Affirm's Pivot to Transaction Volume: Navigating the BNPL Crossroads

The buy-now, pay-later (BNPL) space is in the throes of a reckoning. Once fueled by easy credit and low interest rates, the sector now faces headwinds from rising borrowing costs, regulatory scrutiny, and intensifying competition. For Affirm (AFRM), the company founded by PayPal's “PayPal Mafia” alumnus, Anthony Shih, survival hinges on its ability to evolve beyond its traditional revenue streams.

In a high-interest-rate environment, Affirm's strategy has shifted: it is leaning into transaction volume while diversifying its revenue mix. The move reflects a broader pivot across the BNPL industry, where companies are rethinking reliance on interest income and turning toward fees tied to transaction volume—a trend that could redefine winners and losers in the space.

The Revenue Dilemma: Interest vs. Transactions

Affirm's financials for Q2 2025 reveal a company in transition. Total revenue surged 47% year-over-year to $866 million, driven by a 35% jump in gross merchandise volume (GMV) to $10.1 billion. However, the company's reliance on interest-based revenue—long its primary profit engine—is waning.

While fiscal 2024 saw interest income grow 76% to $1.204 billion, quarterly growth slowed to 42% in the final quarter of 2024. This deceleration mirrors broader macroeconomic pressures: lower interest rates and a strategic shift toward interest-bearing loans (which generate stable revenue but lower margins) have tempered gains.

Meanwhile, transaction-based revenue streams—primarily merchant fees—have stepped into the spotlight. Merchant fees rose 33% in fiscal 2024 to $675 million, fueled by a 21% increase in active merchants and a 25% expansion in high-value partnerships. The merchant discount rate (MDR) structure, which varies by loan type, has become a key lever. Zero-interest loans (Core 0% Long) carry higher MDRs (12.5%-13%), while interest-bearing loans (Core IB) operate at 2.5%-2%, balancing risk and merchant appeal.

The Customer Retention Play: Cards, Partnerships, and Liquidity

Affirm's survival strategy extends beyond financial engineering. Its Affirm Card, a credit card tied to its ecosystem, has become a retention powerhouse. Active users rose 23% to 21 million, with 1.7 million holding the card—a 136% surge. The card's success lies in its dual role: it drives transaction volume through everyday purchases while embedding Affirm deeper into consumer financial habits.

Partnerships with retailers like Shopify and Apple Pay have also amplified GMV. Even the loss of Walmart—a major client—hasn't derailed Affirm's progress, as the retailer accounted for just 2% of revenue. This highlights the company's ability to pivot partnerships while expanding its footprint.

Affirm's liquidity ($22.6 billion) and improved margins—RLTC (Revenue less Transaction Costs) hit 4.1%, exceeding its 3%-4% target—suggest it can weather near-term storms. Yet challenges loom.

The Crossroads: Growth vs. Profitability

Despite these strengths, Affirm faces headwinds. GMV growth slowed to 30% in 2024, down from previous highs, signaling potential market saturation. Active user growth dipped below 20%, and competition is escalating. Klarna, now controlling 29% of the global BNPL market, and PayPal's foray into the space are pressuring margins.

The Walmart exit, while small in revenue terms, underscores the risks of over-reliance on any single partner. Affirm's response—focusing on high-value merchants and expanding into new markets like the UK—aims to mitigate this exposure.

The Investment Case: A Hold with Upside

Affirm's pivot is compelling but not without risks. Analysts project a $43 per share target (up from its current ~$28) based on a forward EV/Sales multiple of 7, assuming it can sustain 2025 revenue of $3.13 billion–$3.19 billion. However, execution remains critical.

Investors should weigh two factors:
1. Transaction Volume Momentum: If Affirm can sustain GMV growth above 30% while expanding its cardholder base, its valuation could stabilize.
2. Margin Resilience: The RLTC margin's 4.1% is a positive sign, but Affirm must prove it can defend margins against rising costs and competition.

Conclusion: A Company Betting on Its Ecosystem

Affirm's survival strategy is a gamble on its ability to build an enduring ecosystem—one where transaction fees and card usage offset declining interest revenue. The company's liquidity and tech-driven risk management (delinquency rates remain a low 2.4%) offer a buffer. Yet investors must decide whether Affirm's vision of a transaction-driven BNPL leader can outpace the industry's growing pains.

For now, Affirm remains a hold, with upside potential if it can maintain momentum in its merchant and card initiatives. The BNPL race is far from over, but Affirm's pivot to volume may just be its best shot at staying in it.