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Affirm Holdings, Inc. (AFRM) Presents at Bank of America Electronic Payments Symposium Broker Conference Call – (Transcript)


Affirm Holdings, Inc. (NASDAQ:AFRM) Bank of America Electronic Payments Symposium March 22, 2022 5:15 PM ET

Company Participants

Michael Linford – CFO

Conference Call Participants

Jason Kupferberg – Bank of America Merrill Lynch

Jason Kupferberg

Hi, everyone. Jason Kupferberg here, payments and IT services analyst at Bank of America. And this is the final session of the 2-day Electronic Payment Symposium, and we’re super excited to have Michael Linford with us, the CFO of Affirm. We’re going to run through a fireside chat session here. [Operator Instructions].

Obviously, no shortage of topics to cover here. And Michael, we know how busy you are. So thanks for your time. Thanks for joining us.

Michael Linford

Thank you for having me.

Question-and-Answer Session

Q – Jason Kupferberg

I wanted to — I know you guys have been talking a lot about the situation in the ABS market, the delayed offering from 1.5 weeks or so ago. You put out a pretty detailed press release regarding your current funding position, which seems quite secure. But the stock, at least at points in time has been acting as if there might be some other funding source challenges, let’s just say. So I actually didn’t really want to talk so much about ABS to start but actually about the warehouse lines and the forward-flow arrangements and just to give investors the confidence of why they should feel comfortable with the outlook there if ABS market conditions, in general, just remain tough in the near term.

Michael Linford

Yes. Well, thank you, and I do think the current run of events is giving the Chicago economists in their efficient markets a run for their money. I think there’s a lot of just, I don’t know, confusion out there.

Let’s talk briefly about how we fund the business and why we feel like we’re in such a strong position. We fund the business today with 3 main channels. We use warehouse lines of credit that are kind of fully in our control but the most expensive kind of capital we have. We have a forward-flow program, where we have committed capital partnerships where we sell loans to counterparties, and that’s our gain-on-sale model. And then we have the ABS market. The ABS market is the most kind of market exposed. It’s the most efficient, but also the most tied to current market conditions. And so it’s not unusual, if you’re a regular issuer in the ABS market, to hit a spot and say this probably isn’t the right time to push a deal out. I think folks saw us do that, and they extrapolated in ways that didn’t really make sense. And since then, you’ve seen several other players pull deals. And you quickly realize that, oh, there’s actually no story there. That didn’t stop the reaction. That’s for sure.

Two things to note about the capital program overall. Firstly, it’s committed capital, and so we’re not living deal to deal. We don’t pool loans and go hit the market and say, “Would somebody please buy it?” Instead, what we do is we set up forward commitments where the counterparties are — in case of forward flows is your bilateral deals and they’re signing up to X hundred million dollars of capacity. And because our asset is so short in duration, the way that actually works is we pledge loans, they amortize. We pledge more loans, and we’re doing that several times a week. And so these are less about doing a deal in terms of forward-flow partners and more about operating the existing levels of commitment.

As we communicated in the K last week, we have over $9.2 billion in committed capital. We think that committed capital can fund over $22 billion in GMV that is substantially ahead of any of the level of the business that we have in the near term. And so then the question, I think, drifts to, okay, well, what about the longer term? And there, like there’s a limit to how much you want to overbuild the program. It does cost us something to have capacity that we’re not using, and we’re careful not to be totally reckless on it.

I think the most important thing is for investors is that when you see issuers like us take a pause button on trying to tap into the market in its most volatile moments, I mean remember the context where the market was 2 weeks ago, we were days away from the first rate movement. And since 2018, we were seeing COVID resurged in China. The war was continuing to drag on. These environments are super volatile, and debt investors certainly put a premium on pricing deals at those times. And you see issuers hit pause in those moments, for us, it’s a sign of strength, not a sign of weakness. We felt really good about the business and thought like we didn’t need to try to jam a deal at those times, and that’s the behavior you’ll see from us at all times. We do the thing that’s right in the long run and not try to get a deal done just because it’s in front of us.

Jason Kupferberg

Yes. So maybe just following up on that. I guess when you made that decision to hit pause, to delay there a bit, I mean can — hypothetically, can you give us a sense of like how much extra would it have cost to get that deal done based on the terms that were being offered? Yes, maybe just start there.

