Okay. Last, but certainly not least, we have Affirm joining us today. Brooke Major-Reid, Chief Capital Officer, Rob O'Hare, SVP, Finance. Thank you so much for joining us. Before we start, I was reprimanded for not mentioning it. There is a cocktail setup that will magically appear outside after the panel. For anybody who wants to stick around and chitchat or, you know, drink away your troubles, whatever it is, there will be a bar out front. Thank you so much again for joining us. Appreciate it.
Thanks for having us.
You know, it's great to have you here, Brooke, because there's a lot of, I think, interesting questions that you are, you are obviously perfectly qualified to answer. One thing that I wanted to ask was sort of like how, you know, how nimble Affirm can be with the funding mix. When you see GMV kind of going up in the quarter, maybe unexpectedly, how quickly can you kind of rotate around it to and in the funding mix? Or is it sort of like you gotta lean into maybe warehouse line, something like that, you know, to?
Yeah.
To get there?
No, really good question. I operate in two minds. One is, regardless of what the business is doing, I need to be adding capital constructively at all times. The ability for us to grow should never be contingent upon my ability to find capital at the moment. The capital that we have, however, we fund the business across warehouse lines, forward flow agreements that are bilateral and ABS, and we have static deals that are off balance sheet and revolving deals. When you think about the mix, there should never be a point in time where a particular channel cannot eat our cooking. We have loans that are six weeks, and we originate loans out to 60 months.
I've structured and we have structured the ecosystem and funding so that most, if not all, our facilities can accept whatever flavor of loan that we originate at the time. That's not a constraint. We can be very flexible. Our warehouses tend to take vertical slices of our collateral. Forward flow, similarly, although they sku longer. Our revolving ABS shelf takes a shorter duration, kind of less than 12, 24 month collateral, very short. It also has a pocket that we could fund Pay in 4, but we tend to fund that in a particular warehouse specifically for Pay in 4. Then our static deals, you know, we stood up largely to fund 0% Peloton loans, and that was a lot more, we had a lot more volume there, and we stood up an Xshell for interest bearing.
We can be very flexible around the ecosystem, and we're very grateful that all of the capital outside of the ABS capital that, you know, if we go to market, is committed capital, multi-year capital. We can be very, very flexible.
How should we think about the relative weighting of those funding sources changing over time? Does the mix shift significantly? I know you report some of this out, does the mix, you know, shift significantly period over period? I guess what are the underlying drivers of why you'd see that mix shift? Is it demand for the paper? Is it pricing you're willing to accept, or what are the drivers of why that mix shifts around?
Yeah. No. Again, a really, really important point, in terms of the mix. If Santa is out there, like I like to be able to kind of give my wish list kind of structurally managing our equity and loans relative to kind of what's going on in any particular channel, a part of my job is to make sure that we can contribute, you know, in a positive way to unit economics. In terms of the broader, you know, perspective on, the mix, it's really about, you know, outside of credit and making sure we have access and risk managing the facilities, it's really optimizing, unit economics and, you know, our cash drag. The warehouse lines, they're very attractively priced, but they're capital intensive.
Forward flow shows up differently in terms of cost of funds. They show up in gain on sale when we sell the loans, and we get the value of that, you know, early upfront when we sell it, versus when we keep loans on sheet. The mix really comes from the flexibility that we want to have to maintain discipline around those two things. There are times when, like in Q2, you saw the warehouses run a little bit hot because we entered a pocket where the ABS market wasn't quite as open and constructive, and you saw that in Q3, that U.S. utilization went down. We anticipate that we'll continue to add capital constructively to manage the economics of the business.
We also love the fact that the model, given the diversity of partners, the diversity of the channels, will complement each other so that we have the flexibility, going back to your original question, to really lean into others, when it allows, 'cause when the market isn't quite as robust or fluid in different areas like, you know, we've seen in the ABS market. It's not necessarily a demand thing per se. It's really around how do we optimize to manage the economics of our units and the cash on the balance sheet, cash usage.
