By Tanaya Macheel
Affirm is making good on its commitment to become a full-service bank. The lending startup led by PayPal co-founder Max Levchin is introducing no-free savings accounts through a bank partner, initially with a 2 percent annual interest rate and no minimum balance, Cheddar has learned.
"As part of making good on our mission to provide honest financial products that improve lives, Affirm is constantly exploring ways to test and pilot new features and offerings," Levchin told Cheddar in an emailed statement. "Based on user feedback and strong consumer interest, we’re working on a pilot that gives existing Affirm users the ability to put money into a savings account via our app. We are taking a thoughtful approach and are excited to get user feedback on the experience when the time is right."
The savings account will be a pilot Affirm plans to roll out within the first quarter, according to a company spokeswoman, who emphasized it is still finalizing details of the offering in an effort to comply with regulators.
"Our plan is to offer you access to a fee-free savings account ... The funds will belong to you, and we won't have ownership of your account. There's always a chance that the planned features or interest rate may change," Affirm says in the app.
Affirm belongs to a young class of point-of-sale finance companies that also includes Klarna, Bread, and Vyze. They issue small loans with short-term repayment plans of three, six, or 12 months and full price transparency with rates up to 30 percent. In a departure from how credit is typically underwritten, Affirm sees every transaction — who is buying, what they’re buying, and where — and underwrites them separately. When banks issue loans or credit lines, they typically don’t know exactly how borrowers are spending the money from the loan.
High-yield savings accounts could become the next go-to customer acquisition strategy for consumer-facing fintech startups, which have long struggled to scale their businesses without the sizable customer base of the legacy banks whose financial products they seek to innovate. A rate of 3 percent or even 2 percent is an attractive offer to many compared to the rates of the top four U.S. banks: Chase (0.04 percent as of Jan. 9), Citi (0.04 percent), Wells Fargo (0.01 percent), and Bank of America (0.06 percent).
In the last year, Simple ー one of the original neobanks whose brand seemed to disappear for a couple years before re-emerging in an ad campaign last year — began offering a 2.02 percent interest rate on money put toward their savings goals. Robinhood, on the other hand, a younger brand and a better-known name, made a splashy announcement last month that it would introduce a savings account with a 3 percent interest rate, which is 30 times greater than the national average. (Almost immediately, regulators flagged concerns with the product’s marketing. Robinhood is currently working on a revamped “cash management” program.) The trend began when Marcus by Goldman Sachs launched its high-yield savings account in 2016. Marcus has raised its rate at least five times in 2018; it currently stands at 2.25 percent.
But the high-yield savings trend is part of a much larger trend: deposit displacement. Fintech companies have long maintained they’re best positioned as partners to incumbent banks ー customers often link their bank account information to use fintech products like Robinhood, Affirm, Venmo, Coinbase — or even non-fintech companies, like the Starbucks app. Increasingly, thanks to apps like Starbucks’, customers now let their cash sit inside those various apps rather than in their bank account.
To date, Square, Venmo, Acorns, SoFi, and Stash have enabled customers to deposit cash into their accounts and spend that cash with a physical debit card (another fintech marketing trend). As a lender, Affirm will most resemble a digital bank when it launches its savings account; if Affirm is successful, it will give the company more deposits to lend out in loans, to earn more interest income.
In the past, Affirm’s business model focused on partnering with online retailers that would advertise the startup as a payment option on their homepages, product pages, and checkout pages. Now the company is done playing in the shadows and appears ready to grow its direct-to-consumer mobile app, which lets users check for prequalified loan offers and create digital credit cards for purchases online or in-store. It also has a merchant discovery shopping tool that shows partner merchants and reveals which of them offer zero percent interest purchasing options.
Affirm has raised a total of $450 million in funding over six rounds, the most recent being a Series E of $200 million in December 2017 that valued the company at almost $2 billion.