Michael Linford

Yes. That’s a bit of a hypothetical. You won’t actually know it until you do a deal, but we think the market was about 30 basis points wider. And 30 basis points, I assure you, is nowhere near a level that the business can’t support, the economics were fine. Like there’s no reason for us to not do the deal except we thought we were paying a premium to price a deal at that moment of volatility. And as insignificant as that may be, it’s still not a good thing to do if you can avoid it, right?

And that’s true at any level, whether you’re talking about loans from 0 to 30 or 30 to 60 or, in this case, 320 to 350 basis points. You don’t do a deal of 30 basis points wider unless you feel like you need to. And at that point in time, we felt like we didn’t really need to. Now again, we don’t really know until you do a deal, and we’ll see where the market is in a few months when we come back out. And if the market is at those same levels, then we’ll do deals, and we’ll be fine. If the market is narrower, then I think we made a good decision. And that’s just — that’s the nature of the ABS market. While it’s super efficient, it’s also the most market exposed. And so that’s just something we take on board, and we put into our total funding strategy, which is to not be dependent upon that deal. I mean part of the reason we’re overbuilt is because we want the ability to say, you know what, actually, today is probably not the best day for this.

Jason Kupferberg

Right, right, right. So is that kind of the rough timing we should maybe be thinking about when a firm might [indiscernible] in the water again a few months from now? Or — because I know it’s not imperative from a funding standpoint but…

Michael Linford

Yes. No, we remain very committed to our ABS program, all 3 of ourselves. We have these revolving programs that we were in the market for. This last time, we also have 2 different set of deals that we do, and you’re going to continue to see us very active in the ABS market. It’s very important to us in the long term.

This specific deal we were trying to do involves a refinancing of a facility that’s currently amortizing, and those have certain timing points where you need to go out at certain points in time to go do a deal. Very ordinary boring stuff candidly. But just because the market tends to be, I think, very concerned on this stuff and keying into it, just know that like it won’t be a thing we do next week. It will be a thing that we need to come back to thoughtfully in the market. You’re going to see us, though, continue to add capital.

I mean I think if you look at our capital that we talked about in the 8-K even versus just where we were ending fiscal Q2, you saw a meaningful expansion in available capacity, and you’re going to see us do that. That’s ordinary course of business for a firm. We are always adding capacity. And that’s something we’re going to keep doing, whether that’s additional forward-flow capacity, whether that’s a new forward-flow partners or even additional warehouse capacity both in the U.S. and in Canada. You’re going to see us continue to add capacity, and that’s just normal course of business for us.

Jason Kupferberg

Okay. Okay. Got it. And I did get a question here, and it’s on this topic. So let me just lob it into you. So what is the — well, you kind of covered this part. What is the stability of the forward-flow arrangements? And over what time horizon could a participant essentially walk away from Affirm who is part of those forward-flow arrangements?

Michael Linford

Yes. So the forward-flow agreements tend to be committed for somewhere between 18 and 24 months, which is pretty long, and we try to stagger those commitment so that we don’t — we’re not staring down any sort of acute issue because, again, the program is trying to avoid any sort of short-term hiccups.

I think I’d encourage everybody to do market checks and channel checks and talk to people who participate in this space. I think our asset is really attractive to a very large swap of buyers because of its duration and yield, and I think it’s a combination of a really safe investment in their eyes, at least it’s what I hear. And yet the short-term duration knows that like they know that we were to have our hands on the steering wheel. And if you think about uncertain clients, we’re kind of — and a lot of these investors’ eye see it as a quality move, and that’s going to serve us quite well in the months and quarters ahead if the market is as volatile as it has been. If it continues to be that way, we think we’re very well positioned.

For what it’s worth when this news came out, which again, we thought was not news, a lot of the conversations that we had with the forward-flow buyers was really around, hey, can I get a bigger allocation? And we kind of let them off to say, sorry, guys, we don’t actually need that deal. But the response wasn’t cause for concern. It was really a request for more capacity, and that’s just the nature of a lot of these forward-flow relationships.

Jason Kupferberg

Interesting. Yes. And obviously, as part of the 8-K last week, you raised guidance for the quarter and the fiscal year relative to what you last told the Street in the second week of February when you reported your fiscal second quarter earnings. So maybe just to start on that. Tell us about the factors that are really driving the upside there because it seems pretty impressive. There’s a lot of concern, obviously, around the lower income demographic and the health of spending. So yes, what’s driving the upside?

