Lending startup Affirm, founded by PayPal and Yelp co-founder Max Levchin, is out to destroy the credit card, or at the very least make a noticeable dent in its utter ubiquity. The company, which began in 2012 by offering simple and transparent loans for web purchases, is today launching a mobile app to the public that acts as a virtual credit card, so it can be used as a line of credit with no strings attached for pretty much any online purchase. The app is available now for iOS and Android.
The virtual card grants you a one-time card number, an expiration date, and a three-digit security code, which can then be used to make singular online purchases, while the repayment plan is managed through the app. Instead of ever-changing rates and fees, Affirm gives you a flat interest percentage rate up front — it ranges from 10 percent to 30 percent — for individual purchases and tells you how exactly how much you will ultimately pay before you buy. To use the service, you need to provide proof of your identity, but credit is extended only for the item you want to buy, with the company determining your likelihood to pay back the loan based on your current credit and the total amount being lended. The company says it will deny loans if it detects “excessive” borrowing behavior, suggesting it has some built-in barriers to prevent it from being used like a high-limit credit card.
“This is a true alternative to credit cards.”
“This is a true alternative to credit cards,” says Jack Chou, Affirm’s head of product. “The namesake of the product itself, the credit part, is fundamentally broken. We think there’s a better way that’s more aligned with consumer interest.” The premise of Affirm’s argument is a simple one: credit card companies make money by extending credit to people who may not be able to pay it back, which leads to mounting debt and revenue for the credit card issuers in the form of penalties, mounting interest payments, and other fees.
Affirm makes money through its flat interest rates and cuts from participating merchants — the longer you decide you need to pay the company back, the more interest you’ll pay. But the rate stays the same, and Affirm restricts repayment to three, six, and 12 months. It also doesn’t give out blanket credit like a credit card company does. You’ll need approval for every purchase you try to make, up to a maximum of $10,000. The company can deny you for larger purchases if it determines you’re unlikely to make the payments on time or if you’ve been late paying other, smaller Affirm loans. In total, Chou says Affirm has made more than 1 million loans for a total amount of more than $1 billion since it started roughly five years ago. It also now counts as over 1,000 merchants as partners, including mattress maker Casper, furniture site Wayfair, and Expedia.
However, with its virtual card, Affirm no longer wants to restrict itself just to partner retailers. Chou says partnering with sites is mainly a way to raise awareness for the product by offering it to people who may never of heard of Affirm before, as well as to help create a simpler experience by integrating directly with a merchant’s checkout process. Now, Affirm wants to extend its services to anyone and any merchant, by going directly to the consumer with a virtual card. “We want to be transparent and honest and clear with our customers,’ Chou says. “We feel that existing institutions and credit card companies incentives are not aligned with customers.”
Affirm won’t magically prevent people from defaulting on loans
Of course, Affirm can’t magically prevent people from defaulting on loans, and failing to pay the company back will ultimately dock your credit score. Now that the company is opening itself up to many more online vendors, that will inevitably mean more users who try and use Affirm for smaller, potentially impulse-related purchases, which could saddle you with unnecessary interest payments. Although Affirm may offer as low as 10 percent APR, or in some cases zero percent for select partner merchants, you still run the risk of paying more for a purchase using the company’s virtual card than if you had a standard credit card. For those who are simply bad with money and borrowing, it has the same pitfalls as a credit card, though with a few more speed bumps and warning signs built in.
Affirm’s critical differentiator is that it doesn’t offer a “revolving” line of credit, as its website puts it. If you do start taking out a number of loans, Affirm should shut you down until you’ve paid off your existing ones. So while Chou describes the new virtual card option as a true credit card alternative, it’s probably more fair to say that Affirm is an alternative to the high-limit nature of some credit cards. It’s a great option for people looking to finance a pricey piece of furniture or an airline ticket, but it’s not so great for buying books on Amazon or moderately priced electronics. If you just flat-out don’t trust credit card companies or big banks and don’t feel like giving those intuitions business, Affirm offers you an avenue to for spreading out payments without having to put your name on a piece of Chase or Bank of America-branded plastic.