Affirm Holdings Inc. (NASDAQ: AFRM) is a fintech offering buy-now-pay-later (BNPL) options for consumers to finance their purchases, enabling merchants to generate additional sales that otherwise may not have been made. The transactions are a win-win for consumers and the merchants, while Affirm is the middleman facilitating the financing. The company is growing and working its way towards profitability. The interest rate cut cycle can further accelerate its path to profitability as the busiest time of the year approaches, the holiday shopping season.
Affirm operates in the business services sector, competing with BNPL providers like Afterpay, owned by Block Inc. (NYSE: SQ), PayPal Holdings Inc., and Sezzle Inc. (NASDAQ: SEZL). Affirm is a pioneer in the BNPL industry founded by PayPal co-founder Max Levchin.
How Interest Rate Cuts Impact Affirm
The U.S. Federal Reserve (Fed) has started its interest rate cut cycle with a 50 bps cut, with more expected on the way. This makes borrowing costs cheaper. Affirm benefits directly as it reduces its cost of capital, improving its profit margins and enabling it to offer more competitive interest rates. Interest rate cuts also stimulate consumer spending, leading to more transactions for Affirm with higher loan volumes.
However, on the flip side, it will also reduce interest income as Affirm passes on the lower interest rate to consumers, thereby reducing revenues. Affirm wouldn't be the only BNPL company benefitting as its competitors are in the same boat, which will continue to put more pressure on the company's market share and pricing.
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