Affirm losses grow in FQ3'23; firm cites bank failures and rising interest rates

Print

Email

Despite the continued growth and rising adoption of buy now pay later schemes, firms are struggling to achieve profitability. For Affirm, the losses more than tripled in the most recent quarter. The fiscal third-quarter loss surged to US$205.7 million or 69 cents a share, which is three times the loss of 19 cents a share recorded during the same quarter a year before.

Net revenue, on the other hand, increased to US$381 million compared to US$355 million reported in FQ3'22. Gross merchandise volume also surged to US$4.6 billion from US$3.9 billion a year before. The firm cited bank failures and rising interest rates as a growing concern in 2023. Higher tech and data analytics spending has also added significantly to the losses reported by Affirm in FQ3'23.

• While addressing the shareholders, executives have acknowledged that higher credit spread can impact revenue less transaction costs. The firm also cited that bank failures and the overall system stress in FQ3'23 are likely to continue to impact funding markets in the short term. As a result, the firm is expecting the volatility to lead to higher credit spreads over the next few quarters.

Going forward, Affirm is foreseeing higher growth opportunities in its direct-to-consumer offerings. The firm's debit card-based service, Debit+, experienced a higher gross merchandise volume during the quarter, increasing from 9% to 24% over the previous quarter. This data indicates that there is a major opportunity for the firm to tap more users outside of its short-term loan offerings.

The innovative Debit+ service offered by Affirm provides shoppers with both pay now and pay later payment options. Furthermore, the feature also expands the usability of Affirm, resulting in higher gross merchandise volume. Consequently, the firm is expected to double down on its effort on driving the growth of Debit+ service over the next few quarters in 2023.

The mixed quarterly performance of Affirm comes months after the firm laid off thousands of employees to cut costs and extend the operational runaway. In February 2023, the firm reduced its workforce by 19%. Simpl, Klarna, and Afterpay are among the other well-known BNPL providers that have announced layoffs over the last 12 months.

Although BNPL firms are facing macroeconomic headwinds in the face of rising interest rates and bank failures, the broader market has continued to record significant growth over the last few quarters. Much of this growth has been derived from resilient consumer spending, especially in sectors like travel and entertainment.

• For Affirm, the strategic decision to partner with global travel and ticket booking platform, is paying off dividends. During FQ3'23, demand in travel and ticketing remained robust. The firm experienced a growth of 62% year over year. Furthermore, Affirm also experienced strong interest from merchants, who are looking to offer the firm’s services on their travel and ticket booking platforms.

To continue its growth in the travel segment, the firm expanded its existing partnership with Booking.com. Additionally, it also forged new alliances with partners like Royal Caribbean and a major airline. Going forward, PayNXT360 expects Affirm to partner strengthen its position in the travel and entertainment category, through more such strategic alliances and partnerships.

In terms of consumer usage of BNPL schemes, consumer adoption, and spending are poised to record accelerated growth over the next few quarters in 2023. Quarterly earnings reported by firms have shown a growing trend. PayPal, for instance, revealed that its users are transacting more often using the BNPL option. In the quarter ending March 2023, transactions per account surged 13% to reach 53.1. The BNPL offering grabbed US$6 billion of the total payment volume for PayPal. This is a growth of 70% on a currency-neutral basis.

This is a clear indication that the demand for buy now pay later schemes remains robust amid the current macroeconomic environment and the trend is projected to further continue from the short to medium-term perspective. As inflation continues to dampen the disposable income of millions worldwide, the adoption of short-term loans through BNPL schemes is expected to remain elevated.

However, rising interest rates will continue to pose a severe challenge for these firms and in their efforts to achieve profitability. Additionally, the growing competitive landscape and the introduction of new solutions will also pose a growth challenge for firms like Affirm from the short to medium-term perspective. Apple, in March 2023, launched its much-anticipated BNPL services, offering short-term loans to shoppers in the United States. 

To know more and gain a deeper understanding of the BNPL market in the United States, click here.