Affirm's stock fell 13% on Thursday after the buy now/pay later lender revealed that loan delinquencies are rising as customers react to inflation and a darkening economic outlook.
"The economy is more than likely in the beginning stage of a downturn," Affirm CEO Max Levchin told analysts during a conference call to discuss its earnings for the quarter ended June 30, noting that it's too early to tell how severe or lasting a downturn might be.
The delinquency rate for Affirm's point-of-sale loans rose above 2% for the first time this year in July and August, prompting the San Francisco-based lender to tighten its underwriting criteria, Levchin said. The default rate was about 1% a year ago.
Affirm has "surgical" tools available to manage lending risks, including asking borrowers for additional income verification or transaction-specific down payments on some purchases, Affirm's chief financial officer, Michael Linford, said.
Demand remains strong — Affirm added 7 million more users to its platform during the last year, bringing its base to 14 million customers — but overall growth rates have slowed as Affirm faces rising competition from fintech rivals like Afterpay and Klarna.
Affirm said in its investor presentation that 16% of its transactions carry no interest because borrowers paid in full at the time of the sale. Another 23% of transactions are 0% interest loans repaid in four segments, up from 14% a year earlier. About 61% of Affirm's transactions are interest-bearing loans with consumers receiving a range of offers at merchants' checkouts, including through partners Shopify and Walmart. Affirm customers use the service for an average of three transactions a year, Linford said.
Affirm is still in the early stages of capitalizing on a partnership with
To encourage customers to shop more through its app, Affirm plans to roll out a rewards program next month with specific retailers funding the rewards, which users may redeem within the Affirm app, Levchin said. He did not disclose further details of the loyalty program.
Affirm's BNPL fintech rival Klarna last month launched a program enabling its users to track and earn loyalty points at 8,000 retailers through the Klarna app, while Affirm's BNPL rivals Afterpay and Zilch have loyalty programs that
The point-of-sale lender is teaming up with Fiserv to streamline its onboarding process for merchants. It's part of Affirm's effort to differentiate itself as more banks and fintechs enter the highly competitive buy now/pay later market.
"Rewards also tend to attract higher credit-quality customers," Levchin said.
The economic headwinds that have helped drive down fintech valuations in recent months could also create M&A opportunities for Affirm, he said.
"If we can find something in the space or near the space [that] is better off owned by us and operated by us, I think we will take it very seriously now that the prices [of BNPL fintechs] have normalized," he said.
Affirm's gross merchandise volume rose 77% during the most recent quarter to $4.4 billion, from $2.5 billion a year earlier, with 85% of transactions coming from repeat users. Travel purchases were a bright spot during the latest quarter, rising to $545 million, up 87% from the same period a year earlier.
Net revenue during Affirm's latest quarter reached a record $364 million, up 39% over the same period a year earlier though roughly in line with the previous two quarters. Affirm posted an operating loss of $277 million during the most recent quarter.
Affirm's overall signals during latest quarter raised concerns about the company's path to profitability, J.P. Morgan Securities analyst Reginald Smith said Friday in a note to investors.
"Management continues to target sustainable operating profitability by the end of its next fiscal year [June 30, 2023] but the climb will be steeper than we previously anticipated," Smith wrote.
