By Emily Dattilo

Affirm Holdings is many things. It's known as a buy-now pay-later lender, calls itself a " the payment network that empowers consumers and helps merchants drive growth," and is dubbed "a third-party payment plan provider" by Google's AI Overview. Now, Needham analysts are wondering if should become a bank.

Analysts led by Kyle Peterson, who rate Affirm a Hold, believe the thought process is important as investors consider how the company can increase its funding quality and lower costs by obtaining a banking license.

At the moment, a sizable portion of Affirm's loans are funded on the balance sheet, which analysts estimate is a costly endeavor.

With a bank charter, the company could fund loans with bank deposits. Depending on the rate environment, analysts believe a bank deposit could cut the company's on-balance sheet funding costs in half, which would lend a healthy boost to earnings per share.

"While still early, we expect AFRM will eventually go down this path, and believe a bank license could nearly double GAAP EPS in FY27 and beyond," the analysts wrote in a January report titled 'To Bank, or Not to Bank?'

There are two ways for Affirm to get on the path. The first -- and simpler -- way, according to Needham would be to purchase a small bank that already has a full-banking license, mirroring what SoFi Technologies and LendingClub have done in the past.

"This would result in AFRM becoming a bank holding company, which would come with more regulation but the ability to offer a full suite of banking products," the analysts wrote.

The second option is for Affirm to apply for an industrial loan charter to get access to a bank license, they continued, adding that the benefit of doing so is avoiding becoming a bank holding company. That being said, that option could take longer to get regulatory approval and is more restricted in the products it could offer.

Barron's has reached out to Affirm for comment.

The banking talk is speculative at this point, but it's certainly worth thinking over. The financial sphere is a competitive one, and though most fintechs begin their journey into the financial world with grand ambitions -- vowing to be different than the institutions that have long governed the sector -- some end up more or less following in their footsteps.

Up next? Affirm is scheduled to file quarterly earnings on Feb. 6 after markets close.

Write to Emily Dattilo at emily.dattilo@dowjones.com

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January 24, 2025 13:29 ET (18:29 GMT)

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