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Affirm’s CFO lays out the future of BNPL as investors start demanding profitability

September 1, 2022, 1:01 PM UTC

In 2021, buy now, pay later fintechs were on top of the world.

On its first day of trading on the Nasdaq in mid-January, shares of Affirm closed at $97.24—nearly double the Silicon Valley fintech’s $49 listing price. Klarna was boasting a nearly $46 billion valuation as the company rolled into 2022 with plans to further expand into the U.S. Earlier this year, Block dove into the space when it acquired Australian BNPL company Afterpay for $29 billion.

And then it all went sour.

By mid-March 2022, Affirm’s stock had fallen to around $26 per share. Klarna sliced its valuation to a measly $6.7 billion in July as it went back to market for more capital, and it has laid off 10% of its staffers.

“We’ve had a few years now where growth has been really heavily prioritized by investors. Now, understandably, they want to see profitability,” Sebastian Siemiatkowski, Klarna’s CEO and co-founder wrote in the quarterly report Klarna publishes.

I sat down this week with Affirm CFO Michael Linford—a few days after the company reported earnings. He expressed a similar sentiment in terms of investor expectations last year, versus this one.

“Let’s put it bluntly: The market didn’t care about profitability. We didn’t talk about profitability,” Linford tells me. “But that’s how we talked about it, versus how we actually plan and operate the business. Profitability was always the plan.”

Now that “profitability” is the word seemingly on every investor’s lips, BNPL companies find themselves in a predicament, as they are still a ways out from a positive bottom line. Klarna recently reported losses of nearly $578 million for the first six months of this year—approaching the $659 million it lost in all calendar year 2021. Affirm reported a net loss of $707.4 million for the year ending in June 2022, up from $441 million year-over-year. And yet, both companies are still reporting climbing revenue figures and growth metrics that likely would have satisfied investors just a year ago, even if pressures like rising interest rates and inflation are adding new risks.

Indeed, while Affirm’s stock may be trading at nearly 80% below its IPO share price, many analysts say Affirm is still well-positioned, though some indicate concerns over new macroeconomic pressures, including consumers’ ability to pay back loans as the economy fumbles. 

Affirm’s “messaging was mixed and did little to address skeptics focused on rising delinquencies and credit losses, in our view,” J.P. Morgan analyst Reginald Smith wrote in a note.

So what’s in store for the buy now, pay later sector? Affirm’s Linford spoke with me about how the business is doing, the impact of rising interest rates, and where the sector is headed next. Here are four takeaways from our conversation:

1. Profitability matters a lot more now than it did last year

Affirm has been planning to become profitable for a while, and its internal timeline for getting there hasn’t changed since the markets soured on the stock, according to Linford. That being said, Affirm hadn’t laid out those profitability plans publicly until earlier this year, Linford says. It hadn’t felt the need to. But market sentiment has changed since then.

“We made a commitment to get there by the end of this fiscal year, which means that we have roughly 10 more months to get there,” Linford says. “I think it is obviously difficult out there. I think most CFOs are struggling with how they manage costs in this environment.”

2. Some consumers are struggling to repay 

In the three months ending in June, more individuals were struggling to make their payments than Affirm had originally projected, Linford pointed out, indicating that there were some early signs of stress in the economy. While Linford wouldn’t specify any particular merchants or consumer sectors, he did say that individuals with lower credit scores, or those who were starting to build them, were most at-risk.

For Affirm’s business, this just means that the company will adjust its own risk models and fine tune its required payment optimizations or loan term lengths. For the broader economy, it’s an early signal of stress in the market, and could be something to monitor closely.

3. Affirm is still hiring and has no plans to lay off employees

Linford says that Affirm has “substantially added human capital to the business over the past three years” and that it still has plenty of dry powder to invest back in the business. The company is still hiring at a rapid clip, particularly in the tech and product segments of the business, though the 100% headcount growth rates from 2021 started to fall about eight months ago. 

“[We] don’t feel like we need to throttle back the staff either to hit our profitability goal or to achieve the long term goals in business,” Linford says.

4. Merchants are more willing to pay for BNPL

When the economy begins to struggle, “the cost of financing goes up in these markets—not down,” Linford says. That has translated into more lucrative relationships with merchants.

Last year, the BNPL market was so competitive that new merchants would expect to add the offerings to their sites for free or even be offered co-marketing, where parties collaborate on marketing each other’s services offerings. Now they are acknowledging they will have to pay, Linford says.

“That is a great indicator for the end market cooling a little bit, because it got so frothy with Afterpay and Klarna doing un-economic deals. And with both of them in full retreat, it has made it so that we can have a more rational conversation with merchants about the actual cost of the program.” (Spokespersons at Afterpay and Klarna declined to comment.)

Overall, Linford says he is trying not to focus on the company’s stock price too much.

“It is extremely volatile, and there’s no other way to describe it,” he says. “I think if we felt like we could control it, we would probably care, but we’re so focused on the long term.”

And now for September’s cartoon

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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