That's super helpful and also speaks to the degree to which, you know, when you guys were years ago sitting down designing the Affirm model, that flexible funding mix, it certainly has turned out to be an important component of the story. How do you decide whether you wanna keep something on balance sheet or move it off the balance sheet? What are the advantages and disadvantages of on-balance sheet, off-balance sheet?
You know, the primary advantage of on balance sheet is that we get the benefit of the economics over time. Because we are, you know, comfortable with our ability to underwrite and risk manage and, and, you know, comfortable with the credit outcomes we generate, we really objectively don't have a problem keeping loans on sheet.
Going back to the point about, you know, just kind of attenuating and managing the equity in loans, you know, when we grow, we're growing a portfolio, and growing the business, you know, if we have warehouse advance rates in the mid-80s, high 80s and probably closer to mid-80s now, you have ABS advance rate in terms of revolver in the 90s, that's, even though it's higher leverage execution, it creates a cash drag, particularly, you know, as you're growing.
Mm.
You really, you know, what we try to do is manage it such that we're not creating a huge cash drag as we grow, but we're also saying, "Where's the most constructive part of the market with respect to pricing?" Right now, on the bilateral side, there's kind of a divergence of views in terms of what the consumer, what credit. You know, people may be saying, "Okay, we're potentially at the top of the rate cycle," or it's actually a little more clear now than it was maybe 6 or 12 months ago. Credit is the piece where people are debating the severity of the deterioration that we would anticipate. Pricing does actually still matter.
The point about, you know, making sure that we're managing that cash, the capital efficiency and unit economics, that's how we think about whether we keep loans on or off sheet. The shorter originations are typically on sheet because they're not really. They turn over too quickly for forward flow buyers.
Does the funding source change, at all based on the, you know, for example, where the loans are being originated, if it's international versus a U.S. loan or what, you know, whatever particular product?
Yeah.
-rate, in-interest rate loan or buy that. Do you tailor that front end to the funding source or not? It all just get pulled up and packaged up.
In terms of the geography and the kind of how we manage it's a very similar model. We have our Canadian business, and we use a similar construct, a similar model, so we have warehouse and loan purchase agreements in Canada. We don't have, we have not tapped or issued ABS there. The market just isn't as deep as it is in the U.S.
Mm.
you know, we've always been we've had conversations, and are always looking to see if that becomes a channel for us. Right now we fund the business really well, across the two channels in Canada. Any jurisdiction that we go into, our typical model is we equity fund for a while and then we aggregate, and then we stand up these facilities that are very diverse and offer us flexibility to fund the business at scale.
Probably just kind of like a tipping point where it makes sense.
Yeah. Absolutely.
to build out a model.
Absolutely. Yeah.
What about the duration and/or commitment of terms with the forward flow and warehouse line partners? I guess the underlying question is, when it comes to the pricing of the vehicles, how long is that commitment? Can those folks come back and renegotiate pricing? How much visibility do you have to the terms that you have access to with those two vehicles?
Right. With respect to warehouse lines, across the board, they're typically multi-year, so on average two years. We have maybe one or so on the, on the flow side that's slightly longer. Generically speaking, 24 months. In our even revolving periods, we've moved from, you know, 18-month revolving periods to 24 months. We like to have that multi-year commitment. With respect to kind of refinancing the warehouse lines floating rate with the spread, you know, utilized, unutilized fees, et cetera. That's pretty standard. You have the visibility there reflected in the curve at any point in time. Forward flow, very bespoke. We have insurance companies, pension funds, you know, hedge funds that are partners, you know, large banks, and they have different needs.
When we originally set up the agreements, those can either be structured such that there are 6 months repricing or semiannual repricing based on credit. Some are structured such that there's an adjustment for rates, not credit. On the forward flow side, you find there's a variation in terms of the structures and how we manage those. Generally speaking, the intention of that book is to remain largely fixed in terms of the yields. There are times like, you know, in pockets of volatility, where there's a conversation maybe about how do we protect the yield of our partners? That's the levers that we pulled through, increasing to 36 or having some sort of construct that minimizes downside.
There are different things for different partners that we do, but the objective really is to have a lot more visibility into where those changes may occur in the forward flow book. It's just been a little less consistent in the last kind of, you know, 12 months or so given the rate environment.
