Consumer lending startup Affirm has tried to make it easier for people to make big-ticket purchases at checkout, by providing financing options that it believes are better than using a credit card.
Today Affirm has announced that it has more than 1,000 merchants signed up to offer its financing options at checkout, helping to reduce the friction around making large purchases and, by extension, increasing sales for its partners.
While promoting its most recent milestone, Affirm is also trying to get across the message of how it’s different — and frankly, better — than point-of-sale financing options of the past. As a result, the company is pushing a marketing campaign around “honest finance” to enumerate the ways in which Affirm helps consumers by providing more access and better terms for big-ticket items.
After decades of predatory lending practices at checkout, it’s no wonder Affirm is trying to distance itself from the competition. Retailers seeking to boost sales previously aligned themselves with financing partners who sought to hoodwink consumers into adopting revolving credit lines built on compound interest, hidden fees and small print.
While advertisements promoted zero-percent interest on the cash borrowed to make a purchase, the banks financing those credit lines made the bulk of their money off of fees that inevitably sprung up if a consumer didn’t pay them off before the end of a certain term, or if they made a late payment.
So you can understand the skepticism of some people when offered the following financing offer while looking at a pair of $400 pants:
It’s easy to debate the merits of financing a pair of ugly, expensive pants, but for Affirm CEO Max Levchin, that misses the point. It’s not the lender’s job to decide if a borrower should buy a thing, but whether or not she will be able to pay back the loan.
“We cannot be judgmental but we must be proscriptive,” Levchin told me. “If you can’t afford a $200 dress [or presumably, a $400 pair of pants], maybe we’re not helping those people.”
That is, the goal is not to place judgments around what one consumer may value over another. The same borrower who finances a $2,500 couch using Affirm may think the guy buying a $2,500 road bike is out of his mind.
In that way, Affirm is agnostic. All it cares about, really, is whether or not the borrower can afford to pay back a loan and if the terms are fair. Which brings us to the second criticism of the $400 pants example — i.e. the 10 percent APR for 12 months.
You might say that the interest rate is high for a short-term loan, but the company would probably argue that it’s better than using a credit card and certainly better than point-of-sale financing options of the past.
Furthermore, Levchin points out how transparency is an important part of the way the financing is messaged to the consumer. “We express the interest in both rates and dollars,” he said. The interest is capped and there are no wacky fees to surprise the consumer.
Fairness — i.e. not charging compounding or deferred interest — is one part of Affirm’s idea of “honest finance,” and so is simplicity. But another aspect is Affirm’s ability to provide access to credit for borrowers that might not qualify for other short-term loans or credit cards — and certainly wouldn’t qualify on the same terms.
Because it doesn’t rely as heavily on FICO or other credit agencies, and has instead has built its own ID verification and fraud prevention techniques, Affirm is more comfortable extending credit to consumers that might have a thin credit file, for instance.
And Affirm says it will never extend credit to someone it doesn’t think will be able to pay the loan back. In that way, the company is setting itself apart from more predatory lenders that issue credit lines while banking on late fees.
Affirm hopes the idea of honest finance will cause more retail partners to sign up, as it not only helps them increase sales, but also helps them avoid the fallout when customers think they’re screwed by financing partners. At least, that’s what the company is betting on with its latest campaign.