Ladies and gentlemen, the program is about to begin. Reminder that you can submit questions at any time via the Ask Questions tab on the webcast page. At this time, it is my pleasure to turn the program over to your host, Jason Kupferberg. You may begin.
Thank you everyone for joining us here at the 11:15 A.M. session at day two of our virtual electronic payment symposium. I'm Jason Kupferberg, the Payments Processors & IT Services analyst here, and we are very happy to again have with us management of Affirm. We have Rob O'Hare here, who is the SVP of finance, really excited to get into a whole bunch of different lines of conversation. Rob, we appreciate you taking the time we'll start the same place we're starting with pretty much everybody during the conference. Just talk about where you may or may not have any exposures to some of the bank failures out there. I mean, you guys actually were all on top of this right away.
You had a press release out about Silicon Valley Bank, you know, right when they failed, saying they were not a partner of yours. If you can just talk through some of the pieces. Obviously, there's been some other developments since Silicon Valley, that we can have an understanding there.
Yeah. Thanks, Jason, and really appreciate you and the team having us here today.
Sure.
Yeah, in terms of our exposure, you know, we were pretty proactive in terms of getting a press release out, I think the Friday after the SVB news broke, just sort of making it clear to investors and interested folks that, you know, we don't have any exposure to SVB. Same is true with First Republic. I mean, we tend to hold all of our cash at a very large money center bank, not one that seems to be in the fray, in terms of the liquidity issues that are going on. We do though, you know, we do have a wholesale funded business and so, we work with a variety of financing partners, and we also have originating banks that actually originate loans on behalf of Affirm.
You know, we don't think that there's any liquidity issues for our originating bank partners. We intentionally have more than one bank partner, such that that creates, you know, the ability to diversify and it's a risk management approach that we've had in place for several years now. On the funding side, you know, we have committed warehouse facilities from, you know, large money center banks. Those have, you know, expirations that are laddered out across several years, and we don't see any risk today with any of those facilities, either in terms of their normal course operating, nor do we see any risk of being able to renew those facilities down the road.
You know, obviously, we try to cultivate strong relationships there and make sure that our partners understand the risk management approach that we take to underwriting our loans and making sure that we're putting, you know, good assets into those facilities to de-risk renewals. On the, you know, the other sort of area that that's probably relevant to the conversation is just our forward flow for our wholesale loan sale program. We don't see any risk with any of the partners. I mean, we have two-year, typically two-year committed relationships with those loan buying partners. There are some banks that are in that ecosystem for us, but we have good relationships there and, you know, the banks are not the majority of the funding partners.
We also work with insurance companies, asset managers, and then large pension funds like CPPIB. Right now we feel good about the funding ecosystem at large and haven't had any sort of liquidity issues across the partner landscape.
Okay. everything's kind of flowing properly, if you will?
Yeah. I mean, again, it's obviously, a volatile time-
Business as usual.
Yeah, we feel good about the roster of counterparties and partners that we have today.
Like you said, I mean, you guys have always pursued a strategy of diversification. It seems to be especially pronounced on the funding side. Maybe on the loan side, the origination side, it's a little more concentrated. I mean, do you rethink any of that just in terms of broadening out the partner set and origination potentially?
Yeah. We have a handful of conversations and really integration work underway to continue to diversify on the originating bank side. Just to be maybe a bit more specific about our originating partners 'cause those names are all public and in our filings. Historically, Cross River Bank has been our originating partner. Cross River Bank is located in New Jersey, and as a result, they have a 30% APR cap. One of the big initiatives that we have underway at the company is moving to a 36% APR cap for our interest-bearing loans, and that meant bringing on a new bank partner because Cross River could not originate 36% loans.
We diversified to a bank called Celtic Bank, which is based in Utah and isn't subject to the New Jersey rate cap. You know, as we look out ahead, we're looking to bring on some additional partners that can support our 36% interest-bearing program. We'll have a diversity of partners, we hope, by, you know, the end of this calendar year, certainly.
Okay. Okay. Okay. It kinda worked out that you've got some of this added diversification coming in. You know, you were working on that even before this regional banking crisis. Okay. That's good. That's good color. I guess just on a related note, I mean, you know, you're seeing all this daily transactional activity over your platform. I mean, over the past couple of weeks since some of these bank failures started, like, any noticeable, like, change in trajectory of spending, you know, trend lines or anything like that?