This might be a question for either of you, but, you decide who's the best one to start it off. What about funding sources? What about the evolution of that part of your business? Or should we just think of these same four categories that you're gonna lean to for long haul? Or how should we think about new funding sources maybe coming online? You know, Debit+ is something that might generate some or any other savings product. You know, how should we think about other, you know, sources of capital that you might have access to over time? And whether that's a priority or whether you're pretty happy with the four chess pieces that you're moving around the board, you know, today?
Yeah. I'm never happy with the four chess pieces. The strategy at the moment, and I think it's, you know, I can say that we won't become a depository institution anytime soon. Where we are from a GMV and growth perspective, we are a ways away from needing to have a bank charter or access other types of depository capital in different ways. What I will say is that the scaling of the ecosystem is what's going to be very important. ABS, we are kind of a nascent, you know, a small issuer. We've issued just under $5 billion total since we stood up the program in 2020. We are very grateful for the reception and the access that we've received, even with just the DBRS rating, the different shelves.
We feel like, you know, given that despite the fact that the ABS market can be challenging at times and windows open and close, the fact that we aren't overly reliant on that creates opportunities for us to be thoughtful about being programmatic. I would say we have a lot of room to run in terms of continuing to refine the program and access ABS thoughtfully. The last 12 months has taught us that we have to be very disciplined about issuing. When you're in the market, you time it according to your risk parameters, but you have to execute at the market, and that's something we're committed to doing. On the forward flow side, we believe that there are other opportunities to scale how those deals are structured.
At the level we are now, we think there's still a lot of opportunity if we're structured the right way to scale that. On the warehouse side, we continue to find it to be very constructive. The warehouse part of our ecosystem is really for... It's kind of a release valve. It helps us to aggregate for deals. The intention is never to have that channel fully utilized. You saw it run a little bit hot in Q2 because, again, we wanted to bring a deal. That wasn't possible, and so it ran a little higher than we normally do. The idea is that, you know, when the, when the window was a little bit more constructive and open for us, we ended up having the collateral release from those.
There's a lot of opportunity, I think, for us to scale what we have today.
One thing that you guys have executed very well on is just managing delinquency rates and underwriting, et cetera. You know, talk about the advantages intrinsic to the model. You know, when I first looked at this model, you know, a ways back, I felt like things like, you know, a short duration, a shortish duration loan relative to like an auto loan or something like that. Just also the, kind of the idea that you're underwriting every transaction, is a, you know, would bring you sort of a better model independent of, you know, AI and your own skills with data science and whatever. You know, how is that playing out in terms of the cycle? I guess just, you know, What are you doing right when it comes to managing delinquencies?
I mean, I think it's definitely top of mind for everyone on the executive team is sort of getting credit right, and that means getting delinquency outcomes right for the loans that we hold and for the loans that we sell to our partners. We don't ever differentiate between the two when we're looking at data sets, right? We only think about sort of credit decisions in a singular way. And I think the structural advantages that you touched on are two of the most important ones for sure. The fact that we are able to work with consumers we already know, we have a really high repeat rate, and we get to re-underwrite a transaction that on average is about $300 every time. We're not extending.
Even though we may extend, you know, $1,200 of credit to a consumer in a given year, we're able to get three or four bites at the apple with that, and we're able to sort of course correct. If we see something change in the consumer's file, if we see something change, with repayments, we can react really, really quickly. We've built a big enough and diversified enough business that we've got a really awesome data set to look at, and we have teams of people that are staring at this every single day looking for small deviations in the expected repayment outcomes versus what we had modeled, right?
When we do see signs of stress or pockets of stress, we're able to change the underwriting in a pretty dynamic way and also a pretty localized way such that We're doing everything we can to maintain volume and incrementality for our merchants too. We're not just lopping off, you know, big chunks of the business with underwriting changes. We're able to do it pretty tactically.
Can I get you a glass of water?
Yeah, that would be great.
Yeah. I'm sorry, Rach. Here. I know.
Excuse me.
have a clean glass. It's all right. No problem. Go ahead.
Thank you so much.
No problem. trust me on that, I feel. Story of my life.
Thank you.
