Affirm's 2-in-1 business model

Buy-now-pay-later lender Affirm, which also filed to go public this week, seeks out the kind of customers that most lenders tend to shun, treats them very well, and builds loyalty that way.

Affirm also has a roaring business financing the purchase of Peloton exercise equipment, which is generally bought by a more well-heeled clientele, most of whom have abundant access to credit.

How it works: Affirm finances purchases on an item-by-item basis, often on a 0% interest basis.

• In most cases Affirm gets paid by the merchant, out of the gross profit margin.
• Consumers also sometimes pay simple interest, with no unpleasant surprises like late fees.

The big picture: Many younger millennials are sensibly wary of taking on debt. They prefer debit cards to credit cards, and like to feel in control of what little money they have.

• For large purchases, Affirm offers what is effectively an old-fashioned installment plan, where you pay for the item over time.
• CEO Max Levchin has said he likes to finance the purchase of items that last at least as long as the installment plan — things like mattresses or furniture or kitchen equipment. When consumers feel that they're paying off something they're still getting benefit from, he says, they're less likely to default on their payments.

Between the lines: Affirm has a longstanding deal with Peloton, which has been growing so fast during the pandemic that it now accounts for 30% of Affirm's revenues.

• Peloton buyers are often older and richer than the core Affirm customer base, and more likely to be happy to use credit cards. But given the option to get 0% financing on their exercise bike, they'll take it.
• By the numbers: Peloton paid Affirm more than $50 million just in the third quarter of this year. That more than makes up for the credit risk that Affirm is taking by lending to Peloton's customers.

The bottom line: The Peloton relationship has done a great job of boosting Affirm's revenues. But it's largely separate from the company's core business of providing simple credit products to the underbanked.