E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
Affirm lets consumers split purchases into smaller monthly payments. PayPal co-founder Max Levchin has assembled a senior team full of PayPal alumni to lead the project.
Many of the customers of cosmetics e-retailer Beautylish are shopping for personal use, but others are makeup artists shopping for products she plans to use at freelance gigs. That causes a cash flow issue, says Nils Johnson, Beautylish’s founder, because the customer has to pay for the product up front before she gets paid for her work.
Johnson wasn’t able to offer his own financing solution but he knew the team at Affirm, a consumer finance service, was developing a service that split payments into more manageable chunks. That service, called Affirm Split Pay, officially launches today.
Max Levchin, a co-founder of PayPal—now owned by eBay Inc.—started Affirm in 2012 to make credit more accessible to consumers. About half of the company’s senior team is former PayPal employees, but they represent just a small percentage of the company’s 32 total employees, Levchin says. Affirm now offers Split Pay, which literally splits the purchase price, plus a small amount of interest dependent on the individual consumer, into monthly payments.
Affirm takes on the risk of credit; the merchant receives full payment right away. Affirm makes money from the interest charged to consumers as well as the processing fee merchants pay, which Levchin says is comparable to credit card processing fees. Credit card fees generally average between 2%-3% of the purchase price.
Consumers apply for financing during the checkout process on an e-retailer’s site. Affirm developed its own criteria for credit decisions. Affirm collects personal information from the consumer, such as mobile number, date of birth and name, and checks that information against several consumer-information the company has access to that reveal a picture of the consumer’s credit worthiness. Levchin declined to reveal which databases the company uses.
After consumers are accepted, they see the exact amount of each monthly payment and the date when the last payment is due. Levchin says the service adjusts the interest rate based on the consumer’s credit profile, offering shoppers with higher ratings lower rates. Affirm sends e-mail and text message payment reminders to consumers, and a consumer can also set up automatic repayment by linking his Affirm account to a bank account.
Levchin sees Affirm serving the “slightly marginalized participants in the e-commerce world,” such as students, immigrants and young professionals, who are worthy of credit but wouldn’t qualify based on traditional credit-granting criteria, he says. The service is designed to smooth out consumers’ cash flow, which can become unbalanced due to large purchases such a mattress or large item of furniture.
Or, in the case of some Beautylish customers, having to front the cost of cosmetic items before getting paid. Since starting to offer the payment method in October 2013, consumers using Affirm have spent on average 20% more than consumers using traditional payment methods, Johnson says.. Johnson has also seen an increased conversion rate, though he did not have specific figures, and that was especially true on mobile. Johnson thinks that’s because consumers don’t have to enter it payment information on the phone. “Typing your credit card number on a smartphone is a painful experience,” he says.
Johnson says Affirm is the company’s fastest-growing payment method, though he would not say how many of its customers use it. Levchin’s former company, PayPal, offers a financing option called Bill Me Later, where consumers can apply for financing for purchases more than $99. Beautylish is adding PayPal as a payment method on its site soon, but says it prefers Affirm for financing. “With Affirm, their algorithms look at more data than just traditional credit scoring,” says Johnson. “If a consumer gets denied credit on PayPal’s Bill Me Later, they may still have a chance with Affirm.”
Twice, an online retailer of second-hand apparel, is currently implementing Affirm’s Split Pay. Items on the retailer’s site vary from $20 Ann Taylor shorts to $500 designer Fendi dresses. “In our business, our clothes are all one of kind so it’s important for us to provide as much flexibility to our customers as we can,” says Chris Luhur, Twice’s director of marketing. “Sometimes you might see something you like right now, but you might not be in a position to pay for it all right away.”
Affirm is also a way to build up trust with consumers, Beautylish’s Johnson says, by offering the product now and letting consumers pay later. Johnson thinks that’s especially important for smaller retailers trying to compete with much larger brands. “It’s really putting our best foot forward on the basis of trust,” he says. “Even for people who aren’t as established as any Top 500 retailer, it’s a pretty nice option to build trust with your customer base.”