Credit is broken & Affirm has a plan to fix it

In 2016, credit card issuers in the United States raked in $94.3 billion in fees alone (because the $70.4 billion in interest income was apparently not enough).

Maybe that’s not so surprising when the average credit card has 6 fees, with some having as many as 12! This year alone, credit card debt in the United States has reached over $1 trillion, defaults are on the rise, and many Americans are spiraling into compounding debt with no end in sight.

The bottom line is credit is broken and the incentives for banks that issue it are built on business models that profit from hurting consumers and betting on their failure. These perverse incentives have given banks little reason to innovate or put their customers' best interests first. Not only are their core financial infrastructures built with technology from the 1970’s, but the number of people who can say, "I trust my bank to look out for me" is shrinking, and for good reason—most banks aren't.

In a recent survey Affirm, Inc. conducted of more than 1,600 U.S adults about the complexities of consumer credit, 67% said that they believe some credit products are designed to purposefully cheat consumers.

It doesn't have to be this way. Affirm, Inc. was started in order to counter this practice with a simple yet powerful mission: deliver honest financial products that improve lives. We’re starting by reinventing credit at the point of sale.

In order to reinvent credit, we started by doing three essential things:

1: Design a business model in which the company's incentives are fully aligned with the best interests of the customer (even if it means less profit)

In order to ensure that Affirm's incentives are aligned with the bests interests of our customers, we designed our business model around a few important policies and product decisions:

• No fees of any kind
• No compounding interest
• Only extend credit to people that can afford to repay on-time and in full

The only profit Affirm makes from customers is the precomputed, simple interest that we calculate and disclose to the customer upfront, before they make their purchase. This way they know exactly how much it will cost them over 3, 6, or 12 months without ever paying a penny more. Guaranteed. That’s in contrast to a credit card, where you have no idea how much a single purchase will cost you over 3, 6 or 12 months. You could theoretically accrue endless interest and penalty fees. In fact, many do.

65% of respondents to another survey conducted by Affirm, Inc. of over 1,000 U.S. individuals said they have an actual fear of debt. Nearly a third of them said it was because they don’t know how long it would take to pay off. This is due to the way that credit cards calculate interest, which is often confusing, deceptive, and designed to not be consumer-friendly.

2: Build an anti-fraud and underwriting system that is better than the FICO score

1 in 10 Americans have unscorable credit reports, meaning 30+ million adults are excluded from the traditional credit system due to no fault of their own. Many of these people are immigrants, 18-24 year olds, and people who have opted to not use traditional credit products. The result is that many of these people have no access to credit or are limited to products with exorbitant interest rates and fees.

Affirm's smarter underwriting approves up to 126% more creditworthy people—across all credit tranches—for access to credit than industry averages. This means more people are able to afford that mattress for their first home, that suit and pair of shoes for their job interview, or that bicycle for their commute to work.

3: Offer superior products and services to customers and our merchant partners

Merchants that are focused on aggressively competing against the likes of Amazon are increasingly turning their attention towards building a brand and community that earns loyalty and continually drives customers back to their stores. The most savvy merchants understand that in order to win their customers over and thrive in the current retail environment, they need a credit partner that:

• Is built for mobile
• Reduces friction in the checkout process
• Is completely transparent and honest with its customers
• Is trusted and loved by its customers
• Is a newer, simpler, and more convenient product than just another credit card

Retailers that choose the oldest, cheapest credit partner pushing the same non-consumer-friendly products risk hurting customer perception of their brand and the likeliness that they will transact with that retailer again. 55% of respondents to Affirm, Inc.’s survey about the complexities of consumer credit said they would think less favorably of a brand that offers financial products that are known to harm some consumers. At Affirm, we always ask retailers, “Why would you put your brand on the front of a card and allow the bank to screw over your customer?” Your customer associates that negative experience with the brand on the front of the card in addition to the bank behind it. In fact, 89.39% of Affirm customers surveyed feel more positively about a brand because they were offered the ability to pay for their purchase over several months, without using or applying for a credit card.

How else does Affirm differ from traditional financial and credit institutions?

• Digital application process is instant, no paperwork required
• Net Promoter Score of 82+, the highest in the industry
• Retail partners see 75% average order value lifts, up to 20% conversion lifts, and 10%+ lifts in revenue per visitor
• 25% of Affirm customers, on average, repeat purchase
• 60% of Affirm transactions happen on mobile

With more than 1,000 retail partners and more than 1 million loans issued, Affirm has created its first product to reinvent point of sale financing online and in-store that is great for both customers and retailers—and we’re just getting started…

If everyone used Affirm today (instead of credit cards), we could save Americans hundreds of billions of dollars every year in fees and interest alone. Imagine what other products and services we can reimagine—the opportunities are endless.

Our plan is to continue to build on our core mission and create more products that truly improve people's lives from buying and borrowing, to saving and managing their finances.

Join Affirm and the #honestfinance movement.