Katherine Adkins, Chief Legal Officer at BNPL Fintech firm Affirm (NASDAQ: AFRM) noted that consumer spending is like the engine that drives the American economy, accounting for about 70% of US GDP by most estimates.
Katherine Adkins of Affirm also mentioned that if spending is the engine, then access to reliable credit may be considered the fuel.
Affirm has reportedly been committed to responsibly extending “access to credit and to make payments transparent, efficient, and consumer-friendly.”
Adkins further noted that like other fairly new industries, they understand that there “are going to be questions to answer and skepticism to address.”
But, they pointed out that Affirm welcome “debate and dialogue, especially when it is well-informed.”
Recently, the Consumer Financial Protection Bureau (CFPB) released a report on ‘Buy Now, Pay Later’ (BNPL).
Adkins added that while the report represents an attempt to “provide insights into how consumers are using pay-over-time options, it could not delve into nuances and distinctions given the anonymized nature of aggregating data from across the industry.”
As a senior professional at Affirm, the pay-over-time provider, Adkins felt it was necessary to provide “additional context to help paint a more accurate, and complete picture.”
They also noted that the CFPB claims this research will “fill the data gap” of the BNPL sector.
Affirm says that it is committed “to greater industry transparency and helping close that gap.”
Adkins explained that as a publicly traded company, Affirm “discloses a significant amount of information about their business and they furnish some monthly loans, which make up a majority of their volume, for credit reporting.”
Despite the CFPB’s aims, Affirm claims that the research has “a number of limitations.”
As noted in a blog post by Affirm, the CFPB analysis relies on data from 2020-2022. BNPL is still considered to be a “relatively young, dynamic sector that experienced growth and change during that period.”
Adkins also shared that it would be a good idea or approach to “look at conclusions from dated statistics with several grains of salt.”
Adkins added that the report “aggregates information from … fundamentally different companies to make generalizations about an industry and population.”
According to Adkins, this “broad brush characterizes an entire industry and consumer population as homogenous, obscuring critical differences, for example, in business models and underwriting practices, which can lead to … different consumer outcomes.”
They also stated that while the CFPB report suggests that “borrowers with subprime or deep subprime credit scores make up the majority of BNPL originations across the industry, it’s important to note that this isn’t representative of all providers.”
Nearly three-quarters of Affirm’s consumer base are “near prime, prime or superprime compared to … 35% among the aggregated figures in the CFPB’s report.”
These represent borrowers with FICO scores “above 620.”
While a greater proportion of Affirm’s consumer base “has higher FICO ratings, they strive to responsibly extend access to credit to as many people as possible and they view consumers as more than just their credit scores alone.”
This reportedly shows up in their underwriting.
Adkins also mentioned that one of the most significant findings from the CFPB’s report is that BNPL default rates are “substantially lower than credit cards: BNPL borrowers defaulted on 2% of their BNPL loans.”
In comparison, BNPL borrowers defaulted “on 10 percent of the credit cards they held during the same time period.”
The report suggested the difference might be “attributed to automatic repayment requirements of many BNPL platforms.”
But, Adkins has argued that the authors do “very little to substantiate that conclusion.”
According to the Affirm executive, that reasoning “significantly oversimplifies the story.”
Lower default rates for Affirm’s financial products, “as compared to credit cards, are driven by several advantages – that are structural and the result of significant investment.”
Adkins further explained that core to that is their underwriting model, which reportedly evaluates transactions “individually before making a real-time credit decision.”
They claim to stand out by offering “transparent financing options with no compound interest, late fees, or hidden charges.”
Adkins added that this transaction-level underwriting approach allows them to “responsibly extend credit to more consumers, aligning with CFPB findings that requiring down payments and offering lower credit amounts than sought by the consumer increased approval rates for BNPL loans.”
Because they claim to have zero business benefit to “extending access to credit that is not repaid, they only approve consumers for what they believe they are able to repay – thereby creating an environment where consumers are better positioned to succeed.”
They added:
“Our success depends on consumers’ successfully managing their finances. Revolving lines of credit are the antithesis to this approach as the lender’s interest may not always be aligned with the borrower.”
They also shared that what’s absent from the CFPB‘s analysis is “more context around the massive burden on American households” from traditional credit cards – one of the largest “sources of non-housing debt for most U.S. consumers.”
At Affirm, they claim to have “intentionally” designed their products to prevent the debt traps that plague traditional credit cards.
Their customers cannot “revolve” their balances – there’s “no compounding interest, and they succeed when consumers pay down their balances.”
Adkins concluded that the average outstanding balance per Affirm user is about “$660, more than ten times less than the typical credit card debt burden.”
Although Affirm’s approach may help consumers maintain financial independence and wellbeing, it’s always better to carefully review key terms and conditions before using a payments plan or accepting any type of loans.
During the past 5 years, flexible payments methods like BNPL have become very popular. But consumers are also overspending in many instances which has increased the amount of debt people hold.
