Affirm is raising interest rates on its buy now, pay later loans.
In an interview with Bloomberg News on Friday (Feb. 17), CEO Max Levchin said the company has convinced several major retailers — Dick’s Sporting Goods and Shopify among them — to permit it to hike its interest rates.
“We are trying to run a profitable company — that’s a conversation that every merchant understands very well,” Levchin told Bloomberg. “These are very positive conversations in the sense that we can quantify exactly how much more value we can bring to them.”
The move comes two weeks after Affirm said it was cutting staff by 19% amid a decline in demand for buy now, pay later (BNPL) offerings.
As PYMNTS reported, slowing consumer demand — and in some cases, outright drops in discretionary spending — hindered gross merchandise volume (GMV) growth rates to 27% in Affirm’s most recent quarter. Last year at the same time that rate had been 115%.
The new merchant agreements will see annual percentage rates on Affirm loans climb from 30% to as high as 36%, Bloomberg reported, noting that some retailers have also agreed to pay higher merchant fees.
The new maximum rate means a $240 loan, spread over 12 months, will cost $49.30 in interest, compared to the current $40.80, Affirm says.
The report adds that one-to-one talks with merchants are necessary because Affirm initially made agreements with them that did not include an automatic mechanism for dealing with rate increases by the Federal Reserve.
However, Levchin tells Bloomberg that merchants have been amenable to changing the terms of the deal, as retailers who use its BNPL services had 63% higher average cart sizes.
According to Bloomberg, the company is becoming more reticent when offering credit, and it expects its GMV to hit $20 billion, down from the $21.5 billion it projected recently.
“If it’s a trade-off between, ‘Let’s make a few bad loans and have a great headline number,’ versus ‘Let’s be very diligent and not get overextended,’ then let’s make sure we say no as frequently as we must say no,” Levchin said.
This is happening as consumers — in anticipation of inflation lasting into next year – are embracing zero-percent, promotional financing, PYMNTS wrote recently.
“Buy now, pay later (BNPL), in particular, has extended its reach beyond an initial popularity among Gen Z and millennials shoppers,” that report said.
“Now installment loans have grabbed the attention of older, wealthier consumers who want to act on a purchase but not have to put up their own capital at the register to do so. BNPL is no longer a relatively low volume, FinTech niche product; it’s now reached the masses.”
The reasons are evident. As Bread Financial Chief Commercial Officer Val Greer told PYMNTS, consumers began moderating their spending in the middle of 2022, and by December, retail spending dropped by a percentage point.
“Consumers decided to open up their wallet only when they saw big promotions and big discount offers,” Greer said.