Earlier today, Amazon AMZN and buy-now-pay-later provider Affirm announced a partnership in which the option to pay over time will be offered to Amazon customers for purchases of more than $50. Within minutes, Affirm’s shares were up over 40%.
Younger consumers have shown an aversion to traditional banking. Far fewer of them have credit cards and their use of debit cards is exploding. They are less likely than older to use banks at all and are the drivers of growth in online alternative-banking platforms. Despite their aversion to traditional forms of credit, younger consumers are the drivers of the buy-now-pay-later growth happening online and in stores. It’s a paradox of banking that the existing lenders are finding frustrating to break through.
Affirm and its competitors have real data about their effect on retail sales. Shortly after their buy-now-pay-later service is initiated, retail sales take a jump. Although the incremental dollar amount added is often low, the annual effective interest rate is very lucrative. Lending to retail customers is a great and very profitable business. With the sales funnel provided by Amazon, Affirm will grow dramatically.
It is possible that, like so many things on Amazon, it’s an experiment. You could envision Amazon enabling other buy-now-pay-later options over time. And you could also envision Amazon providing its own buy-now-pay-later option to keep the profit for itself. If Amazon sees that large numbers of its customers are going to Affirm, it will be tempted to offer other options to consumers that benefit Amazon more. But if the sales lift from Affirm is big enough, Affirm will have some clout to push back with against Amazon making changes. All of that may happen, but for the moment it’s all Affirm’s and given Amazon’s size, it’s going to be big.
We are starting to see consolidation in the buy-now-pay-later market with the announcement of the purchase of Afterpay by Square SQ . It’s inevitable that we will see more. There is so much profitability to be had and it seems unreachable for traditional, legacy banks. The existing players are going to combine and many of those will be acquired by banks who have to find a way to break into the market. But for right now, the opportunity for Affirm is enormous and if they can keep the Amazon customer base for themselves, they are going to reap enormous benefits.
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