Michael Linford

Yes. I mean we highlighted in the K, I think there’s just strength across the board and in particular in our really efficient scaling of some of our transaction costs and notably our provision expense, where we do have a more optimistic outlook than we did even a month ago with respect to the credit and the business.

And one of the things we talk a lot about is us being in control. That sometimes can mean that we have surprises to the good. It very rarely means surprises to the bad on credit. And I think that what you’re seeing is stronger mix of business, which results in lower on balance sheet allowances, which means less provision than we had modeled before.

That’s a lot of words to say. We feel better about credit even today than we did a month ago, which is very — flies in the face of, I think, a lot of investors are worried about. And I want to be really clear that it is not to say that we don’t have the same generalized concerns about where the business goes in the future. We’re very concerned and focused on managing credit risk today, but we’re not seeing it yet. And where our provision works better or worse is it’s really model-driven. And when the models suggest that we’re going to have better-than-expected credit performance, then we have to provision in line with that. And that’s something we’re obviously pretty careful to not overdue, and we continue to maintain stress on that number and everything else.

But I think the reflection that you’re seeing here is despite the market’s concerns about what the future might be, despite the market’s concerns around a particular ABS deal, despite these things, what we see internally is really strong results, tracking ahead of all of the estimates that we had internally and externally and feel very strong about our market position. Not to take away from the concerns, we think they’re real and we’re going to manage them. But what we’re seeing right now is better than what the market probably thinks.

Jason Kupferberg

Yes. It certainly sounds that way. And I guess if we rewind back to December quarter results, I mean our take was that, overall, the results were quite strong. I think there was a lot of confusion in the investment community with regard to some parts of the guidance. It just seemed like there was this confluence of very fast-moving mix factors, creating some temporary dynamics where certain metrics were not necessarily moving in sync over the short term as much as the Street kind of thought that they would. And maybe just to unpack that a bit, can you walk us just through the mechanics, the accounting of, say, an Amazon transaction versus a Peloton transaction, right? Because I think it was dynamics like that, that just was hard for the Street to kind of anticipate from the outside looking in. And all of a sudden with Amazon and Walmart, Shopify going up and Peloton going down. It was kind of a bad short-term combination for gross profit.

Michael Linford

Yes. So first, an obligatory statement just for the avoidance of doubt, we beat the numbers in Q2 and we raised our outlook. So like I think that’s lost. I think the criticism or complaint is yes, but your beat wasn’t as big on some lines as it was on the other and your raise wasn’t big enough on some lines. It’s okay, I get it. But like our outlook improved sequentially and will continue to improve, as you saw in our 8-K.

So from our internal standpoint, things are getting better every day, and that will continue to be the case. I think the specific thing that in trying to be hyper focused on the rate of guidance movement on some of the line items, I think the market got really obsessed with the rate of our revenue less transaction costs, our unit economics number in light of the GMV and revenue moves. And there, there’s a number of puts and takes.

As you highlighted, I think that the revenue and margin profile of an interest-bearing loan that’s on the balance sheet looks very different than a 0% loan, whether it’s on the balance sheet or not. And so let’s briefly talk through that for a second. A 0% long-term loan of which the majority of our program with Peloton is that, which, as you know, last year was a big part of our business but is decreasing very quick in terms of mix. That business allows us to recognize all of the merchant fee that Peloton pays us at the time we capture that transaction. That is offset by the loss on loan purchase commitment in the period, but generally speaking, has very strong economics.

To contrast that with an interest-bearing loan, the revenue at the time of origination is actually very, very thin. You earn whatever merchant fee is being paid on an interest-bearing loan. But the interest income, which makes up the majority of the revenue on those loans, is recognized, as you’d expect, ratably over the life of the loan.

That means that in a given period, say, the first month of the year, 12-month loan, so again, think about December originations for our Q4, we might get a few weeks of revenue out of the interest income line for what is 12 months of total revenue. And as you can imagine, that’s not a — that is back-end loaded because we provisioned for all of our losses at the time that we acquired the loan from our bank partner.

So you have all this expense, you have very little revenue on interest-bearing. And yes, Amazon was that. Amazon launched with interest-bearing only, but that’s also true at our partner with partners like Walmart, where our program is exclusively interest-bearing. And the real strength in the Q4 — calendar Q4 business, the real strength there was in a phenomenal holiday season. We had such great execution and demand and our partners were winning holiday. And when that happens, you just have a lot of late November and early December originations. And especially for interest-bearing loans, it can cost some skew in the timing.

