While PayPal deals with Consumer Financial Protection Bureau probes related to its consumer credit products, one of the company's founders is forging ahead with a company he created to develop its own consumer credit service for e-commerce.
Affirm Inc. and CEO Max Levchin announced Thursday it has raised $275 million in debt and equity in a funding round designed to bolster its Buy With Affirm e-commerce payment and consumer lending product.
The new funding comes nearly a year after Levchin, who co-founded PayPal, first revealed he had raised $45 million to help his new company target consumers seeking new credit tools for online shopping. Spark Capital Growth, investment bank Jeffries and Andreessen Horowitz, Khosla Ventures and Lightspeed Venture partners contributed to the latest funding round.
The funding continues Affirm's stated mission to "remake consumer lending from the ground up," while essentially leaving traditional banks and credit cards behind.
Buy With Affirm delivers another "very innovative credit product" to market to address a growing need for non-traditional credit, said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "The banks have not been fulfilling this need, and that's why you are seeing so many startups filling this demand for consumer credit and small business lending," Luria said. "A lot of people can't get credit cards and they have no access to a small and secured loan."
Consumers who have not established a credit rating have no way of getting a credit card, which most consumers turn to for short-term loans, Luria said.
The idea behind Affirm is to provide younger consumers, many of whom have never used a credit card, an option to obtain small credit lines in the $500 range to use for online shopping.
When choosing Buy With Affirm as a payment option on a participating merchant site, the consumer draws money from his Affirm account to make a purchase. Affirm, in turn, pays the retailer within a day, with all repayment and fraud risk taken on by Affirm.
Companies like PayPal and Affirm have better information available [about credit applicants] than a bank would, Luria said. "Banks just really have your credit scores, while these companies have your purchase history and a company like PayPal would know if you were a good buyer on eBay," he said.
Levchin founded Affirm in 2012 with Nathan Gettings, co-founder of Palantir, and Jeff Kaditz, a former chief data officer for gaming company ngmoco.
In July of 2014, Affirm introduced Split Pay to allow e-commerce merchants the opportunity to offer customers a payment installment option when checking out.
This early entry into the consumer-lending world coincided with PayPal rebranding its Bill Me Later instant credit product to PayPal Credit, a name that took effect in August of 2014.
But Bill Me Later, which eBay acquired in 2008 for its PayPal division, attracted Consumer Financial Protection Bureau attention in October of 2013 over concerns about potential higher lending rates than what credit cards offered.
That investigation resulted in reports in April that the bureau is considering a lawsuit against PayPal for some of its lending practices.
The bureau's investigations into these new lending products could be the "wild card" that affects Affirm in the future as well, said Marc Cochrane, an independent senior payments advisor.
"The CFPB is very conservative and has been coming down on prepaid cards and lending programs," Cochrane said. "So something like Affirm's program could get nit-picked at."
However, the Affirm concept is "a terrific way to wholesale consumer credit for e-commerce retailers," Cochrane added.
If Affirm keeps its annual percentage rate reasonable and fully discloses its terms and conditions to consumers, it should find some success with younger consumers and avoid CFPB trouble, Cochrane said.
Affirm did not respond to inquiries prior to deadline. The company's website indicates it sets its APR at between 10% and 30% depending on a customer's information and the amount of the loan.
Levchin founded PayPal in 1998 with Peter Thiel and Elon Musk, serving as the online payment giant's chief technology officer.