Macro Update; Affirm’s S-1 and Warrants deal for Shopify; Marqeta Hitches a Ride

Greetings,

This week, we dig into Affirm’s S-1 as the e-commerce enabler looks to bring holiday cheer to its investors. We touch on some of the other industry highlights of the week such as Marqeta inking a global partnership with Uber.

And finally, a programming note: with Thanksgiving around the corner, the newsletter will be off next week, returning the first week of December. Enjoy the holiday, and we’ll see you in two weeks!

Let’s get to it.

Getting Ready for a Rough Winter

This week’s unemployment data continues to underline the consistent, if muted, economic recovery to date: new claims of 742k, up slightly from the week prior, but continuing a streak of sub-800k reports. Overall unemployment rolls continued to fall to 6.4MM from 6.8MM, as employers continued to add new hires during the retail heavy holiday season.

Source: WSJ, PeerIQ

Policymakers continue to underscore that the recovery is far from complete. In a Q&A session this week, Fed Chair Powell, reiterated that the economy would require additional support from Washington, but with stimulus talks on hold and emergency lending programs set to expire on December 31st, there’s clearly more to be done to ensure strong footing before the winter freeze takes hold.

Will Borrowers Hibernate for the Holidays?

As readers know, for the last few months we’ve been keeping a close eye on the performance of borrowers that took advantage of hardship programs during COVID. We’ve seen current / DQ rates hold pretty steady for the majority of early adopters, and we are retiring that analysis this week.

Instead, over the coming weeks, we’ll be tracking how the major macroeconomic events we’ve highlighted flow through to borrower behavior; for example:

• Will consumers go into hibernation this holiday season, or is a pick-me-up to brighten the dark winter months just what the doctor ordered? At least according to Fed data, there may be more Hyundais than Hot Wheels under the tree this year.
• Will Trump’s rush to lock in major policy changes and key appointments before January result in presents or coal for the economy?

We’ll be digging into these questions, and more, in the coming weeks; stay tuned!

Affirm Seeks IPO Affirmation

This week, Max Levchin’s BNPL powerhouse, Affirm, filed its IPO paperwork, aiming to pull off one more major IPO before the end of the year.

Overall, point-of-sale is hot - in part due to the massive size of the market. A number of firms are already complete in the market (GreenSky, Synchrony, Klarna) and a number of big players and smaller startups have their eyes on the prize as well (Stripe, Visa, Wisetack)

There are quite a few insights on their business from the S-1; let’s take a look:

The Vision - Displace Networks: Affirm has fired a shot across the bow to Visa and Mastercard, declaring its vision “to be as ubiquitous, secure, and convenient as legacy networks yet far more transparent, honest, and both consumer and merchant centric.”

Strong Numbers thru COVID: Simply put, revenue is up (90%+ YoY) and losses are down (from $120.5MM in FY19 to $112.6MM in FY20), with the company reaching 6.2MM customers and 6,500 merchant partners since inception. Even as that volume has increased, credit quality has held up, with overall delinquency rates falling versus 2019.

Source: Affirm’s S-1, PeerIQ

There are important nuances behind the headlines, though:

• Vast majority of revenues are driven by merchant fees (50%) and what Affirm calls Interest Income (37%), which includes amortization of discounts on 0% APR loans. By contrast, servicing is only 2% [above average]. Expect that as the platform matures, servicing will become more important - providing ballast as overall volume continues to grow
• Affirm has generated a ~6% average gain-on-sale when selling loans. Well above industry benchmarks, and reflecting the strong credit performance. However, markets won’t assign much value to this type of transactional and volatile revenue stream
• COVID has clearly been an accelerant, as more transactions move online. That’s also created concentration risk: fitness darling, Peloton, represents 30% of Affirm’s revenue
• Affirm is holding $1Bn of their loans on balance sheet (held for investment), with ACL hovering at about 9% ($95MM), holding steady as a % over time. Those assets are pretty short duration (averaging about 6mos according to their filing), but it complicates the story
• Majority of funding has come through Cross River, a key partner institution. Affirm is diversifying their sources, and now has over $4Bn in capacity with average funding costs of 5.9%

What about that Shopify Deal?