For the avoidance of doubt, we think that we can deliver really strong unit economics across all of our product types and interest-bearing, whether it’s at Amazon or Walmart or any other partner is no different. In fact, if anything, is slightly better. And so yes, there’s a lot of mix effects. But again, I would remind the market that we are continuing to grow our outlook for margin, and we’re delivering on the higher end of our 3% to 4% range. And we feel a lot of conversation on is 3% or 4% a reasonable number for you guys? And how do you think about it? What are the parts of that? And I think it’s interesting. I think some people viewed our guidance changes prove that we couldn’t deliver 3% to 4%, which is very interesting to me because I think like if anything, it should have proved that we can because in light of all those mix factors, we’re still printing in that range, in the high end of that range.

Jason Kupferberg

Yes, yes. I remember last year when the number was running, I think maybe you can touch 5% at one point. And I don’t know if you remember was it me or someone else on the call was like, hey, this 3% to 4% need to come up. And you were like, no, guys, tap the brakes like. We’re reversing provision right now, and things are going to change. And you are right, this is how the model is designed to work, right? So you’re still sitting here basically above the top end of the range, where everything kind of nets out.

So maybe let’s talk about rate sensitivity. I mean I thought in the last earnings call, one of the most valuable disclosures and discussion topics was the interest rate sensitivity. So maybe just talk about how higher rates impact your funding cost, but then obviously, the APRs that you charge to consumers. And then we can go through some of the detail of what you disclosed on the call so everyone’s on the same page here.

Michael Linford

Yes. So what we talked to you on the call was, I’ll call it, short-term, medium-term and longer-term flow-through of rate exposure. And the reason why the term matters is because, if you recall, we talked about with our committed capital relationships, not all of our funding is exposed to rates on a floating basis. A lot of those funding vehicles are either fixed or subject to episodic repricing events that are not continuous. They’re very discrete pricing event.

For example, our warehouse financing is all floating, right? And that’s L plus whatever in any given facility. That contrast to our, say, securitizations, which tend to be fixed rate, and so you’re borrowing at a very fixed coupon for 18 or 24 months. So that means that loans that you’re funding with fixed debt are obviously running at cheaper rates given that you did those deals 12 or 24 months ago. And so you have that kind of benefit, and therefore, you have to think about this along those time horizons.

And what we laid out for folks on the call was in the rest of this fiscal year, the current forward curve of which you saw the first rate movement. The Fed move 25 basis points. That was expected. That was in line with the market’s current expectations, and you saw the curve. You could see the growing number of moves and you see the market saying, here’s what we would expect in. At any given time, when we give a forecast, we reflect that current expectation.

And we said to the market on the earnings call, if there were an additional 100 basis points of movement, that is to say if the market moved above the current curve. So for example, if the Fed had come along and said, hey, we’re doing 100, instead of 25, then you would have seen a pretty minimal amount of impact in this fiscal year, just given the fact that all of our funding is locked up already and we wouldn’t actually experience very much of that cost.

We then said, looking out to fiscal ’23, given that we have, again, most of the funding locked up even for what we would anticipate doing in fiscal ’23, we would expect there to be some impact, but it to be pretty muted. And in the very long term, we said for every 100 basis points, we’d expect the gross exposure before we mitigate to be about 40 basis points.

And the reason why the number is into 100 basis points for every 100 basis points of movement is because of the weighted average life of our loans is short. So it takes — we turn over the book to and change times a year. And so for every 100 bps of movement, there’s only 40 basis points of impact inside the percent of GMV numbers before we mitigate, and the mitigants for us are twofold.

On the revenue side, we have both rates with the consumers and rates with merchants. And we get this question a lot, and it’s true that the market is really competitive and we have to demonstrate value and we’re out earning our business every day, but it’s also true that we deliver something of real value to the merchants. And when our costs change, we have a track record of being able to change that price with the merchants. And to do so on the order of 10 to 50 bps is something that we think is well within our control when we have real cost changes.

And then there’s, of course, rate movement with the consumer, which we know is not particularly rate sensitive. Just given the way we express the cost of financing in dollar terms, a few basis points of movement in rates, just generally speaking will trigger the consumers one way or the other.

And then on the cost side, the biggest cost optimizations are things that we would have in any way, optimizing our processing and servicing costs, but also importantly, the credit cost. And if you think about these things being interlinked, we can continue to control credit in light of any new costs. But in particular, in light of higher rates, the value of our product goes up, and the need to approve deeper and the credit stack goes down and we can manage some of the exposure that way.