No, I mean, we do look at daily volumes, of course. I mean, it's been too early to see a real trend line. I mean, we've seen, you would've seen this in the December results, but we've seen strength in travel, and that's continued. You know, it's a seasonally strong period for travel for us and for the industry. That's continued, but no, really nothing to call out in terms of, you know, near-term changes post the SVB news.
Okay. Okay. That's good to hear. For what it's worth, very consistent with what we've heard from others. The more companies that are telling us that, I guess the more reassuring it seems to be, and hopefully it stays that way. All right, let's move off of the crisis and into some other topics here. I think one of the sort of fascinating dynamics at Affirm in the past, you know, couple of years is that there's just been these massive shifts in your GMV mix. I mean, you know, Peloton peaked, I think it was roughly a third of your volume. That was, I guess, kind of in the throes of COVID, maybe around the middle of 2020. It's down to, like, 2% of GMV now.
You know, Amazon, you didn't even have as a customer until the calendar fourth quarter of 2021, I think you had half of that quarter. Now it's at 23% of your GMV. And so that's obviously driven a lot of, you know, mix shift in terms of, you know, 0% APR, you know, versus interest-bearing. Just talk about what some of the implications of these big swings have been for your financial profile, because I think this is something that, you know, the investment community kind of didn't appreciate.
Yeah.
-fully as it was happening. You know, it kinda caused some surprises along the way in some of the key financial metrics that folks monitor for you guys.
Yeah, that's right, thanks for the question. Yeah, you know, in terms of the mix, from 0% to interest-bearing, I think one thing that we haven't done a great job of articulating is actually that the fact that interest-bearing loans are our most profitable loan product. You know, I'll talk through some of the timing dynamics that happen with an interest-bearing loan. There's also, you didn't ask this in your question, but I think there's also a dynamic around how we're utilizing our balance sheet and the proportion of loans that we're carrying to maturity versus, you know, selling pretty soon after origination. That's a big dynamic as well in terms of the economics. You know, full stop, interest-bearing loans are our most profitable loan product.
In terms of, you know, the profitability of the portfolio, it's actually a positive thing for us, right, to mix into interest-bearing and to mix out of 0%. You know, just to address the Peloton concentration, I mean, they're a great partner of ours. They've been a long-term partner of ours, and we hope that continues, you know, into the foreseeable future. You know, when they were a third of our volume, we obviously were over-indexing in terms of their share of e-commerce, right? There was concentration there. It was a committed long-term relationship, contractual relationship. You know, as you look at e-commerce at large, Peloton is not a third of e-commerce. Yes, they were definitely over-indexing for us.
We're proud of what we were able to do to support that program, but probably a little too heavy on Peloton when they were at their peak. You know, I think, I think the opposite is true actually for Amazon, right? I mean, Amazon is roughly a third of U.S. e-commerce. Because we're driving for ubiquity across a variety of merchants, I mean, it makes sense for Amazon to be a large percentage of our business because at the end of the day, we wanna be everywhere that people are shopping, not only in e-commerce, but also offline as well. You know, it makes sense for Amazon to be a large partner, and we're really proud of the work that we've done to scale that program.
Then in terms of, like, what that all means for, you know, the P&L, you know, I think the differences really are all around timing of sort of revenue and expense recognition. When Peloton was as large as it was with a 0% interest loan, the only way that Affirm is making money is through the merchant side of the transaction. We were collecting a pretty healthy merchant discount rate or an MDR at the time of the transaction. We recognized all of that MDR upfront and in the period that the GMV is originated. The large majority of our Peloton volume was actually being sold to third-party loan buyers. There wasn't any...
When we sell a loan, we don't book a provision for consumer credit losses. There was no. That tends to be our largest expense on the transaction cost side for a given loan. We didn't have the expense. We were collecting a big merchant fee upfront or a, you know, healthy merchant fee upfront at least. So, you know, you were really just sort of booking income almost immediately into the P&L. You know, with our interest-bearing program with Amazon, for example, but it's indicative of our other merchant relationships too, the MDR maybe will be significantly less than the MDR that you would see on a long-term, 0% APR program like Peloton, right?
