How Affirm's Cash Flow Turnaround Tests Regulatory Resilience in an AI-Driven Era

Affirm Holdings has reversed years of cash drain with a stunning operational turnaround. Annual operating cash flow surged to $450 million in 2024, a 3,595% jump from the prior year, and climbed another 88.6% year-over-year in Q1 2025 to $719 million. This contrasts sharply with the -$193 million operating cash flow recorded back in 2020, signaling a shift from survival mode to growth momentum. The company's digital commerce platform and merchant solutions-used by retailers to offer flexible payment options-have driven this recovery, with 12-month operating cash flow reaching $1.875 billion as of March 2025.

Yet the sustainability of this cash flow rebound faces a critical test. A multistate regulatory probe launched in December 2025 targets Affirm alongside five other buy-now-pay-later providers, focusing on repayment structures, billing practices, and borrower risk assessments. The investigation emerges after federal consumer protections for BNPL services were rolled back in 2024, creating uncertainty around hidden fees and debt traps. If regulators determine Affirm's models pose systemic risks, potential penalties or operational restrictions could erode profit margins and strain cash generation. For now, the company's cash trajectory remains strong, but regulatory scrutiny introduces a wildcard that could reshape its financial outlook.

Regulatory Threats: Legal Actions and Compliance Burden

New York has become the first state to impose strict licensing requirements on buy-now-pay-later services through its May 2025 BNPL Act. Affirm must now obtain authorization from the state Department of Financial Services to operate, facing significant compliance expenses and administrative burdens. The law broadly defines BNPL as closed-end credit repayable in installments for goods and services (excluding vehicles), creating ongoing operational costs as companies prepare for implementation rules that take effect 180 days after publication.

A multi-state investigation led by Connecticut Attorney General William Tong targets six major BNPL providers including Affirm, probing compliance with consumer protection laws and risks like hidden fees and debt traps. This inquiry follows the Trump Administration's rescission of a 2024 CFPB rule that had extended Truth in Lending Act protections to BNPL services, leaving regulatory gaps that states are now filling. The investigation scrutinizes repayment structures, billing practices, and how lenders assess borrowers' repayment capacity amid surging usage - particularly during holiday seasons. Litigation costs and potential penalties from this probe could erode cash flow and divert resources from growth initiatives.

The Consumer Financial Protection Bureau's transitional policy adds regulatory uncertainty. While announcing in 2024 it would not penalize BNPL providers during their transition to new credit card-like regulations, the CFPB maintains the rule requiring billing statements and charge dispute mechanisms remains in effect. This creates ongoing compliance costs as companies adapt their systems while facing industry legal challenges arguing the rule misaligns with BNPL business models. The resulting regulatory ambiguity forces Affirm to allocate capital toward compliance without clear end dates, while potential future enforcement actions represent an unresolved liability risk.

AI-Powered Growth and Merchant Expansion

Affirm's recent revenue surge owes much to its push into artificial intelligence and rapidly broadening merchant base. The company launched AdaptAI, an AI promotions platform in 2025, designed to boost checkout conversions by offering real-time, personalized financial benefits like tailored APR rates or cash savings, which internal tests showed increased conversion rates by approximately 10%. This aligns with the expansion of its merchant network, which grew 23% year-over-year to reach 358,000 active partners by Q3 2025. Merchant network revenue surged 34.3% in that same quarter, indicating the synergy between the AI tools and the larger partner ecosystem.

The strong merchant growth, driven significantly by U.S. and U.K. market expansion, has translated directly into higher revenue streams. However, the path to scaling AI benefits across the entire network remains undefined. It's unclear how quickly AdaptAI will be adopted universally or how effectively it will perform outside controlled testing environments. Furthermore, regulatory headwinds pose a tangible threat. Ongoing scrutiny and potential policy changes could complicate Affirm's operations and increase compliance costs, creating friction for its BNPL model. While the current trajectory is promising, these uncertainties highlight the need for cautious optimism as the company navigates both technological rollout and evolving legal landscapes.

Merchant Growth vs. Regulatory Uncertainty

Affirm Holdings has seen impressive merchant expansion in 2024-2025, with its active merchant base growing rapidly across both U.S. and U.K. markets. The company added 104,000 merchants between 2024 and Q3 2025, marking a 23% year-over-year increase to 358,000 merchants. This merchant network growth has translated directly into revenue, with merchant network revenues rising 34.3% in the same period. The company's GMV also grew 36% to $8.6 billion in Q3 2025, indicating strong adoption of its flexible payment solutions by merchants and consumers.

However, Affirm faces significant regulatory challenges that could impact future growth. In December 2025, Connecticut Attorney General William Tong initiated a multistate investigation targeting six major BNPL providers, including Affirm. The inquiry focuses on repayment structures, billing practices, and borrower assessment methods amid growing concerns about debt cycles and financial harm to vulnerable consumers. This regulatory scrutiny follows the Trump Administration's rescission of a 2024 CFPB rule that had extended Truth in Lending Act protections to BNPL services, creating gaps in consumer safeguards.

The regulatory investigation presents a binary risk scenario: either the company faces compliance challenges or potential penalties that could disrupt cash flows. Unlike gradual merchant growth trends, this regulatory matter represents an all-or-nothing risk that could materialize suddenly. While the merchant growth remains strong, any regulatory uncertainty could undermine investor confidence.

In this environment, investors should monitor two key thresholds closely. First, any decline in merchant growth below 20% year-over-year would signal weakening momentum in the core business. Second, any concrete regulatory action or penalty announcement would represent a material negative development requiring immediate reevaluation.

Our positioning strategy should prioritize cash preservation given the binary nature of these risks. If merchant growth slows significantly or regulatory challenges escalate, we should be prepared to reduce positions to limit exposure. The current strong merchant growth provides some buffer, but the regulatory uncertainty creates downside risk that warrants a defensive posture.