Purchase loan disruptor Affirm now partnered with 1,000 retailers

Dive Brief:

Affirm, a financing company with a mission to disrupt consumer credit options with a new approach to purchase and installment-plan financing, is now partnered with 1,000 retailers, according to a company press release on Thursday.
The company touted the milestone at its first AFFIRMation Conference for retail partners just three months after it processing its one millionth consumer installment loan, made by its bank partner, New Jersey-based Cross River Bank.
Founder Max Levchin also announced the launch of the company’s “Honest Finance” initiative, a call to retailers and financial institutions to abandon predatory consumer credit practices.

Dive Insight:

Affirm’s approach is simple (literally) — the company charges simple interest rather than deferred or compounding interest, a departure from most retail-affiliated credit plans. When shoppers mull financing a purchase with Affirm, they see all relevant terms and costs upfront in a clear and concise way.

“Affirm is reinventing consumer credit,” Levchin said in a statement. “We’ve created a simple way to offer honest consumer financing that is fully aligned with the best interests of consumers. We are now challenging the industry to join us in putting people over profit. Every American, rich or poor, deserves to be treated equitably and honestly in every aspect of their lives — including their finances.”

That’s true, though many of the victims of predatory, or at least inscrutable, purchase loans are not on the wealthy end of that scale. Affirm's position is to make bigger ticket retail purchases more readily available to lower-income shoppers. Rather than hiding interest, fees and fines, retailers and their financial partners should be clear to customers, according to Affirm, and do a better job of assessing a person’s credit risk, regardless of income.

“It would be easier to rely on FICO scores for underwriting and to settle for turning away a high proportion of credit-worthy borrowers,” the company said in a press release. “Instead, Affirm heavily invests in proprietary underwriting technology that makes it possible to give more consumers access to credit. Affirm also invests in serving its customers wherever they are, whether that’s on mobile or desktop, online or in store.”

Store cards are getting more expensive to use, especially for those holding onto revolving credit, without much to balance that out, according to research from Creditcards.com. The average annual percentage rate on America's largest retailer credit cards has risen to 23.84% and these days only half of the cards include a sign-up reward deal or purchase discount, according to that survey.

But that doesn't mean that the simplicity advocated by Affirm is always the best choice from the consumer's perspective, according to Matt Schulz, senior industry analyst at Creditcards.com. "Anything that makes financial transactions simpler and more transparent is absolutely welcome," he told Retail Dive in an email. "Far too many people do things with their money that they don't fully understand, and that's a sure way to get yourself in trouble. Also, it's great to give people more options when it comes to paying for big purchases. That amps up the competition among these companies, and when that happens, consumers tend to come out ahead."

Levchin pins part of the problem of Draconian credit terms on incentives that retailers and their partners have been loathe to resist. Indeed, analysts told the New York Times earlier this year that many retailers are leaning on the profit streams from their store-branded cards as their sales and margins erode. Macy’s store cards made for 39% of its total profit last year, a 26% increase from 2013, according to research from Morgan Stanley cited by the Times. Kohl’s card-generated profit was 35% (a 23% increase in that time) and Target’s was 13% (an 11% increase). Amazon’s credit cards garner only 3% of its total operating profit, according to the report.

The situation is becoming increasingly bothersome to millennials, the cohort of consumers that retailers are otherwise working so hard to please. Most (60%) are worried about falling into debt, driven in part by the uncertainty that comes with the compounding interest of credit cards; 29% said they’re afraid that they’ll end up owing more than they can afford, according to a survey conducted by Affirm and Qualtrics of more than 1,000 22- to 44-year-olds in the U.S.

Even more (63%) millennials are so debt averse they don’t even own a credit card, Affirm found. Meanwhile, 20% of Americans are also credit unscorable because they don’t have a credit card or have an insufficient credit history. The situation, while profitable for retailers and their partners for now, is a losing proposition for everyone, Levchin says.

“Devious credit practices are ultimately in no one's best interest,” he said. “They hurt consumers financially, and while they can artificially boost profits, at the end of the day they damage a retailer’s brand.”