Affirm stock (AFRM) - Get Affirm Holdings Report climbed over 40% in one trading session after Friday's announcement of the payment firm’s partnership with Amazon. Managed by one of PayPal’s founders, the fintech is a large player in the subdivision of the payment industry known as “buy now, pay later”, or BNPL. Globally, segment revenues reached US$ 4.5 billion last year.
Investors, on the other hand, have not shown the same enthusiasm for Amazon stock (AMZN) - Get Amazon.com, Inc. Report. Shares were up merely 1% after the announcement. Although more flexible payment options could lead to more sales, the market seemed unimpressed by how the Affirm deal could impact Amazon stock price.
Below, the Amazon Maven discusses the topic in more detail.
(Read more from the Amazon Maven: 3 Reasons To Buy Amazon Stock By The End Of August)
BNPL is huge, Amazon knows it
According to Marketwatch, global BNPL is projected to grow considerably, even by the most conservative estimates. Revenues should hit the $15.5 billion dollar mark in 2026 from the reported $4.5 billion in 2020, for a 36% CAGR.
In the US, BNPL revenues are also expected to increase significantly, despite the effects of the pandemic. In 2020, market size grew more than tenfold in the United States alone, as consumers look for lending alternatives other than loading up on credit card debt.
According to Statista, the growth trend can be seen in the monthly app installs of certain BNPL providers in the US. Downloads have doubled between April and September 2020.
Affirm: a valuable ally for Amazon
The BNPL business model resembles getting a loan from a commercial bank. Borrowers are offered an amount of credit that is compatible with their credit score to purchase products and services now, rather than postponing the purchase. The consumption incentive, by the way, is primarily how Amazon benefits from this deal with Affirm.
After going public in January of 2021, Affirm has been proving the appeal of the business model. Its third quarter earnings report showed user base growth of 64% year-over-year. Total revenues looked equally robust, reaching $608 million for an increase of 71% over third quarter 2020 levels.
Expanding the opportunity
Amazon has already been validating the benefits of such payment partnerships. In Australia, the e-commerce giant works with fintech Zip. In the US, BNPL is not as well established yet. Amazon offers installment programs for a selected group of customers through the Amazon.com Store Card, the Amazon Rewards Visa Card, and certain Citi credit cards.
We think that the Affirm deal is a step in the right direction from here. Eric Morse, Senior Vice President of Sales at Affirm, helped to drive the point home when he said the following:
“By partnering with Amazon, we bring the transparency, predictability and affordability that Affirm provides today to the millions of people who shop on Amazon.com in the U.S. Offering Affirm’s alternative to credit cards also delivers more of the payment choice and flexibility consumers on Amazon want.”
The Amazon Maven’s take
Judging my market action, Affirm may look like the only player benefiting from the Amazon partnership. But the Amazon Maven believes that, in the long run, Amazon stands to gain the most.
As new BNPL players join the market, the space becomes more competitive for Affirm. For instance, a report from eMarketer has shown that Affirm had 78% of BNPL apps downloads in 2018. The figure dropped sharply to about 16% this year. But at the same time, competition is good news for users of the payment model.
With more payment options available, Amazon may gain bargaining power over time, while benefiting from higher demand for its products and services driven by more plentiful credit alternatives available.
Do you think that the Amazon + Affirm partnership announced last week is a better deal for the e-commerce giant, the deferred payment company, or both equally?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)