The amount of income that comes into the period of origination is significantly less. The majority of the income that we make from an interest-bearing loan is if we're holding that loan to maturity, which we are doing a bit more in today's environment, the income is gonna come over the lifetime of the loan, right? We're gonna recognize the interest income ratably, you know, as the loan is paid off. While, as I said, while interest-bearing is a very profitable program for us, it'll just take longer for that income to come into the P&L and show up as revenue and transaction profit.
Okay. Right. Hopefully at this point, there's been a little bit more normalization now, right? I mean, Peloton's not gonna go back to being a third of your volume.
Right.
You know, Amazon will probably, you know, go up from here, but it's not like it's gonna, you know, fluctuate dramatically. That's, that's helpful. If we reflect on this past quarter of financial results, I mean, I guess, like, our overarching takeaway was there were some signs of, you know, for lack of a better term, some trade-off between growth and risk at Affirm. Credit metrics clearly remained impressive and under control, but the top line was below expectations. Maybe you can just touch on how Affirm's strategy has kind of evolved in this regard, you know, again, these trade-offs with growth and risk, just as the U.S. economy has gone into a more volatile period, you know, with spikes in interest rates and inflation.
I mean, I think the... You know, we are in a volatile environment, and that volatility has meant a lot of different things. We've seen pockets of stress with consumers towards the lower end of the credit spectrum, right? That's something that started to show up in our data, you know, roughly a year ago and something that we've been able to manage through optimizing our approach to underwriting. That doesn't always mean saying no to a consumer. It may just mean that we put a different type of offer in front of them. It may mean that we ask them for a down payment at the point of sale rather than allowing them to finance the entirety of the purchase.
There's lots of things that we can do to sort of optimize and take risk and take other costs out of the stack for us. You know, the volatility has also meant that, you know, it was a pretty unprecedented year for interest rates in 2022. That meant that the yields that our loan buyers, our third-party loan buyers within our forward flow program, the yields that they were solving for, were increasing, you know, throughout the calendar year. In order to make sure that they were making their returns, we also had to take, you know, like I said, other costs out of the system.
tightening credit, making sure that we were optimizing credit as tightly as we could, that really was sort of job one for us because being able to fund the business at scale, being able to sort of continue to grow programs like Shopify and Amazon in the ways that we have, I mean, that's really where we're focused and we have to. You know, our loan buyers have to know that we're gonna do the right things to protect their yields. yeah, that, you know, all of that resulted in slightly less GMV growth than we had guided to. I think we missed the low end by 1% and the high end by 3%.
We're hopefully building a generational business here, and blips like that, you know, won't matter in the long run. Yeah, when forced with a decision point, you know, we're gonna do what we can to protect the unit-level economics in our loans and that should give us, you know, a durable way to fund the business throughout the cycle and at scale.
Yeah. I think you guys have been very consistent with that messaging. You know, I know that Max and Michael and yourself have said for a while that you can control the credit outcomes, right? I think, you know, recent results would kind of bear that out. Maybe you can just talk a bit about what really differentiates your credit models versus not just other BNPL providers or more traditional credit card issuers, and then talk about how loan approval rates have trended as we've gone through this more volatile part of the economic cycle.
I mean, you know, I think it's important just to set the backdrop that Affirm really started in what we call the higher average order value or AOV, the higher AOV end of the spectrum, more of the sort of multi-thousand dollar Peloton-type loans than the Pay in 4 side of the world that is probably clustered, you know, under $250. I think by starting with higher ticket items, typically those goods get financed over longer terms. There's obviously risk the longer that you're extending credit.
Because I think we started in what I would consider the hardest part of consumer unsecured lending, within buy now, pay later, at least, you know, I think risk management and underwriting has always been integral to sort of the company's DNA. I mean, in fact, one of the original ideas for Affirm was actually just to build a credit score that they would then sell to other lenders, right? It, it really I think speaks to sort of the DNA of the company and, it's a huge point of emphasis for us internally. We pay a lot of attention to it. We care a lot about it, and we think it's one of the ways that we build a moat to make sure that we have durable funding, right?