And that’s really tactical. Strategically speaking, we still want to approve as many folks as we can. And so we’d seek to be compensated for that risk in the market either with merchants or consumers. That being said, if we’re unable to, we can control the expenses and still deliver the range of margins we’ve talked about in the 3% to 4% range by controlling the amount of credit losses.

Jason Kupferberg

Okay. And so I mean is your feeling — I mean even if we go into a recession, which, who knows, but even if we do, the 3% or 4% still holds in your models?

Michael Linford

Yes. I think the bigger impact for the recession on the front end, where there may be some volatility in that number. But on the front end of a recession, that is to say as things start to get worse and deteriorate, assuming there’s a meaningful unemployment surge associated with that, then we would experience higher losses. However, given the short duration of our asset, we think we’d be able to reposition the funnel quite a bit. And again, we saw this during the onset of COVID, and we think that the book can deoptimize that environment.

I think the bigger thing than the 3% to 4%, which we would continue to feel like is our goal, I think the bigger thing that you’d see is just less growth. And that’s the first order effect, right, that we have to be more careful on credit going into a recession. However, once you kind of get rid of your back book, which for us is like 3 months, we believe we can then be very aggressive in that market because while other lenders are reeling, we’d front-footed and out there trying to take share because we’d be only forward-looking. And we think it puts us in a really strong spot.

And yes, I think the first couple of quarters of a recession are probably going to see us grow at a slower rate. Now ordinarily, that might be concerning. But just given the overall growth in our category, where you see massive adoption in swing in BNPL as a payment method, we think that’s a pretty manageable piece of brake tapping, as I call it, going into the recession. I can afford 10 points of GMV growth into a recession, mostly because I feel like the business has so much growth in it underneath the surface.

Jason Kupferberg

Yes. Yes. And so obviously, there’s been some normalization in key credit metrics. We’ve talked about that a little bit, the provisions, the delinquencies that is all part of your plan. And I think like the other thing that got lost in the shuffle was simply like those metrics are still below pre-pandemic levels. And so I guess as you’re managing the business going forward, are you thinking about those pre-pandemic levels on these credit metrics as a guardrail per se? Or is it really just all about that 3% to 4%, and that’s what you’re managing today? There’s all kinds of levers that can keep you in that range.

Michael Linford

Exactly. It’s definitely the latter. I mean there’s obviously a series of things we manage to with respect to our capital funding availability. So we have covenants we disclosed in the 8-K, for example, about the most restricted covenant for substantially all of our funding. It’s a 6% trailing 3-month 30-day delinquency number. It’s a lot of words. But the point is we have a number, and we manage that but that’s an outer limit and pretty far away from where we are at on a portfolio basis.

But other than that, we don’t really manage the business to an optical number there. We manage to that margin. And so for some level of loss, so long as we get compensated for that loss across the portfolio, we’re pretty comfortable taking it. And yet, the reason for us, if you see us try to manage that number, it’s probably not because of the funding because that’s I talked about. We feel really good about that. And it’s probably not for even a 3% to 4%, but it’s probably for anticipation of this thing we’ve talked about, which is being mindful about if the market turns on us pretty quickly, we want to be in a position to be able to take advantage of it.

And the key to that, our entire strategy for being front-footed through a recession involves us being very quick to react to the market conditions. I think there’s one thing I’d like everybody to really hold us accountable to is Affirm willing to react quickly to the market. And we’ve proved that we were during COVID. I continue to think that we will here now, and that’s the key to unlocking so much goodness long term and through the cycle credit performance for Affirm is combining that short-duration asset with a short decision-making process. If we react quickly with the short asset, we’re going to be very, very well equipped to navigate the market.

Jason Kupferberg

One question we’ve got into the portal is just, what are you observing in terms of just the spending patterns among the lower-income demographic? I mean I know you guys have so many signals coming out of your business. And everyone knows what’s going on with inflation, gas prices, et cetera. So it seems like there’s pressure on that cohort. But I mean judging from your guidance, it doesn’t seem like you’re seeing it. But just any other color you’d add there?

Michael Linford

No, we’re really not seeing it yet. And I think the only color is, and I mean this with all due respect to love for the folks who are worried about this topic, it follows very logically that the rising gas prices, the general inflation and even the consumer sentiment, which are all seem to be pointing against you, we just — what we see in our business is it’s — those are small issues compared to the big issue, which is employment.

