Not dumb at all! They are a payment method and they convince merchants to pay up to 8% of the transaction, while VISA and Mastercard only charge 2-3%. It's the exact same business model. Credit cards convince merchants to pay interchange because their payment method was increasing sales, as clients could spend money they did not have. That's exactly the same value proposition than the BNPL providers like Affirm.
If the consumer have a Visa or Master on file with Affirm as a primary payment method, they Visa and Master end-up getting their cut. But they also do pay by bank, which is virtually free for Affirm, and in this case, Visa and Master don't get their cut. Furthermore, I expect all BNPL providers to push more aggressively pay by bank as they mature and want focus more on profitability and less on payment volume.
This makes sense as the integration cost for pay by bank in EU/UK (still the biggest market for Klarna and the biggest growth market for Affirm) is very little and you make all of the 3% (acquirer, interchange and issuer fees).
This may be a dumb question, but how does Affirm "buy now, pay later" compete with the likes of Visa and Mastercard?
Not dumb at all! They are a payment method and they convince merchants to pay up to 8% of the transaction, while VISA and Mastercard only charge 2-3%. It's the exact same business model. Credit cards convince merchants to pay interchange because their payment method was increasing sales, as clients could spend money they did not have. That's exactly the same value proposition than the BNPL providers like Affirm.
This makes sense, thanks for explaining but I have some follow up questions.
Does the 8% not also include fees like card processing (for the pay in 4 plans) and other fees because they're taking on the lending risk directly?
So Visa/Mastercard still make their network fees regardless in that case.
If the consumer have a Visa or Master on file with Affirm as a primary payment method, they Visa and Master end-up getting their cut. But they also do pay by bank, which is virtually free for Affirm, and in this case, Visa and Master don't get their cut. Furthermore, I expect all BNPL providers to push more aggressively pay by bank as they mature and want focus more on profitability and less on payment volume.
Thanks for sharing, I understand it now.
This makes sense as the integration cost for pay by bank in EU/UK (still the biggest market for Klarna and the biggest growth market for Affirm) is very little and you make all of the 3% (acquirer, interchange and issuer fees).