Amazon – Affirm

Clearly if Affirm/Amazon was an isolated incident, then there would be no impact to V. But Adding Walmart and other large merchants does start to impact Visa’s GDV at a 2% level in a 5 yr view

Key Reading

  1. Affirm 3Q Earnings (last night)
  2. Earning Transcript
  3. Affirm Investor Forum (28 Sept)
  4. Amazon take Venmo (my blog)
  5. Affirm Debit+ (my blog)
  6. Amazon/Visa Battle (my blog)
  7. Amazon Co-Brand is In Play

November is turning out to be a very big week in payments! The top investor question seems to be how will V/MA be impacted? My response.. In next 2 yrs.. Less than 1-2% of US GDV however Affirm is turning out to be the leading company to watch in creating a V/MA alternative.  

Amazon

Amazon is playing a very strategic and well planned “long game”. US cost of payments for Amazon is the highest of any geography, and they are now demonstrating just how serious they are in tackling this issue (see my V-Amazon blog, and Amazon’s Visa Surcharge in Singapore). This week we see that Amazon is taking ACH heavy Venmo and now Affirm. Affirm has been in testing with Amazon since August, what changed yesterday is that Affirm has locked them up in the US and given them warrants to ensure they have both alignment and upside. I love this deal construct. Typically Amazon lets partners take risk in new areas.. Allows them to invest and then builds their own if it takes off (a strategy that irritates many merchants and manufacturers).  The performance warrants discourage Amazon from this approach. 

Is this a threat to V/MA? 

Changing consumer behavior is very hard. Within payments, frequency of use establishes consumer behavior (20 yrs for ATMs and Debit cards). Historically it was grocery, gas and transit that were centers of payment innovation. Is Amazon incented to drive Affirm adoption? Yes! While they may get $200 for an enrollment in a Chase Co-brand and get 50bps payments from Chase Cards and Synchony store cards.. Affirm does something much different for Amazon:

  1. Expands sales in lower mass. Innovative under writing expands the availability of credit (see WSJ article)
  2. Improves the conversion funnel. Consumers see BNPL as more transparent, with terms easier to understand, and Affirm’s instant approval process is seamless. 

Amazon is looking for “commitments to underwrite competitively to widen the acquisition funnel,”. 

16 Sept WSJ. 

What could be impact to Visa/MA?

Amazon US GMV is ~$375B, of which ~80% is on V/MA network. The loss of Visa Co-brand to Amex/MA would have a very immediate impact of ~10-15% on V/MA. However the loss of volume to either Venmo or Affirm is much hard to predict. Will there be incentives? 

Assuming a massive year one success Affirm penetration is 15% and that consumers use Affirm on purchases larger than $200 (or 20% of time) on the 80% of card volume. 

Network GDV Loss would be 15%*20%*80%*GDV = 2.4% * $375B = $9B (split between V and MA)

Visa US GDV is $4.7T..

Affirm/Amazon’s maximum impact to Visa’s US GDV in next 12 months is thus

$9B*70%/$4,674B = 0.135%

Clearly if Affirm/Amazon was an isolated incident, then there would be no impact to V. But Adding Walmart and other large merchants does start to impact Visa’s GDV at a 2% level in a 5 yr view. My view is that Amazon’s real damage to V/MA is not loss of volume, but enabling a long term competing model to how consumers obtain credit. 

Amazon has created 5 key leverage points with Banks:

  1. Co-Brand.. Short term material impact to V
  2. Affirm… enabling a new consumer credit model
  3. Venmo .. enabling an ACH payment alternative
  4. Store card (synchrony).. 
  5. Pay with Amazon.. Enabling all of the above with other merchants

Affirm – Invest Here

Affirm now has the largest 2 merchants on the planet. Assuming a $12B annualized GMV, an Amazon “massive success” of $9B is 75% growth, now add WalMart, drive into Point of Sale and Debit+. Affirm’s FY 22 guidance is $13.13-$13.38B..  My view? Sandbag at the extreme. Thus my personal purchase of Affirm today.  Great company, great people, great products, great customers.. remaking credit and checkout, expanding to POS, creating consumer direct products, … ALWAYS invest in someone that is attacking an industry which poorly serves the customer. (for example take a look at this example payment processor invoice to a small restaurant.. from my 2016 blog Last Mile Redesign).

Square/Afterpay and PayPal were potential threats, but the speed at which Affirm locked up the two MOST IMPORTANT strategic retailers is just amazing. They are creating network effects AND are on course to establish themselves as the key brand of BNPL in the US.

4 thoughts on “Amazon – Affirm”

  1. I think you meant to say “Affirm” in place of “AfterPay” in your last paragraph about locking up the two most important retailers.

  2. Great blog. One question though – thinking through the actual V/MA volumes at risk…

    “Network GDV Loss would be 15%*20%*80%*GDV = 2.4% * $375B = $9B (split between V and MA)”

    But given ~75%+ of BNPL transactions are then paid off via debit cards, wouldn’t the actual impact to V/MA only be: the other 25% of those $9B of AFRM volumes PLUS (+) the negative take rate mix effect on that 75% shifting from credit to debit [if we’re talking about >$200 purchases, presumably most of those would have been funded via credit, but now are being paid for via 4 debit transactions] LESS (-) the incremental per-transaction fees Visa gets from splitting up what would’ve been 1 transaction into 4 (or more)?

    1. I don’t dis-agree with your point. BNPL is currently operating as you outline.. and it is a network fee “win” for Visa. THe point in my math is the MAXIMUM pain. What is unique about Amazon is that they DO HAVE the ability to get consumers to put in their ACH.. and this also seems to be the plan behind Affirm’s debit+. So before BNPL behavior gets set in the US.. I honestly believe that Amazon and Affirm will try to set up ACH payment. Remember Max came from PayPal and learned lessons the hard way.

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