Affirm's Valuation Risks: Merchant Concentration and UK Regulatory Headwinds

In the evolving landscape of fintech, Affirm Holdings (AFRM) has emerged as a key player in the Buy Now, Pay Later (BNPL) sector, leveraging its 0% APR installment loans and strategic partnerships to drive growth. However, as the company expands its merchant network and enters new markets, two critical valuation risks loom large: merchant concentration and regulatory challenges in the UK. These factors, while not insurmountable, could significantly impact Affirm's long-term profitability and market position.

Merchant Concentration: A Double-Edged Sword

Affirm's rapid growth in 2025 is underscored by a 30% year-over-year increase in active merchants, reaching 419,000 as of September 30, 2025, and a 42% rise in Gross Merchandise Value (GMV) to $10.8 billion in the same quarter. This expansion reflects the company's broadening ecosystem, spanning sectors like fashion, electronics, and travel. Yet, beneath these impressive figures lies a concentration risk.

Data from Affirm's Q3 2025 earnings report reveals that its top five merchants and platform partners contributed to a 41% increase in GMV. While the company has not disclosed specific revenue shares from these top merchants, its partnerships with major retailers such as Amazon, Shopify, and Costco suggest a significant reliance on a few key players. This concentration, while beneficial in the short term, exposes Affirm to potential volatility. For instance, the loss of Walmart-a longstanding partner-as it shifted to Klarna's BNPL services, highlights the fragility of such dependencies.

Seeking Alpha analysts caution that merchant concentration could lead to a 30% downside in Affirm's valuation if key partnerships falter or if merchants shift to competitors. The company's recent expansion into the Canadian market through partnerships with Williams-Sonoma and KAYAK may mitigate some of these risks, but the core challenge remains: a small number of merchants disproportionately drive revenue growth.

UK Regulatory Challenges: Compliance Costs and Strategic Reckoning

Affirm's foray into the UK market, while strategically sound, is fraught with regulatory hurdles. The UK's Financial Conduct Authority (FCA) has introduced stringent rules for BNPL providers, including mandatory affordability checks and enhanced transparency in terms and conditions. These requirements aim to protect consumers but come at a cost.

According to a report by TheCityUK and PwC UK, the annual compliance costs for UK financial services firms in 2025 exceed £33.9 billion, representing over 13% of average operating expenses. While Affirm has proactively secured FCA authorization and eliminated hidden fees-a move that aligns with regulatory expectations-its compliance expenses are likely to rise in tandem with the sector's broader challenges. The report notes that 84% of firms have seen compliance costs increase over the past five years, with UK compliance costs often outpacing those in other jurisdictions (according to The Payments Association).

Affirm's UK operations, which include partnerships with international retailers, are part of its broader BNPL strategy. However, the company's Q3 2025 earnings call transcript suggests a cautious outlook, with management projecting GMV growth to moderate to 34% in the next quarter. This moderation may reflect the anticipated drag from compliance costs, which could strain margins and dilute the returns from international expansion.

Valuation Implications: Balancing Growth and Risk

Affirm's valuation hinges on its ability to sustain high GMV growth while managing these risks. The company's 36% year-over-year revenue increase in Q3 2025, driven by interest income and card adoption, is commendable. Yet, the Seeking Alpha analysis underscores that merchant concentration and UK compliance costs could cap growth at 15% by Q3 2026, far below the 23% sell-side consensus.

For investors, the key question is whether Affirm can diversify its merchant base and scale its UK operations without sacrificing profitability. The company's proactive approach to regulatory compliance and its focus on partnerships with platforms like Shopify offer some optimism. However, the loss of Walmart and the rising compliance burden in the UK suggest that Affirm's path to sustainable growth is not without obstacles.

Conclusion

Affirm's valuation risks are multifaceted, rooted in both operational and regulatory dynamics. Merchant concentration, while a driver of short-term growth, introduces vulnerabilities that could undermine long-term stability. Meanwhile, the UK's regulatory environment, though aligned with consumer protection goals, imposes significant compliance costs that may constrain profitability. For Affirm to justify its current valuation, it must demonstrate resilience in diversifying its merchant ecosystem and navigating the UK's regulatory landscape efficiently. Until then, these risks warrant close scrutiny by investors.