Some thoughts on UPST vs AFRM

On one hand, we have Upstart. Everything is focused on the end consumer. We have a customer who needs access to credit. Either to consolidate loans and debit/credit cards. Or cover unexpected expenses like medical bills, pay for home improvements, finance a wedding, etc.

Upstart’s only job is to assess the risk. Upstart doesn’t need cash to underwrite (approve/disapprove) the loan. All it needs is the technology and the personnel to keep feeding their AI/ML models to learn and improve. Underwriting a loan simply means giving a yes or no answer. The client then gets the loan from a bank/credit union that works with Upstart. Now Upstart makes money by taking a % from the transaction as well as a servicing fee along the way.

On the other hand, we have Affirm. Here, of course, once again we have the end consumer in mind who essentially needs access to credit too. The customer here wants the cash for purchases online (buy now) that is willing to give back plus the interest (pay later). Here, the end consumer is not the only variable in the equation. Here we have the merchant too. You see Affirm doesn’t only sell to the end consumer. But by selling to merchants too. By implementing Affirms BNPL function on any platform, merchants pay a % to affirm for taking the risk and providing their service.

Affirm’s job is to take the risk. Affirm says yes or no to clients who wish to use the BNPL feature and charges the merchant a % of the sale right at the spot. And then makes back a portion of the interest earned through the loan given to the end consumer. But in reality, the client doesn’t take on the loan. Affirm does that. That’s why Affirm needs to pay the bank a fee for servicing the loan as well as a % when originating the loan in the first place. So, you could say that Affirm is like the customer of Upstart who needs access to credit. Affirm then goes on and pays the merchant the amount for the sale minus its % fee as explained.

So put simply, Affirm acts as the client of the merchants. The actual client never paid the merchant a penny. So, it’s like opening a business and having a person (third party) standing outside telling people come on in buy this for free today and you can pay me (not the actual business owner) later with a small interest. This person then goes around forming good relationships with other business owners telling them that I can bring in a lot more customers just by allowing me to take on the risk. You as the merchant will get your money no matter what. Even if the client doesn’t pay me back. I’ll cover that too.,q_auto:good,fl_p…

On the one end we have banks/loan originators (risk takers) and on the other end the underwriters (risk evaluators). Affirm is the former and Upstart the latter. In the middle lies the end consumer. The end consumer of Upstart however doesn’t pay back Upstart but the loan originator instead. Upstart’s money will come from the bank/credit union as a thank you for giving the ok for this client. If the client doesn’t pay back the bank Upstart doesn’t need to pay anything back. The end consumer of Affirm pays back Affirm itself because the loan is on Affirm and not them.

So, the customer of Upstart is essentially the banks and credit unions of the world. Because they sell all loans back to them or to institutional investors. They take nothing on their books. Once the loan is approved their job is done and they won’t see a penny from the person using the loan. You could think of Upstart as a sieve that filters potential customers for lenders.

Thus, Affirm is first and foremost a company that makes money from loans, followed closely by the money they are able to extract from merchants from both transactions and interchange fees. Upstart is solely a technology company.

I like to go over the social media (especially IG) of the companies I follow to get a sense as a customer of what they are trying to put out. Upstart appears as the company that wants people to get their finances right by giving out financial self-improvement tips regularly. You can see lots of examples here

This might appear counterproductive since most credit companies don’t care about the borrower’s habits when it comes to finances since they make money by taking advantage of the lack of it. Upstart’s theme appears to speak to the logical part of humans. How to be better financially, save on your interest rates, create a budget, assess your income and spending, make your home efficient, etc.

Affirm, on the other hand, shows a different story. The theme here is a bit more celebrating, colorful, and shows lots of people taking trips, adventures, enjoying new clothes and buying stuff with the motto of buy now and pay over time. I guess the whole point of Affirm is to help people buy what they want now and split the cost along the way thus taking action today rather than having to save first and pay upfront the whole amount.

You could say that Upstart focuses on more important decisions with a higher borrowing amount whereas Affirm enables smaller-amount purchases. Personally, if I could get a cheap BNPL deal (0-2%) on any amount I’d take it every time. Similarly, I simply wouldn’t if the cost was too high (10%+). It seems that a lot of people disagree hence Affirm and several other similar companies exist.