We think that we can do a really good job of sorting risk and driving visibility and predictability into our results. You know, I think that sort of culture of risk management is hard to overstate. From there, I think relative to, like, a credit card provider, as you mentioned, I think we have a structural advantage in that. We're underwriting every single transaction every single time, right? We're not issuing a multi-year line of credit to a consumer and then hoping that that consumer, you know, maintains their job and can pay us back at any point in time over the next, you know, three to five years. We're looking at a transaction.
Our average loan is, you know, roughly 1 year long, but it pays back really quickly, so the weighted average life is closer to 5 months. We just don't have capital at risk for as long as a credit card line of credit would be outstanding. We're re-underwriting the consumer every single time. We get lots of at-bats and as things change with consumers, we're able to sort of, you know, course correct and make sure that we're issuing the right amount to the consumer at the right time. I think those points are really important. The other point that's important is that, you know, an increasing % of our transactions are coming from consumers that we've already worked with, right?
The amount of sort of risk and the amount of credit losses that are in a consumer's second, third, fourth loan, it falls off really quickly. That naturally helps take risk out of the system for us too, just by partnering with consumers that we already know. We're still doing the underwriting, right? It's sort of a trust but verify approach. Just working with consumers that we've already, touched one, two, three times in the past, that's a structural advantage too. That one, you know, there's a bit of a flywheel there as we broaden our distribution across an increasing proportion of e-commerce.
Just any directional commentary on the trend in loan approval rates, let's say, over the last few quarters?
Yeah. You know, I think, we get that question a lot. I mean, I think the approval, as I referred to earlier, it's maybe a little less binary than I think folks think. Again, you know, it may be that we can't finance the entire $1,000 purchase for a consumer, but maybe we can finance $800. It's, it's really not necessarily just around saying yes or no, or is this a good credit or a bad credit? It, it's about are we being compensated properly for, the risk? You know, at the end of the day, we're selling conversion to our merchants, and so we wanna find ways to say yes.
I think, you know, part of the elegance in the Affirm model is that we have a range of interest rates we can put in front of the consumer. If we need to increase rates, you know, being able to go to a 36% cap can help us say yes more. It can help us underwrite more deeply than we would've been able to do six months ago. And, you know, increasing down payments, things like that, can help us say yes as well. Approval rates have actually been, you know, on a program-by-program basis, actually pretty constant, despite the fact that we have, we have tightened and we have found ways to take some of the risk out of the ecosystem.
Okay. I also wanted to come back to, you had alluded earlier to some of the initiatives around moving from 30% APR to 36%. I think as part of that, maybe you guys had talked about, you know, adjusting some of the terms, the duration of those loans. Just wondering, like, you know, how's that going so far, I guess? How's that being received in the market? Is it having any appreciable impact on demand? Or have these strategies essentially, you know, passed through to the consumer with kind of minimal friction at this point?
Yeah. I mean, Affirm has a couple different product offerings, as you know. You know, one of the product offerings is a product called Affirm Anywhere, which is really our direct-to-consumer lending. Typically, those loans are issued to consumers that have already worked with Affirm once or twice. We were able to test the elasticity of increasing APRs over the course of last summer. What we saw was that really it didn't have any impact on what we call take-up, right? The consumers were just as likely to accept a 36% APR loan as they were a 30% APR loan.
I mean, if you sort of run the math on our average order value is about $300, and you look at, you know, a 12-month loan, I think you're talking about, like, $0.75 a month in terms of increased payment as you go from 30 to 36. While it is, you know, there is some additional cost there, it's not enough to see a headwind on the take-up side. We feel good that, you know, the product can work at 36%, work for us and work for consumers and for merchants. You know, we said, I think in the most recent shareholder letter that we were at about 23% of our interest-bearing program had a 36% rate cap.
Obviously, there's some large merchants in our ecosystem that are running primarily interest-bearing programs. Discussions with that group has continued into this quarter. Nothing to announce here, but we feel like those conversations have been really constructive. I think in some cases you may be able to go to some of our marquee merchant sites and see a 36% offer today. You know, that's a positive. Again, we don't think this is gonna impact take-up or the trajectory of growth. What we think it'll do is it'll put more economics into the loans, that'll allow us to sort of keep some for ourself or underwrite more deeply or make sure that we're sort of keeping healthy relationships with our loan buyers as well.
I think all good things from our perspective.