And if folks have a job, they’re much more likely in our spaces to continue to be engaging with our product, having demand for products and also being current on their obligations. That matters more. I mean the way I talk about it is 10% growth in gas prices is nowhere near as impactful as 100% of your wages. And so employment matters more, and I think that market continues — that indicator continues to be very positive for the consumer. And that certainly shows up in our data right now.

It doesn’t mean it won’t happen. I’m not saying that folks are wrong. I’m saying that it just hasn’t shown up yet given the strong labor market, and I don’t know that it will. I do know that we are monitoring the business in anticipation of something happening. Again, it’s important for us to react quickly, but we haven’t seen anything yet.

Jason Kupferberg

Good news. Yes. Okay. Maybe we talk about Amazon for a minute. I think whatever it was, $300 million or maybe a little bit more GMV in, what, half a quarter, the first half of a quarter of the partnership. Would just be curious how that results compared to your internal targets. And can you give us any sense of how things are going in the March quarter with Amazon? I mean, obviously, you’re going to have seasonal fluctuations here. So any color there?

Michael Linford

Yes. With respect to the internal projections, I’ll be real candid with you. We were doing everything we could to get that product out, and every day mattered. For those who maybe aren’t as used to the normal retail and consumer calendar, that second week in November through that — through the end of December is a pretty high season, and every day there is not like any other day in the year.

I think for Amazon specifically, you have Prime Day, which usually happens in the summer; and you have Black Friday through Cyber Monday, which is a very unique set of volume and consumer engagement. That is not replicated throughout the course of the year.

So it is true that we had — we were happy with the results we had, but we also cherry-picked the highest 6-week period in the entire year, and so I think it’s a mistake to think about how you linearize that or annualize that to the rest of the year. I was talking to one investor who said, “Well, half a quarter, so multiply it times 2 and then multiply it times 4, that gets you to the run rate that you’re at. And that math would work if it were another 6-week period, it just happens to have been obviously a really high season for us.

And that’s offset by the fact that we have a lot of work to grow that relationship, and so we feel very good about the traction that we had early. We feel good — we feel really good that we got it out. I think very few companies could have signed a contract when we did, which was like, I think, the day before earnings call and then be live by the time Black Friday hit. Like that was an impressive feat. Very proud about that.

Also very proud about the traction that we have. I’m proud that we’re testing now a second product. I feel very good about where we are going long term. But I also would implore folks to be patient because we said there’s a lot during Shopify. Jason, like we went public, it was like the first question, every earnings call was, hey, where are you at on Shopify? Where you at? Kept having the question. We kept saying, “Not yet. Just relax. It’s coming. It’s going to be okay. It’s going to be okay. It’s going to be okay.” And then bam, it hit. And it was explosive.

And I think with Shopify, it was unique because we had specific ideas about distribution. I think on Amazon, you’re not going to expect a big bang, but the patience should come in the form of we’re working the program. We’re going to keep growing and expanding it. And it’s going to be a source of growth for quarters and years ahead because the program is nowhere near its optimized state. It does not have this big bang kind of flash-bang approach that you might see in other merchants or enterprise partnerships.

Jason Kupferberg

So there, you’re talking about presentment in the checkout flow, and yes.

Michael Linford

It’s presentment. It’s the kinds of offers. It’s working with category managers to earn their trust on the relative impact that our product has for their conversion. It’s communicating the offer, how we communicate it. It’s a little silly stuff, size of font and position on the screen. And you think these things don’t matter, but I promise you they really do.

And it’s why we have posted such strong growth for merchants who have been live for more than a year on our platform. It’s because these optimizations we talk about, they can be credit optimizations because you’re improving the funnel. That in turn results in you approving more people. They can also be just frankly communicating the offer better.

And then it could be introduction of new products. We saw during COVID, one of our — we quoted first half, I mean, I shouldn’t say during COVID like it’s past tense, we’re still in COVID. But when COVID first started, one of our merchants said, hey, what can we do for our consumers. And we said, you should really try 0% offers because we think it will move the needle and it may be worth lot for your consumer. And this company shared our ethos with respect to the consumer.

So they trialed 0%, and they’re still on 0% because they realize the value that it delivered to the consumer. And these are the kinds of things that you work on with merchants over the course of the relationship. You can’t — it’s really hard to flip the switch and get there. As you work with them and earn their trust, you begin to be able to expand the total offering.

