Is "Buy Now, Pay Later" for Real? Affirmative. - 7investing
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A computer button that says "Buy Now Pay Later"

Is “Buy Now, Pay Later” for Real? Affirmative.

August 25, 2021

Square (NYSE: SQ) shook up the entire payments industry earlier this month by announcing its $29 billion acquisition of Afterpay (OTC: AFTPY). The global payments titan was more than willing to loosen up the purse strings to establish an early lead in the growing “Buy Now, Pay Later” movement. Seeing of the world’s largest payment ecosystems putting that much cash to work was a clear confirmation that this trend is worthy of investor attention.

Yet there are several other players who are also honing in on this BNPL trend. And one that’s high on my radar is Affirm Holdings (NASDAQ: AFRM).

Affirm is a financial services company who is similarly giving consumers a new option of paying for their purchases in installments. Embedded into the digital checkout page of e-commerce vendors or platforms, it allows customers to pay over a period of 3 to 36 months. This is an alternative to paying with a credit card or with PayPal.

Many people are getting tired of the credit card industry’s sneaky tricks. We collectively paid more than $15 billion of unexpected late fees and overdraft penalties last year. Tech-savvy millennials and Generation Z are looking for other options in how to pay for the things they’re purchasing online. Trust is very important in this industry.

Affirm prioritizes transparency first and foremost, disclosing upfront how much interest it will collect for each of the payment plans. There are no hidden fees or late penalties, as the balance gets deducted directly from the consumer’s bank account. It uses proprietary algorithms to determine if consumers are creditworthy, collecting only a handful of data points (such as your name and phone number) on anyone interested in signing up. No credit checks. No dings to your credit score. And no waiting around for a new credit card to be mailed to you.

Affirm then makes its money on interest payments from consumers, but it also takes a 3-6% commission of the total order from the vendor. More than 12,000 merchants are currently signed up, including Peloton (NASDAQ: PTON), Neiman Marcus, and Expedia (NASDAQ: EXPE). One risk worth monitoring is that Affirm takes on the risk of the customers actually repaying, and it currently sports a balance of $4.2 billion in outstanding loans.

But perhaps the most interesting thing worth considering is how popular the Buy Now, Pay Later movement is becoming. The number of BNPL apps downloaded globally by mobile devices grew at a triple-digit pace last year, and nearly 40 million millennials in the US alone don’t carry credit cards. The continued growth of the $600 billion e-commerce market and the rising influence of the gig economy are together driving innovation in the way payments are being made.

Square was quick to pick up on that, and it moved quickly to pay up for Afterpay. Affirm could soon become the next pure-play, publicly-traded company to cash in on this growing trend.

Want to hear Simon provide an even deeper-dive into Affirm? Click here to tune into him describing the company on the Chit Chat Money podcast.