriting: Deterministic models approve/decline loans in milliseconds based on risk data

• Fraud detection: AI blocks suspicious behavior before it costs money

• Customer service automation: Two-thirds of support inquiries handled by chatbots

• Dynamic pricing: APR optimization based on individual risk profiles

Future ideas:

• Proactive default prediction: Spot customers heading for trouble and intervene before they hit it

• Merchant analytics dashboard: Sell insights on purchase patterns, repeat usage, AOV to help merchants optimize

• Personalized financial coaching: AI-powered guidance integrated into Affirm app

• Voice-activated applications: Smart speaker loan approvals for frictionless experience

• Computer vision risk assessment: Instant product categorization and fraud detection

Bumps in the Road

Regulatory heat: CFPB inquiry led to new rules requiring credit card-style consumer protections. Unlike competitors who feared this, Affirm welcomed it since their transparent model already exceeded most requirements.

Partnership losses: Lost exclusive Walmart deal to Klarna in March 2025, representing ~5% of GMV. Shows merchant power when deals aren't truly sticky.

Profitability pressure: Despite rapid growth, company only recently turned profitable in latest quarter. Still targeting consistent GAAP profitability by Q4 2025.

Data breach exposure: Partner bank Evolve suffered breach in June 2024, potentially affecting Affirm customers (though Affirm systems weren't compromised).

Debt burden: Debt-to-equity ratio of 248% creates financial risk in rising rate environment. Heavy funding needs for loan portfolio.

Competition intensifying: Apple ended its own BNPL service but partners with multiple providers. Traditional credit card companies launching competing products.

Your Swipe File

I'm trying to focus on the positive here as they have built a $20+ billion business!

Build the moat before the market matures. Affirm invested heavily in ML underwriting when BNPL was nascent. Now they process more volume profitably while competitors struggle with unit economics.

Make your product a marketing channel. Every Affirm transaction educates consumers about transparent lending. Product experience drives word-of-mouth better than ads ever could.

Partner aggressively, but diversify. Amazon and Shopify drove growth, but Walmart loss shows concentration risk. Spread bets across multiple channels and don't rely on exclusivity.

Turn regulation into competitive advantage. While competitors feared CFPB scrutiny, Affirm welcomed it since their transparent model already exceeded requirements. Sometimes the rules help you.

Use promotions strategically for lifetime value. 0% APR promos aren't just customer acquisition—they're future Affirm Card candidates with higher lifetime value potential.

Negative Lesson: Avoid regulatory arbitrage - BNPL grew by skirting rules, now facing reckoning