Jason Kupferberg

Just some trial and error, I’m sure, involved and all that.

Michael Linford

And then lots of testing. I mean we get tested out. You know what? Because every merchant success it says, “Are you really worth it? Can you really add value?” And it’s easy for us to get tested there, and we do. We test — we get tested every single day.

Jason Kupferberg

Exactly. Exactly. So maybe just on the regulatory front, I know you guys and a handful of other BNPL providers just responded to the data inquiry from CFPB. And I know that, that was just focused on the paying for part of the market, which is really only 15% to 20% of your GMV versus like 100% for some others. You guys don’t charge late fees. Like we get that. So I guess like on the other side of this, do you feel like this will just be more about sort of transparency and like formalized relationships with credit bureaus so that there’s kind of data sharing, if you will, among the BNPL providers as opposed to there being real, significant operational impediments created?

Michael Linford

Okay. So first, really important level setting thing what the CFPB did. So they sense this request for information. The CFPB has a number of tools in our arsenal to regulate. This would be like the earliest of any action taken. This is truly — and I don’t want to put words in their mouth, but I believe this is truly them saying, “Help us understand what this market even is,” and it was a genuine attempt to understand the market. That’s how we took it, and that’s how we responded, which we think is a really good thing for consumers. We think it’s a good thing to begin to pay attention to this really important new payment method.

We are humble enough to know that like there’s any number of things that could be perceived incorrectly or footfall that exists in the kind of business that we have. But given the fact that we really do try to put the consumer in front of everything, we think this is a good conversation to be had.

I won’t speculate as to where this goes because, honestly, I think that’s for the CFPB to do the work and understand it. What we have said and we’ll continue to say is we have our own framework for what we would like to see, and what we would like to see are the things you alluded to. We would love it if the playing field got level.

Part of the reason we won the Shopify relationship was because they specified at the outset the late fees and other kind of hidden gotcha fees weren’t to be allowed. I think unlikely the CFPB regulates there as a speculative matter. I don’t actually know what they’re thinking, but I would love it if they did. I would love it if they did. But I don’t think that — we’re not certainly relying on that or hoping for that.

I do think that conversations around underwriting, how various players approach the underwriting problem. Are you actually underwriting the consumer? Are you creating indebtedness where you shouldn’t be? So that’s an area that I think the CFPB might take a peek at. And I do think they’re going to have a lot to say, in general, about basic stuff like disclosures, which again, are really hard.

And I don’t envy the regulators at all because they’re having to think about ways to understand why the consumers are adopting these new payment methods, which are admittedly very different and still deliver the appropriate disclosures. And we’re very focused on trying to be as transparent as we can. It’s a core value for us at Affirm. And frankly, we do hope that — again, we hope that we help, participate in any way we can and finding a way for our industry to communicate as transparently as they can to consumers.

Jason Kupferberg

Right. Right. Okay. Yes, that all makes sense. Another question coming into the portal here is around the Debit+ card, so maybe just give us an update on when we may see that kind of in the wild a little bit more. I know Max can barely contain his excitement, and I picture you kind of wanting to almost strangle him if you were in the same room at the time of the earnings call, but there you go.

What’s kind of the expectation here? I mean is this very much like, hey, we got to get it out in the market and then we’ve got to put a lot of marketing muscle behind it? Or do you think it’s something that can ignite fairly quickly?

Michael Linford

So no breaking announcements, so I apologize in saying that. I can’t tell you time lines or anything of the sort, except to say that it’s very much a live product and in the hands of thousands of people, myself included, and we really want to make sure we get the experience right. We want to make sure we stick to that.

This is a situation where you don’t want to take that now north of a million user wait list and give them the bad experience because you’re not getting a shot on that, and we want to be thoughtful about that. I don’t think this is a thing that we expect to be like overnight in the hands of millions. I think we’re going to be very thoughtful about the rollout once we start rolling it out.

And I do think that means that we’re going to want to roll it out, start that process sooner rather than later. But can’t — no specific time lines. Don’t expect there to be a massive marketing event in the first days of this. We do think there’s a tremendous market fit for the product, and we’re really excited about what it looks like once we’ll start adopting it. But I think that we’re going to be patient and thoughtful to make sure we do it right and that we don’t burn the one asset that we have here in this card, which is a really strong consumer pull on it. We don’t want to create any sort of regret on our side for rushing out a product that isn’t going to be to our standard.