Okay. It sounds like there's a path for that 23% to probably just go up naturally as you roll it out to a broader swath of consumers and merchants.
Yeah. I mean, we gave it a lot of airtime in the Q2 note.
Yeah.
It's been a big point of focus for us. There's just some sort of normal operational friction to
Right.
to get that rolled out en masse. We're definitely heads down on the project and, you know, have a good trajectory there.
What about the parallel effort to kind of get MDRs, you know, higher at certain merchants? Maybe you can tell us a little bit about how far along you are in that process and, you know, which types of merchants are those initiatives mostly concentrated with.
Yeah. I mean, you know, We have a slide deck in our earnings supplement that sort of shows the merchant rates by loan product. What you'll see, and I think it makes intuitive sense, is that 0% APRs tend to have the highest merchant fees because that's the only way that Affirm is making money in that transaction. The longer you go out from a time perspective, right, there's increased fees, you know, for those loans as well. I mean, one of the bigger things that we've been doing actually is moving some of our entirely 0% programs to be what we call fixed APR programs.
An example would be, maybe a year or two ago, we had all 0% offerings to the consumer at a given merchant. It may make sense in this environment to have a consumer interest rate that's 4.99 or 6.99. Still very much a subsidized rate from the merchant, but not subsidized all the way down to 0 because in this rate environment, that's increasingly expensive for us and for our merchants as well. We've had good success there and it's a way for us to get more economics into the loans, right? We're being compensated by the merchant and being compensated by the consumer as well.
You know, in some cases, that may mean, you know, a small MDR reduction for the merchant. In some cases, it may mean that MDRs stay flat, and we get the consumer interest on top. We have had instances where the merchant discount rate just sort of didn't work, and the merchant didn't wanna go to a fixed APR. So, you know, we were able to pass on price increases. You know, I can think of a couple examples of that situation as well. So it really comes down to what the merchant is solving for. You know, some merchants will wanna test a fixed APR before they roll it out en masse. Some sort of don't wanna do the test. So it's really.
I think because we have a lot of flexibility within our platform, you know, it's something that we've been sort of taking on a case-by-case basis with merchants.
Okay. Right. Really just trying to strike that balance between kinda merchant revenue, consumer revenue at the individual merchant level and what makes sense for Affirm, what makes sense for the individual merchant. Okay. That makes sense. The engagement metrics at Affirm have really been quite strong. Wanna just hear some of the ways that you guys are really driving engagement, repeat usage with customers. To what extent, just strategically, are you prioritizing those engagement efforts over efforts to add new users onto the platform?
Yeah. I mean, it's something that we're really proud of. I mean, I think when you look at how our customer base has grown from a consumer perspective, you know, we nearly doubled in calendar 2022, right? At the same time, we drove increasing engagement, you know, as measured by transactions per user per year. I think, you know, one of the things that we do is that we do have really strong coverage across e-commerce.
Once a consumer sees us, you know, and uses us once, that ability for them to use us again at places that they know and love from a merchant perspective, I think that's really, really powerful and that's been incredibly important to driving frequency, being present across Shopify, being present across Amazon and Walmart. I mean, those, you know, those are, incredibly important, it's incredibly important real estate for us, and that drives a lot of the frequency. We also have direct-to-consumer, products like Affirm Anywhere, which I mentioned previously, you know, that allow consumers to start their shopping journey, with Affirm. They can get a virtual card offering that they can use anywhere that Visa is accepted.
Really, I think we've done a really good job of getting distribution across the point of sale, Affirm Anywhere makes that distribution, you know, basically 100% in terms of e-commerce coverage. You know, really important there. I think ultimately, what we're, what we're building and what we're looking to do is to complement all of that with Debit+ . I mean, Debit+ will be the next iteration of Affirm Anywhere, really, when you think about it. The idea that you can have a physical piece of plastic that works not only online but also at brick-and-mortar gives you the flexibility to sort of finance purchases where, you know, some cash flow smoothing makes sense for the consumer.
The other thing, obviously, with Debit+ is that it should bring us into everyday spend, both online, and in brick-and-mortar, right? I mean, being able to sort of have to participate in sort of the traditional debit purchases, right, the dry cleaning, the cups of coffee, that should increase frequency and engagement with the base as well.
