Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.

Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.

Affirm faced several headwinds in its fiscal second quarter, executives said on a Feb. 8 earnings call. The company lowered full-year guidance of revenue and gross merchandise value and cut its workforce by 19%. Shares plummeted by over 17% at market close Feb. 9 and dropped by another 5.98% as of 2:30 p.m. ET on Feb. 10.

The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike. In the quarter ended Dec. 31, 2022, the volume of interesting-bearing loans was nearly 3x that of interest-free loans.

"I think it's, generally speaking, reasonable to expect as the Fed rate continues to go up, or at least remains high or elevated relative to last year, to see more interest-bearing loans versus zeroes," Affirm founder and CEO Max Levchin said.

Affirm grew gross merchandise value, or GMV, by 27% and revenue by 11% year over year in its fiscal second quarter, which ended Dec. 31, 2022. In the corresponding quarter of 2021, GMV growth was 115% and revenue growth was 77%.

For the fiscal second half of 2023, which ends June 30, Affirm's guidance for revenue less transaction costs misses consensus by 22%, and its gross merchandise value guidance misses by 14%, according to Stephens analyst Vincent Caintic.

"Just for the record, this is not the growth rate that I personally like," Levchin said on the call. "We intend to grow the business faster. So the expectation of where they are now is not the expectation that I have for this business."

Shifting to interest-bearing loans

As a consumer lender without a bank charter, Affirm relies on bank partners to originate the majority of its loans. In its fiscal second quarter, which ended Dec. 31, 2022, 67% of loans originated through Affirm's platform were interest-bearing, up from 64% in the prior quarter.

In the quarter, the interest-free Pay in 4 product that makes up the company's buy-now, pay-later segment accounted for 23% of total loan volumes, up from 18% in the prior quarter. Consumers use Pay in 4 to complete a payment transaction typically in four biweekly, interest-free installments. With Pay in 4, Affirm generates revenues from merchants who pay a percentage of the value of the merchandise sold via Affirm.

With interest-bearing loans accounting for two-thirds of its total loans, Affirm is becoming more of a lender than a payments company, Stephens' Caintic wrote in a Feb. 9 research report. The annual percentage rate of those loans is potentially higher than credit cards, Caintic noted.

"Frankly, Affirm is not an 'audacious idea'; high-APR, small-dollar lending has been around for a long time, and we can think of better, profitable companies to invest in," Caintic wrote.

Headwinds from merchants, consumers

Affirm had planned to increase pricing for merchants, but the technology implementation took longer than expected, which hurt its quarterly financial results, Levchin said.

Meanwhile, consumers are pulling back from discretionary spend amid macroeconomic softening.

"Nobody knows when the trough of consumer demand has hit, but I don't feel like people are running out and buying couches all of February or all of January," Levchin said.

In addition, the exclusivity provision of Affirm's contract with e-commerce merchant Amazon.com Inc. expired Jan. 31. The merchandise volume on Amazon accounted for a little over 20% of the total, CFO Michael Linford said on the call.

"Nothing happened to our business, to Max's earlier point, on the day the contract terms turned over," Linford told analysts.