Affirm Holdings, a leader in the “buy now, pay later” (BNPL) sector, has announced its largest capital commitment through a new partnership with private credit firm Sixth Street. Sixth Street will invest $4 billion over the next three years to help Affirm scale its lending operations.
The Deal and Growth Potential
Sixth Street will provide upfront capital to Affirm, allowing it to underwrite short-term installment loans. These loans will typically last four to six months. As consumers repay the loans, the capital will be recycled to issue new loans. This could enable Affirm to lend over $20 billion during the partnership. Loan sales are set to begin in 2025, following a ramp-up period.
This deal highlights the rising influence of private credit in financing fintech platforms, as private investors seek alternatives to traditional banking systems.
Why Fintechs Turn to Private Credit
Fintech companies like buy now, pay later Affirm are turning to private credit because of its flexibility. Unlike banks, which rely on deposits to fund lending, fintech firms use diverse models. These include warehouse facilities, asset-backed securitizations, and forward flow agreements. Affirm’s deal with Sixth Street is a forward flow agreement, where Sixth Street will purchase loans issued by Affirm as consumers make purchases on platforms like Amazon and Apple. This structure offers Affirm predictable funding and gives Sixth Street exposure to the growing BNPL market.
Earlier this year, PayPal signed a similar deal with KKR to fund installment loans across Europe.
BNPL’s Growth and the Role of Banks
Private credit funds are increasingly driving BNPL growth, but traditional banks still play a role. Banks indirectly support these loans by funding private credit funds, which increases the overall funding available for installment loans.
Affirm’s funding capacity has surged to $16.8 billion as of September 30, marking a 130% increase over the past three years. This growth tracks rising demand for BNPL solutions, with Affirm’s gross merchandise volume growing by 34% in the first nine months of the year. However, growth was slower than in 2022.
Managing Loan Performance and Consumer Risk
Affirm offers credit with annual percentage rates (APRs) ranging from 0% to 36%, depending on factors like purchase amount, merchant, and borrower risk. Affirm does not charge additional fees for missed or late payments, meaning investors do not earn extra yields on overdue loans.
As of September, Affirm’s delinquency rate stood at 2.8% for loans more than 30 days overdue, reflecting the company’s strong credit risk management.
A Scalable Future for BNPL Financing
The Affirm-Sixth Street partnership is a significant development for the BNPL industry, providing scalable and flexible financing to meet growing consumer demand. With private credit firms funding innovative fintech platforms, the ecosystem is poised for further growth. The $4 billion deal strengthens Affirm’s position in the global BNPL market, while opening new opportunities for private credit investors.