Yeah. Why don't we jump over to Debit+? I know it's been talked about for a while now, and you guys have been in sort of this test and learn phase, I guess I would call it. We'd love to hear a bit about what you have learned. You know, when do you think, you know, we go to more of a full-scale launch and more of a volume ramp-up there? Maybe just for those who are less familiar, just go a little bit more into the mechanics of the product, and what kind of user experience it's gonna be like.
Yeah. Maybe I'll just start there and give a quick primer. I mean, Debit+, really, for us, we think it's sort of three payment modalities in one. Debit+ is a, you know, it's a physical card, it's a physical piece of plastic. That card is then linked to a consumer's bank account. Today it won't be an Affirm bank account because we're not a bank. You can link it to any sort of bank in the U.S., it's a layer, it's a payment layer that sits on top of your existing bank account. You can use it for, like I said earlier, everyday spend, right?
The example there would be if you buy a cup of coffee with your Debit+ card, Affirm will pull, you know, the $4 or $5 for the cup of coffee from your bank account 48 hours later. We're taking a little bit of float on the transaction, and then we're collecting the interchange from the swipe. We think that, you know, that modality, it won't be the highest margin or highest revenue take rate, you know, in our stack, but we can make that, you know, a profitable transaction and again, that's unlocking a portion of consumer spend that we're not touching today. For larger ticket items, for items that you don't wanna pay off immediately, it's got some credit extension features.
The lending side of Debit+ will really come in 2 forms. One will be a Pay in 4 option, that's a 6 or an 8-week loan to the consumer, 0 interest there. You know, that works like our Pay in 4 business does at the point of sale. You know, you go into the app, the complimentary app to the Debit+, you sort of hit the toggle, "Yes, I wanna finance this. Yes, I'd like the Pay in 4 option." Then we'll collect funds from you via ACH in normal course like we would, you know, in 3 or 4 payments at a 2-week interval until the loan's paid off.
The other option is for probably for higher ticket items, the sort of traditional interest-bearing lending approach. Like I said earlier, that's our most profitable loan product. We feel good about sort of the economics on that side of the house, and that really will be the biggest driver of margin for us within Debit+. It gives sort of consumers, you know, the loan options that they've come to know with Affirm, but, you know, with a physical card to complement.
Okay. Okay. You guys foresee a meaningful ramp in your fiscal 24 there or?
Yeah. You know, I think in terms of the rollout, you know, the rollout frankly has taken longer than we expected. I think, you know, sort of the change in the macro environment has forced us to make sure that we're fully ready to go and have a well-optimized product before we sort of open up the spigot, so to speak. We've taken probably an extra quarter or two to optimize the economics, and we feel really good about, you know, how each of the three modalities are working from an economic perspective and also just from a consumer understanding and engagement perspective.
Nothing to commit to in terms of rollout today, but I would say we feel really good about the economic profile that we're seeing from the pilot that's currently running, and that gives us confidence that, you know, that the offering ultimately will be successful.
Okay. Understood. Wanted to touch on the competitive environment a bit. I mean, we've felt like for a while that Affirm has been a real share taker, and obviously, you know, winning customers like Amazon helps that even further. We'd just like to get your perspective how the competitive landscape in buy now, pay later has evolved over the past, you know, 2-plus years since you guys went public and, you know, what you're seeing from other providers in terms of how they've navigated some of the moving parts in the macro backdrop.
Yeah. I mean, I think, you know, it's important to remember that Affirm does a lot of things, right? I mean, we can go from a 6-week loan as low as $50, all the way to a 60-month loan as high as $25,000, right? That aperture, I think, is really unique within the competitive set that we play in. Most of the competition that we see is either principally or in some cases, exclusively focused on really this Pay in 4 model that is, you know, splitting a payment into four chunks. Typically, it's a 6 or 8-week loan, and really the utility for the consumer starts to sort of tap out around $300-$500 is what we see.
There's a huge space that we play in that allows us to really differentiate ourselves. When we're talking to merchants that are selling, you know, a variety of goods, you know, the Walmarts and the Amazons of the world, being able to have a single financing provider that can finance a range of transactions for their consumer base, I think it's hard to overstate how important that is on the merchant side. Yeah, you know, I think we've seen. It's always been a competitive space within Pay in 4. I think we've seen some of the froth come out of the competitive set.