Jason Kupferberg

For sure. For sure. Where does the firm stand on relationships with the credit bureaus now? And how do you see that evolving?

Michael Linford

So we are very active consumers of their products and that we buy a lot of data from the bureaus. And we are in very heavy consultation with all parts of their business, including and especially how you think about BNPL furnishing.

I think it’s really early in those or at least nothing is firm enough for us to really talk too much about where that may go eventually. But we’re in a pretty heavy conversation, but I don’t mind sharing that. We believe that underwriting is an important thing to do, but it’s actually a consumer good when firms make intelligent and informed underwriting decisions, and that’s important to us. And we think that’s actually a piece of our mission. It’s pretty important because we don’t ever want to put a consumer in a position where they’re over their skis. It’s a terrible thing for all involved and doubly true for us because we don’t have ways to extract fees out of them. But frankly, even for our competitors.

And we’re mindful and concerned. But it’s a little early, and I think there’s a lot of work to do to really be able to share too much more except that we’re — we continue to engage and partner with the bureaus around what we can do here.

Jason Kupferberg

Okay. Well, let’s talk about Shopify a little bit because that was the big topic a year ago and then it got supplanted by lots of other topics. But just to kind of refresh there. I guess it’s our understanding is that the base term of the contract, 3-year term, expires in July of 2023. So just wanted to check and see if that’s correct. And are there any type of auto renewal provisions in that contract? And I guess, same question for Peloton, which I think our understanding would expire September of 2023. Do we have those dates right?

Michael Linford

I’d be lying if I told you with certainty about those dates. But yes, they were both 3-year deals signed that year. So it’s order of magnitude, right? Generally speaking, our deals tend to be — whenever they go out that far tend to have provisions that would allow us to continue to operate it for whatever reason we couldn’t get to a renewal. And I think in all cases, we have a view that a contract doesn’t displace a need for delivering good results.

And so we don’t hide behind our contracts. We tend to work pretty hard to earn our business even if it’s under contract. That’s how we behave and operate, and that served us well today, and that’s really the focus. I think if you see us do anything with respect to a renewal or an extension on a deal like that, it will probably be as much about growing a relationship as it is about just keeping it. Because candidly, if it’s just keeping it, we’re probably not earning our keep.

Jason Kupferberg

Yes. I guess maybe building on that, we know you have exclusivity with Amazon through the end of January 2023. So just wondering if there are provisions in place that could govern a potential extension of the exclusivity period.

Michael Linford

Amazon is an awesome partner with amazing scale, and they really don’t like that E word at all and for good reason. They hate the idea of 2 businesses blocking out good consumer offers just for the purposes of doing a deal. It’s my perspective. They’ve never said those words. Those are my words. And yet, again, I think if we thought that was important for that business, I think we would have stressed about it. We don’t — we think the more important thing for that business is deliver good results for the category managers who are scaling their businesses and deliver great results for the consumers and the platform. And the rest of it has worked itself out.

Jason Kupferberg

Last one, and then we’ll let you go. Have you seen any further uptick in your pipeline of enterprise merchant opportunities post-Amazon? I would imagine a lot of folks kind of took notice, but maybe if you can just kind of update us there.

Michael Linford

Yes. I think anytime you’re able to partner with the enterprises that we partner with, it serves us a great validation. When we first signed Walmart back in 2018, it was really a validating move that Affirm wasn’t just this new tech company and the kids were T-shirts. It was actually like, oh, shoot, you have the attention of the world’s largest retailer. And anytime you do that, you do get extra attention.

But I’ll be — to directly answer your question, I don’t know if I attribute as much to that as just the growth in our category. I think the thing that is most surprising to me is how mainstream this payment method has become. We estimate that it could be as high as 5% of e-com spend last quarter, I’m talking calendar Q4, and that is just a rapid rise in this new payment method.

And I think that is the thing that validates the category. And if I were an investor, I’d be asking myself is that a real trend, and we certainly think it is. And who’s going to be the winner? And we have a lot of conviction that that’s us.

Jason Kupferberg

We do, too. So we’ll leave it on that note. And thank you very much for your time. Always great to speak to you. Really appreciate all the comments.

Michael Linford

All right. Thanks, Jason. Take care.

Jason Kupferberg

Thanks, Michael. Bye, bye.



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