As long as we're on the topic, do you guys have a, you know, a differentiating with the consumer? What are you seeing out there most recently? It's interesting at this conference, we've been getting some signals from some lenders. Now, some of these lenders admittedly are a little bit more on the subprime side rather than where you guys kind of play. There's kind of this tone that's a little bit better, sort of saying like, "Maybe we were the first ones in, and now we might be the first ones out again." I don't think it's necessarily your typical customer. What are you seeing out there?
Yeah. I mean, I think like many consumer lenders, we did see signs of consumer stress, we think largely attributed to the inflationary environment, you know, about this time last year, maybe a bit earlier. We did tighten our underwriting standards as a result. We saw the outcomes that we wanted once we enacted that tightening. I think similar to what you just shared, I mean, I think we have seen sort of a stabilization in terms of that stress not necessarily dissipating, but sort of being constant. The most important thing in our model is that we can sort risk, and if we can sort risk, we can price it.
Because we now I think have a good sense for what the credit outcomes and what delinquencies are going to be, that stabilization, you know, is the most important thing for us. We've been pretty constant from a credit posture over the last several months. I think there is. You know, there's periods of seasonality around tax season and some benefit typically with repayments as a result. We've benefited there. You saw, I think, pretty good delinquency performance continue through April, which we just shared in our most recent letter. Yeah, I think we feel pretty good about where the consumer is. I think the biggest and most important macro indicator for us on the credit side is really employment.
You know, it's a small enough repayment for most consumers that I think we sit pretty high in the repayment stack, and so employment's gonna be probably the best leading indicator for us. And that's remained really, really healthy, obviously.
You know, the rate environment obviously shot up and we seem to be a little bit more closer to the peak of rates rather than the trough of rates, which is probably a good thing. You know, you guys have the ability to some degree to flow some of that through. I know you're, you know, there was a, you know, there's a few efforts and, you know, a few ways in which you're able to do that. Maybe update us on the progress you're making, you know, getting into, you know, the higher, you know, APR rates you're able to.
Yeah
... and how, you know, how that's going in terms of passing through some of that increased cost, so on through your.
Yeah. I think we Historically, we had a 30% APR rate cap for our interest-bearing loans. We set out over the last six months or so to start to move that rate cap from 30% to a 36% APR. We've been sharing some progress in our last two quarterly letters. I think at the end of the December quarter, we had moved about 23% of the GMV base to that 36% cap. I think we shared that we're at 55% as of the end of the March quarter. We made good progress and a bit of a acceleration in this most recent quarter, as we had a few large merchants agree to the higher cap. We're still heads down on that.
I don't know that it ever gets to a 100% of the interest-bearing book being at a 36% cap, but I think we've got line of sight to continue to make some progress there. It's really impactful for us as a business in terms of the unit level economics and whether we choose to keep those, whether we pass some of that on to the funding partners that we work with, or whether we actually use some of the enhanced economics to underwrite more deeply. I think that remains to be seen, but I think it's goodness all around in any event.
Mm-hmm. Update us on your strategy on the origination side. I think you guys mentioned recently that you had shifted some issuance to Celtic Bank.
Mm-hmm
... and, who I believe is domiciled in a state where you have a higher cap. you know, how flexible is that process by which you can move you know, volumes from one originating partner to another? Is it like a dial and crank, or does it take time?
Yeah. Typically, generally speaking, we can be very flexible, and we have moved substantially all of the volume from Cross River to Celtic Bank. There's certain merchants, basically earlier merchants that it's a little bit more challenging to do, we've opted to keep them at volume-
Mm-hmm
... at Cross River. Given the APR advantage, we were able to successfully shift the volume there. The other thing that we're doing, as we talked about in our earnings and shareholder letter, that we are looking to diversify in terms of the originating bank partners, and we have line of sight to doing so, to adding another partner. We feel that that creates a lot of durability and just like our capital ecosystem that has worked really well for us, having that diversification really creates a little bit more resiliency and just in a constructive way, a risk managed view of our origination approach, so to have multiple partners and partners that can go to 36.