I mean, some of the deals we're getting done in late 2020, you know, calendar 2021, those deals just aren't happening anymore in terms of the merchant incentives, in terms of where the merchant discount rates were being bid down to. You know, I think we've said this in the past and been on record, but, like, one of the reasons that we chose to really build our Pay in 4 program with Shopify is that Shopify was an aggregation of, you know, smaller merchants, and that allowed us to have a bit more pricing power with that product than I think what our competitors chose to do, which was aggregating scale in enterprise.
Just the enterprise portion of Pay in 4 has always been sort of hand-to-hand combat and really, really thin, if not negative economics, I think for the providers that have chosen to play there. I think, you know, with the cost of capital going up for everyone, we have seen our competitors tighten their underwriting. I think because the underwriting maybe isn't as fine-grained in their platforms as we think it is in ours, it seems like approval rates have fallen off pretty precipitously for some of our competitors. We're seeing, you know, an increase in the amount of inbounds that we're getting from merchants looking to bring on a second BNPL provider because they've lost some volume, you know, as underwriting has tightened with their incumbent provider.
They know that Affirm's network is, complementary to sort of what they've already been doing. I think it's an opportunity for us. Like I said, I mean, underwriting is so core to what we do that we think that, so far we've done a really good job of managing in this environment.
Where do you guys see BNPL's penetration of total U.S. e-com right now? I mean, I think we've seen numbers maybe around mid-single digits.
Yeah.
I don't know if that's consistent with your view or anything you've articulated about, you know, where you think that mid-single digit number goes in the next, I don't know, 3, 5, 10 years, whatever it may be.
Yeah. I mean, you know, we've looked at sort of the Australian market.
Okay
... the Nordics, you know, some of the markets where BNPL has been in market longer. I think so far, you know, the U.S. adoption curve has actually tracked. I mean, when you, when you adjust for, you know, sort of years or tenure of the market, it's tracked actually pretty well with those more mature markets. obviously we're bullish on the space. We think that, you know, double-digit penetration of e-commerce is very achievable. I think for Australia, you know, it's approaching a quarter of e-commerce, if not 20%.
We think that there's definitely a ton of headroom, still in the US market and, you know, doing things like not charging late fees, putting, you know, fair and honest and clear terms in front of consumers, we think that gives us the right to continue to sort of build a long-term relationship with consumers. You know, I think consumers are voting with their feet still.
Yeah. Yeah. Okay. No, appreciate that perspective. I wanted to touch on Amazon a little bit, just get an update in terms of adding a 0% APR product there. I know you talked a little bit about that. You know, maybe discuss how the relationship could evolve further over time. I know that, you know, the exclusivity component did expire at the end of January, but the overall contract, you know, runs through January of 2025, you still got some time here, I guess, to drive some avenues of expansion. Would appreciate any color there.
Yeah. Yeah. I mean, I think we're really proud of where the partnership is today. I mean, you cited that it's, you know, approaching a quarter of our GMV from basically a standing start, what? 14, 15 months ago. A lot of work has gone in to make sure that the program is optimized and, you know, able to scale to support just the massive volume within Amazon, right? I mean, our CFO, Michael, refers to Amazon as a country, right? Not as just a merchant.
Right.
Really proud of all the, you know, infrastructure that we've built and, you know, we've proven that our underwriting model can scale and scale with the largest of e-commerce partners. The relationship, as I said, is really, really healthy. The exclusivity did lapse in, I believe, February first of this year. That said, there's, you know, there's a myriad of financing options within Amazon, and so we think that, you know, we have been competing for volume from day one, even when we did have exclusivity. You know, we've got our head down, and we're trying to make sure that we maximize the opportunity and do it, you know, in a way that we show up as really good partners for Amazon.
You know, the exclusivity internally was a bit of a, it was a bit of a non-event, the lapse and, you know, nothing changed on February 2nd from our perspective. I think, you know, in terms of the 0% take-up, I was actually pleasantly surprised with the amount of 0% volume that we did across Amazon in calendar 2022. I was maybe a bit bearish on the take-up and how much Amazon would lean in because, you know, Amazon does have to pay an MDR for 0% loans. You know, we did see a lot of interest on their side in terms of doing pilots in different verticals, pilots in different average order values, pilots around promotional periods seasonally.
