Today, we will dive deep into the much-talked-about Shopify-Affirm deal from the POS financing world.
What is the story?
The e-commerce giant Shopify, named Affirm, a credit card alternative startup as its exclusive partner to power installment payments across Shopify’s U.S. storefronts. The deal comes as the latest addition in the race to rule buy now, pay later (BNPL) payment option. Before we get into the nitty-gritty of the deal, let us take a look at how the integration will work for both the companies.
After this deal, Affirm’s BNPL financing solution will be made available to eligible Shopify merchants in the U.S. who want to offer this flexible payment option to their customers. At checkout, customers will be able to split their total purchase amount into four equal, bi-weekly, interest-free payments. Over and above this, eligible U.S. Shopify merchants who elect to offer BNPL installments to their customers will not have to worry about collecting future payments from customers as Affirm will handle payment collection.
Shopify Affirm deal — its meaning for both?
At a time when the world is hit by a pandemic, the distinguishable thing about this deal is its impeccable timing, which makes it indispensable in bolstering the growth plans of both the companies.
We know COVID-19 still has businesses and consumers isolated in their homes, meaning many are making purchases online out of necessity. It wouldn’t be wrong to say that the pandemic has completely changed the shopping habits.
Afterpay1, a global provider of bnpl payment solutions added over 1.6 million new U.S. users since March 2020. Affirm2 founder Max Levchin recently informed that the demand at Affirm as nearly quadrupled during the pandemic. Splitit3, a bnpl provider processed over $65 million in merchant sales volume in Q2 2020, skyrocketing 260 percent year-over-year and 176 percent compared with the previous quarter.
After the pandemic -induced recession, shoppers are now looking for BNPL options. With increasing financial uncertainty and historically high unemployment numbers, providing customers with flexibility in terms of payments and financing is a strategy that will help Shopify and Affirm in their growth plans.
Now let’s see what this deal individually means for both companies.
For Affirm –
Affirm already had 6,000+ U.S. merchants before partnering with Shopify. But as Shopify’s sole BNPL provider, Affirm’s access to online shoppers will exponentially increase as 52 percent of Shopify’s 1+ million merchants are U.S.-based.
For Shopify –
Firstly, Shopify’s volumes continue to benefit from merchants racing to launch online stores in the wake of brick-and-mortar shutdowns. There is a potential for Shopify to make a mark here.
Secondly, in a quest to stay ahead of its competition, this deal could do what’s needed. Shopify’s aggregated online sales of its U.S. customers rank second to Amazon’s. And, recently Shopify’s rival BigCommerce also filed for an IPO. With this deal, Shopify plans to take on both the rivals.
Things to watch out for
Now that we have understood the deal and the benefits it is going to reap for both the companies, we certainly have something else to watch out for in the near future.
Rivals to look for other bnpl options
First and foremost, the rivals will be looking out for other payment options. Why do I say so? Shopify has around 30 percent of total market share for U.S. e-commerce storefronts platforms. And, now that Affirm has Shopify’s U.S. stores cornered, we will see rivals racing for exclusive deals with other e-commerce companies. So other BNPL services will lookout to grab a slice from the remaining 70 percent of the pie.
Small businesses to reinvent
The pandemic has created more awareness of installment payments. BNPL’s ability to cut immediate costs interests customers, and also offers a helping hand to the intensified financial pressure they might be facing as a result of the pandemic. Such a scenario presents an opportunity for small businesses to reinvent themselves to sustain in the market and build trust and longer-lasting relationships.
BNPL’s rise and credit’s fall?
Recently, Levchin said, “the age of credit cards is rapidly coming to— I wouldn’t call it an end, but a viable alternative in the buy-now-pay-later tools that are built around transparency, clarity, and simplicity.”
It is no surprise that the pandemic may have accelerated customer abandonment of established payment methods, such as credit cards.
The reason being younger consumers often earn lower incomes and have fewer savings than the older generation. They may have also been among the most impacted by credit card debt and fees during the COVID-19 pandemic. One recent survey shows about one in every three millennials (34 percent) — have added to their credit card debt since the pandemic’s onset. These consumers, many of whom are already dealing with student loan bills and other sources of high-interest debt, have a historic distrust for credit.
In a country where millennials account for the greatest share (around 22 percent) of the U.S population, a viable alternative that can prove that consumers’ responsible use of installment payments can help them afford what they need without the pressure of accruing more debt is sure to increase the adoption of BNPL.
1The New Daily: Afterpay breaks records as COVID pandemic reshapes shopping habits
2Bloomberg: Shopify Teams Up With PayPal Co-Founder in Battle With Amazon
3Business Insider: Splitit is quickly adding new customers and merchants thanks to the coronavirus pandemic