Do you find that it's beneficial to have the majority of the volume flowing through a specific partner as opposed to, hey, I've got 20 partners, and I'm gonna spread it out? Is it more, I noticed it was sort of Cross River, and now you've migrated a lot of it over. What's that logic look like in terms of why you'd localize in one versus maybe spread it out?
Currently, I mean, the economics of what the partner we have today kind of creates the, you know, the inability to spread it out more, right?
Right.
Because of, you know.
Mm-hmm
to have more at Cross River, we wouldn't be able to go to 36%. The idea is not necessarily to have the ecosystem be, you know, so broad, but to have enough partners that we feel like we have redundancy and resilience.
Mm-hmm.
It's more of a risk management approach. The way we structure our bank partner, originating bank agreements, we can originate the same types of loans across all parties. There won't be an originator just for, say, you know, zeros or, you know, a particular duration. The idea is to have partners that can originate, you know, the same types of loans in accordance with the same underwriting agreements. There may be folks who have approval processes or different compliance processes that are different. That creates a little bit of a challenge, but the idea is to streamline that in a way that makes it almost seamless to go to, you know, go from one partner to another.
Mm-hmm
... and divide it in a way that, you know, that's healthy in terms of the economics for the partner, but also, creates value for us in terms of the origination approach.
I see. Changing channels entirely here. I wanna ask you, Rob, about the competitive environment. We've seen with buy now, pay later, and I'm fully aware that buy now, pay later is sort of a spectrum of things. People think of it as one, as one thing, but it's actually, you know, it's a lot different to be offered the offer in a product page of a website, and very much different to be, "Hey, I bought this," and "Hey, do you wanna finance it on the back end?" There's a lot of new entrants in the market. You know, Apple is one that's out there with something. You know, PayPal talks about it quite a bit. How do you see the competitive environment evolving into Affirm's place in it? I mean, you guys are still putting up the volumes.
How are you making sense of all that?
Yeah. Yeah. I mean, I think it really starts with the fact that this is a financing mechanism that consumers want, right? I think the fact that you've had these large providers come into the space is just indicative of how strong the consumer demand is. I think we're still really early in terms of the U.S. market, you know, forming and taking shape versus some of the other international markets where this payment mechanism has been around longer. We think it's gonna be a big space.
I think, you know, in the spaces where we play and where we have the deepest partnerships, I think what we hear from our merchants, who have, you know, pretty sophisticated asks is that they want a partner that can serve, you know, a diversity of transaction types. Typically, that means, you know, basket sizes that range across a wide spectrum. I think one of the things that gets lost in sort of the discussion of competition is that Affirm can sort of be, you know, all things to a merchant, right? We can go as low as, you know, a $50 cart size all the way up to, you know, north of $17,500.
Having that singular experience where a consumer knows that financing is gonna be there for them no matter what they throw in their cart, whether it's a T-shirt or a new suit, I think that experience is really important. I think Affirm and our competitors too, we're all here to drive incrementality and conversion for our merchant partners. That's what we're seeing. The range that we cover, I think you have to have teams like Brooks, and you have to have a really strong credit posture to be able to do sort of the higher end of the average order value.
If you're redoing Pay in 4, I think it's a different model, and it's a lot harder to sort of go up the spectrum from underwriting larger transactions.
You alluded to this in terms of the industry being in early innings, what do you think of as the penetration rates in the US? I mean, how much, you know, is there still? It sounds like we're still on a green field. How do you think about that?
Yeah. I think the market data I've seen, I think the US is running at 5.5%, in terms of penetration of US e-commerce.
Mm-hmm.
You know, when you look at Australia and the Nordics and Germany, I think we're seeing penetration rates in those markets that are well into the double digits. We think we have a lot of headroom, and we're still sort of on the vertical part of the S-curve from an overall market size perspective.
Okay. We have, like, literally less than one minute left, but give us a quick update on Debit+.
Yeah. I mean, it continues to be a significant priority. We're excited to continue to share progress as we have it, we think it can be, you know, a real game changer in terms of how we engage with consumers, we're really positive on it internally.
Fantastic. Thank you so much. What a great conversation.
Yeah. Thank you.
Really appreciate it.
Thanks, everybody.
Thank you so much.