I'm not sure that it's ever gonna be 100% on, you know, evergreen part of the program, but I think that they've done enough work to start to, you know, build a case internally to have it as a tool that's used at their disposal to drive incrementality. If you're able to drive incrementality even for Amazon, I think that's really saying something. Again, I think so far so good on the 0% uptake. We never thought it was gonna be, you know, a huge part of the program on day 1, but I think we've done the work and we've laid, you know, laid the foundation to make that a structural part of the program long term.
Okay. Okay. Would you consider that sort of be kind of in pilot phase, or how would you characterize it?
Again, I think, you know, we have lots of different types of 0%, right? I mean, we can go out for really long terms.
Right.
We can do pay in full. Both of those are 0% APR. I think what we've learned about the way that Amazon works is, we need to build a case with the payments team, and then the payments team needs to work with sort of various category managers to make sure that the, you know, the product works in the various industry verticals across Amazon too. It's definitely a, you know, a test and iterate culture. I would say that we're still in sort of testing mode for 0%.
Yeah. Yeah. Okay. I did wanna also just touch on, you know, OpEx. You guys have been acting pretty decisively in that regard and becoming even more prudent with spending. Wanted to just get perspective on how you balance that with some of the ongoing need to invest in an adequate amount of marketing, R&D, 'cause you do have that commitment to the investment community to be at sustained positive adjusted operating income as we exit June of this year.
Yeah. You know, again, I think we did take the decision to reduce the size of our team and that was a really, really difficult decision, and it meant saying goodbye to some really great people, unfortunately. You know, I think what we've seen and what others, you know, frankly, across the world have seen is that, the growth that we were underwriting to when we set the operating plan for this year, I mean, it hasn't shown up in the same ways. With the rising rate environment, right, we have seen, things like our gain on sale yields compress as well, right? It's put... It's not just the shortfall in volume, but it's also, some headwinds on the yield side for us.
Those two things just meant that we needed to have a smaller team, unfortunately. I don't think, while there were some sort of smaller ancillary projects that we've decided to sort of mothball for the time being, nothing that is sort of core to our growth this year or even really our growth next year. I mean, nothing was put on ice that, you know, would've been a significant driver for us from that perspective. We feel good about our ability to execute, we feel good about our ability to launch new products and launch important ones. I don't think that we, you know, I don't think that we needed to sort of cut into bone to sort of get the P&L where it needed to be from a cost perspective.
Okay. Last but not least, regulation. We can hit it quickly. It's been 6 months since that CFPB report came out, which I actually thought was pretty balanced. They didn't come out and say, "Hey, we need to, definitively regulate the space," or, you know, "It's nothing but bad for consumers." It was actually fairly balanced. I guess, where do you guys stand now? I mean, do you feel, you know, a little bit more comfortable now that we're 6 months out and there's really been no kind of direct or explicit follow-up in terms of planned regulatory actions?
I don't know if I'd use the word comfortable, right? I mean.
Yeah.
We, I think generally, we think that regulation is positive for the industry and you know, I think we still stand alone in not charging late fees. Late fees seems to be, you know, a particular hot button for the CFPB, at least on the credit card side of the world. We think that we're doing the right things, whether someone's watching or not, right? At the end of the day, that's all that we can control. You know, we take our relationship with the consumer really, really seriously. We want to create, you know, honest financial products, and for us, that means no late fees. For us, that means Truth in Lending disclosures.
We've also been, I think, at the forefront of furnishing information back to the credit bureaus so that the consumer, whether it's a positive outcome or a negative outcome, that, you know, the consumer's record reflects their engagement with Affirm. I think we're, you know, we're sort of the only provider doing that as well. I think those were some of the things that sort of came out of the CFPB report and have come out subsequently is really around late fees and furnishing back to the bureaus. I think we're leading the charge on both of those fronts. You know, I mean, we built this company to be very transparent and very, very honest with consumers and hopefully that, you know, that shows well with the regulators.
All right. Well, we've got to leave it there. Rob, thank you much for your time. Thanks to everyone who participated in the session here, and our next session will be at 12:30 P.M. We'll have a account-to-account and faster payments panel. Appreciate it. Have a great day, everybody.
Thank you.
Thank you.