BNPL Fintech Affirm CEO Says Next Recession Might “Silence” Alternative Lender’s Critics

BNPL Fintech Affirm (NASDAQ: AFRM) CEO Max Levchin recently noted that the next recession could silence Fintech lender’s doubters or critics.

With shares of the Buy Now, Pay Later (BNPL) Fintech down over 75% from November 2021, Max Levchin said the company’s innovative lending models could set it apart from others in the market.

Levchin added that he’s confident that the Fintech company has “cracked” the code to underwriting more consumers than banking institutions could, the WSJ reported.

As first reported by the WSJ, Levchin claims that the market may be wrong about Affirm Holdings Inc., the BNPL Fintech he co-founded around 10 years back. It could take a major recession to validate these claims.

Affirm’s stock is currently down over 75% after reaching its peak in November, compared with a 9% drop in the S&P 500 during the same timeframe.

Investors may be concerned about the future potential costs of borrowing, increasing competition and if Affirm’s borrowers might get behind on payments during a slow market. The firm’s valuation stands at around $11 billion, which is well below its $47 billion peak.

Levchin is quite confident that Affirm can still provide BNPL services that are competitive and may do a better job of it than banks. Like various other lenders, Affirm has significantly tightened underwriting standards (since early in the COVID-19 pandemic). In 2021, the firm had started loosening them.

Affirm’s management noted that merchants should continue to avail its plans as an effective way to increase their sales and revenue.

In an interview with WSJ, Levchin said:

“I can swear on a stack of Bibles or your preferred book of choice, until we get through a full recession, I will get partial credit when I show the numbers that I said I will. But once we’re back in a rapidly expanding economy and we’re still here, still lending money, still controlling our delinquencies, I think I’ll get full recognition.”

As covered, Affirm is one of the most prominent BNPL Fintechs in the United States, providing payment plans that allow clients to divide the cost over an extended time for purchases,

Clients can make flexible payments if they want to purchase makeup, clothing, furniture, travel and workout equipment.

Notably, Amazon.com Inc. and Walmart Inc. are among the merchants that provide Affirm plans to customers.

Unlike traditional credit cards, however, BNPL plans are for a particular item, and the payments have a specified end date.

Certain plans do not charge interest, which should help to support an increase in their usage and overall popularity in the upcoming years.

Affirm clarified that it does not charge any late fees.

Affirm has expanded its operations considerably in the past few years while emphasizing its ability to approve more applications that may be rejected by established lenders, including those with poor, limited or no credit history.

Affirm’s stock closed this past Friday at $39.19, which is up considerably from a $14.63 low set back in May 2022. However, the stock is well below its high of $168.52 in November 2021.

Levchin claims that investors are trying to categorize his firm with other newer Fintech startups even though there are major differences in their business strategy and lending models.

Affirm underwrites consumers based on their credit reports and recent scores. The Fintech firm also analyzes other data points such as where they might be shopping and what they are trying to purchase.

Items like jewelry can be a lot more prone to fraud, since a buyer might resell it at a sizable profit and then decide to default on the loan payments. Furniture and other more costly items that are used on a regular basis usually tend to be classified as lower-risk.

Affirm usually charges merchants more fees if they want the company to approve riskier applications. Those customers that miss a payment on an Affirm plan usually cannot be cleared for another one until they’re all caught up on their outstanding payments.

Risky borrowers or those financing a costly purchase may be asked to make a significant down payment on an Affirm loan. However, others could be able to buy a new mattress for no money down.

Affirm has provided more payment plans for smaller purchases. These options, along with easing up on underwriting standards since 2021, has reportedly helped boost Affirm’s volume growth—and has placed the firm at the center of growing concerns about consumer credit.

Although skipped consumer-loan payments have reached their lows for most of the COVID-19 crisis, they’ve now started to increase at Affirm and other major Fintech lenders.

Surging interest rates are also a considerable challenge. Since Affirm does not operate as a bank, it is unable to fund itself with deposits.

The company depends on securitization deals, warehouse lines primarily from banking institutions and selling loans to various investors, such as insurers and fund managers.

Around 20% of Affirm’s funding has variable interest rates, the firm revealed.

Shielding the overall impact of surging rates and delinquencies is that the majority of its payment plans tend to be short-term, Affirm noted. These can range from 6 weeks to 5 years, however, an average term is of only 5 months.

The stakes can be quite high should delinquencies increase. Affirm borrows from around 20 banking institutions, pension funds and other firms.

Its conservative lenders typically require that its 3-month average for payments that are late by 30 days (or more) do not exceed 6%. That number was about 2% as of May this year, up considerably from around 1% during its 2021 financial year, and in line or consistent with where it had been before the COVID outbreak.

Affirm’s competitors currently include Afterpay, Klarna Bank AB and PayPal Holdings Inc. Some large banking institutions are offering options that appear to be similar to installment plans. Levchin noted.

Apple Inc.’s move to enter the pay later sector indicates that these payment plans could become more widely adopted.

Affirm further noted that they are fully committed to their objectives. Levchin added: “I think the biggest ill in this world is revolving credit.”

It’s worth noting that a slowdown in retail sales might pose a major challenge, particularly since BNPL Fintechs tend to charge merchants more in fees when compared to credit card firms.

Merchants also need to pay more to provide Affirm payment plans that do not charge any interest, particularly when rates are surging.

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