• Efforts to diversify are underway, and Affirm granted Shopify a 5% stake (via 10-year warrants valued at $60MM+) as part of an exclusivity agreement
• The warrant deal with Shopify means that competition in the POS market is intensifying.
• Offering warrants to win contracts is not uncommon for earlier stage companies looking to establish a beachhead
• However, offering equity to win business is not a sustainable business plan. Imagine the CFO at Peloton reviewing the S-1 and calling Affirm - “We’d like our fair share of the warrant pie”
• Affirm must have seen extraordinary strategic value in inking Shopify. What makes Shopify different from another merchant? We believe Shopify has a natural position to offer lending and payments services to its merchant base. After all, Amazon has had success financing its own small businesses and has launched Amazon Pay. It’s likely that Affirm’s warrant package was in part to deter a formidable potential competitor

The Unanswered Questions: The story’s there, and it’s strong, but there are a few open points to consider:

• Cost of revenue is still increasing, most recently at 6.5% of revenue; when will network effects and operating leverage kick in?
• $1Bn balance sheet is a lot of credit to hold; will the street value them like PayPal (capital light, payment heavy), or Synchrony (balance sheet heavy)?

Marqeta Hitches a Ride with Uber

Uber and Marqeta this week announced a global card-issuing partnership, integrated across all of Uber’s services as it expands globally. Marqeta, led by Jason Gardner, already supports Uber Eats in the U.S. - with plans to expand into Europe - and with this agreement, will provide Uber’s users a central payment experience across its product suite.

Mastercard / Finicity Deal Approved

Regulators have officially given Mastercard the green light to finalize its acquisition of Finicity, a Salt Lake City-based fintech led by Steve Smith. The transaction, worth a reported $825MM, was seen as Mastercard’s response to Visa’s $5.3Bn purchase of Plaid - but that latter deal is now in question, with the DoJ pursuing antitrust action against Visa to stop the buy.

Congratulations to Steve and the Finicity team on this milestone!

In the News:

• Fed’s Powell Says Rising Coronavirus Cases Pose Threat to Economy (WSJ, 11/17/2020) Fed Chairman, Jerome Powell is pessimistic about the economy as Covid cases surge.
• American Consumers Shun Plastic but Borrow More for Homes and Cars, Fed Report Shows (WSJ, 11/17/2020) According to a report from the New York Fed, household debt increased by 87%, while credit card balances decreased by $10Bn.
• Trump nominates Brian Brooks for head of OCC (FinLedger, 11/18/2020) Acting Head of the OCC, Brian Brooks, was nominated by President Trump to serve as the 32nd Comptroller of the Currency.
• Podcast Why is it so Hard for a FinTech to Become a Bank? (American Banker, 11/19/2020) It will be challenging for many FinTechs to obtain bank charters, unless policymakers have a concrete definition of what a bank really means.
• Synthetic Identity Fraud Risks on the Rise for Credit Unions (American Banker, 11/16/2020) SentiLink research shows that one in every seven synthetic identities were connected to a credit union.
• Citi: ‘Digital is Going to Lead our Physical Expansion’ (FinLedger, 11/16/2020) CEO of Citigroup’s U.S. Consumer Banking division, Anand Selva, discussed Covid’s impact on digital banking trends.
• How Chime Is Dominating Digital Banking (And All Of Banking) (Forbes, 11/16/2020) How Chime is winning consumers over with FinTech.
• Uber and Marqeta Announce Global Card Issuing Partnership (Yahoo Finance, 11/17/2020) Uber plans to leverage Marqeta in the partnership to streamline payment experience.
• PwC Sells FinTech Unit Amid Big Four Regulatory Scrutiny (Fnlondon, 11/16/2020) PwC will sell its FinTech business, eBam, and the firm will be rebranded to LikeZero.
• Payment Company Affirm Files to go Public with Revenues Doubling Year-Over-Year (CNBC, 11/18/2020) FinTech startup led by CEO, Max Levchin, filed their S-1 for IPO.

Lighter Fare:

• Human Ageing Reversed in ‘Holy Grail’ Study, Scientists Say (The Independent, 11/19/2020) Researchers from Tel Aviv University and Shamir Medical Center found a way to reverse aging by using Hyperbaric Oxygen Therapy.