Can Shopify help Affirm beat the point of sale credit crowd?
Installment payments are gaining mainstream appeal as an alternative to traditional credit products, prompting Affirm to boost its visibility in an increasingly crowded market.
By teaming with Shopify, Affirm hopes to gain brand recognition — and scale — among small businesses and e-commerce sellers.
“We’ll be able to get Affirm’s acceptance in a far greater number of places and march toward ubiquity,” said Michael Linford, Affirm’s CFO.
Affirm will support installment plans on Shopify’s e-commerce platform, piloting the option in the coming months. Shop Pay installments are scheduled to reach merchants later this year, initially in the U.S.
Merchants will add Shop Pay installments from Affirm on their Shopify store. Affirm will be on by default for any customer who chooses to pay via Shop Pay at checkout, giving Affirm a head start among point of sale credit options. Shoppers can split total purchase amounts into four biweekly interest-free payments with no added fees for consumers.
Affirm reports it has served 5.6 million consumers and more than 6,000 merchants, with a 40% increase in merchant signings from March 1 to April 30, 2020, versus. Jan. 1 to Feb. 29). Affirm merchants include Dyson, Oscar de la Renta, Walmart, Peloton and West Elm.
Shopify has about 1.2 million merchants, up from just over 800,000 in 2018, according to Marketplacepulse.
Part of the race among point of sale credit companies like Affirm, Klarna, Splitit and PayPal is merchant reach. The companies are less likely to use the service frequently if it’s uncertain that most merchants will offer the product.
“Shopify’s scale is massive, with millions of potential consumers,” Linford said. “This will benefit tremendously when we get more universally present in the eye of the consumer.”
Point of sale credit companies have reported increases during the pandemic as consumers pivot away from revolving credit for larger purchases.
Splitit reported 165% year-over-year growth in April, and a 153% lift from March to April. Klarna reported a 16% weekly jump in the final week of April alone, with similar double-digit jumps for most other weeks this spring and early summer.
Just as challenger banks were born of the 2008 financial crisis, credit alternatives are taking the spotlight during the financial downturn that has accompanied the coronavirus outbreak.
“It’s easy to rack up credit card debt,” Linford said. “The revolving card product is designed for people to make the minimum payment. By using installments, you aren’t letting the consumer do things that are bad for themselves, or get in over their heads.”
There is a counter trend that could squeeze installment lending and increase competition among lenders. More than half of consumers (53%) are cutting spending, generally resulting in lower overall adoption of payment methods, including installment loans, reports Javelin Strategy & Research. In 2019, 39% of consumers had used an installment loan in the past 12 months, but that number dropped to 34% in 2020 amid spending cuts, according to Javelin.
“One of the drawbacks to an installment loan is that it is geared toward encouraging discretionary spend. It’s not as if you can use them to help pay for groceries or other essentials,” said Rachel Huber, senior analyst for payments at Javelin. “As a result, it may inadvertently encourage a consumer who lives paycheck to paycheck to make a purchase they otherwise wouldn’t have, hurting chances of repayment and affecting their financial stability.”
Affirm also hopes to reach smaller businesses that average $50,000 to $100,000 in sales, which typically fall outside of the market for co-branded or private-label credit cards.
The push for point of sale credit is less about people not trusting banks — as it was in 2008 — as much as it is a wish to gain what consumers feel is a greater visibility into their debt. Point of sale credit is not a debit card. It’s still lending, but usually comes with a promise of dedicated installment payments, no interest and straightforward fees.
There’s just as much reason for banks to be worried about credit card debt. Card utilization increased from 23% at the beginning of 2014 to 24% at the end of 2019, with bank exposure jumping from $660 billion out of $2.91 trillion in limits to $930 billion in balances — causing banks to add $1 trillion in limits to meet demand, according to the Federal Reserve Bank of New York.
During the recession, this credit will tighten as card lenders cut limits. This will push more of the market into alternative credit arrangements. The credit card companies are aware of the trend, and have made moves to adjust.
Mastercard recently entered a five-year agreement with Splitit to use the card network’s gateway and API to improve the delivery of Splitit’s installment payment in different channels. And Visa has invested in Klarna ahead of the Swedish company’s expansion into the U.S.
The point of sale credit market has come under scrutiny. In Sweden, regulators have required merchants to present payment options that do not create debt along with debt-accruing choices.
The scale of the merchant network provides a feed of data that informs Affirm’s underwriting, Linford said, adding delinquencies are at an “all time low.”