written by
Renjit Philip

Buy-Now Pay Later: Affirm's Business Model Teardown

Buy-Now Pay Later Fintech 2 min read , December 31, 2020


  1. Buy Now Pay Later Introduction.
  2. Revenue Flow.
  3. Revenue sources
  4. Revenue Split

Buy Now Pay Later

Buy-now pay later (BNPL), is fast gaining prominence in the world of Fintechs in the Middle East. We have seen startups like Tabby and Tamara making news for their funding rounds or their merchant tie-ups. It is a phenomenon that has been over eight years in the making in its new avatar (Klarna/ Affirm). It originates from the Layaway /Khata concept popular in markets as diverse as the US & India. Retailers have always been extending credit to their top customers- BNPL is the digital version.

Ever wondered how the business model works? Thanks to the good folks at Affirm, we get a glimpse into the inner workings of Affirm’s business model (refer image for the steps):

Revenue flow

Step 1- Customer makes an online purchase.

Step 2- Affirm has an originating bank (in this case, the Cross River Bank of New Jersey) that deducts the merchant service fee and remits the rest to the merchant (example here $50)

Step 3- Affirm buys back the loan from the bank. The customer pays to Affirm the installments along with the interest payments. It pays a fee to the bank for this transaction

Step 4-Customer repays over time (This is a bit tricky as Affirm says it does not charge late fees!)

Step 5-Affirm collects the Merchant fee through the originating bank

Affirm has other revenue sources:

1- Interchange fee on purchases made by their customers on its virtual Visa card. Customers could make these purchases on non-partner merchants as well as their partner merchants. Possibly creates an incentive for the non-partner merchants to tie-up with Affirm.

2- Interest income on the loans that Affirm purchased from the bank

3- Servicing income (when the loan is securitized and sold, Affirm services those loans to control the customer experience)

4- Sale of loans (This is a form of securitization that clears up their balance sheet). As their Machine Learning based credit models get better, they can get better value from these sales.

Revenue Split

What does the revenue split look like?

Affirm Revenue sources
Affirm P&L Analysis (Values shown as percentage of total revenue for that period)

As you can see, the majority of the revenue comes from Merchant Network revenue and the interest income.

  • There is anecdotal evidence that Affirm charges merchants 2% to 5% of the value of the goods purchased through Affirm’s app or payment solution.
  • Interest income component is derived from the loans that Affirm buys back from its originating bank

What does the actual revenue look like?

Affirm revenue for 2019 and 2020
Affirm’s Revenue for 2019 & 2020 (in thousands of USD)

First half of 2020 was spectacular for Affirm with revenues almost doubling and a steady increase in the merchant and interest income.

As their ticket sizes are small and the velocity of funding is high (short term loans), Affirm can lend out its capital multiple times in a year to generate returns. That in short, is Affirm’s business model.

If you look carefully, it functions as a quasi-lending institution, without all the regulatory burdens (yet!). At some point, it will make sense for Affirm to acquire a banking charter.

I will write another post on the cost side of the equation at some point, so stay tuned.

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