Affirm Holdings, Inc. (NASDAQ:AFRM) Autonomous Research 7th Annual Future of Commerce Symposium September 15, 2022 4:30 PM ET
Company Participants
Michael Linford – Chief Financial Officer
Conference Call Participants
Rob Wildhack – Autonomous
Rob Wildhack
Great. Welcome back, everyone. My name is Rob Wildhack. I cover consumer finance, fintech, buy now, pay later, some lenders here at Autonomous. We’re really excited, though, right now to have Michael Linford joining us. Michael is the CFO of a firm. He’s been in that role since 2018, which means he’s led the company through – Michael, significant growth, the IPO process and then the last almost two years now as a public company. I’ll jump right in and start with some Q&A. But to the audience, we do want to make this interactive. So if you want to ask Michael a question, feel free to use the Q&A box in Zoom or you can e-mail them directly to me at rwildhack@autonomous.com.
Michael, let’s get started. Thanks for joining us today.
Michael Linford
Thank you for having me.
Rob Wildhack
Definitely. I get started with a high-level question. It’s the future of Commerce Conference, so it feels appropriate to start there. How does buy now, pay later fit into that description, the future of commerce? What’s your vision for buy now, pay later as a product and as a sector 5, 10 years down the road from here?
Michael Linford
Yes, it’s a good question and a good way to frame the problem. We have a lot of conviction around the fundamental change in consumer behavior that’s driving the adoption of this new payment method. And at the core of it is this set of consumers who have walked away from credit cards who have given up the buying power that they could have had with credit cards and were using debit mostly. And what buy now, pay later has done is it’s introduced an alternative way for consumers to still get access to credit, but to do so without any of the fine print, tricks and tracks associated with revolving credit. And that’s the backdrop. That backdrop started years ago. And with that consumer desire to have this new way to pay, brought a bunch of market entrants into the category.
And we have a lot of conviction that if you wind the clock forward, you’re going to see this as a payment method that rivals traditional credit and debit products. And that means first online, where we think there is going to be continued gain in the share of this payment method. And then we think over the longer period of time, it will do so offline as well. Our view is that the future is going to be won by those who can offer the most products and those who treat the consumer the best. That is no late fees, no deferred interest, no fine print and tricks, and who can still extend credit responsibly. And so you pull that together, and we think that in the end, this is going to be an industry that’s very important. It means a lot to consumers and to merchants online and off-line, and really across all transaction types.
Rob Wildhack
Awesome. And then as you zoom in on the buy now, pay later group, Affirm is certainly among one of the heavyweights. Talk about what you think your competitive advantages are that we – that you guys winning within the buy now, pay later group.
Michael Linford
Yes. I mean we talked a lot about underwriting and risk management a year and half ago, people didn’t care as much. They care a lot these days, and it really is a key differentiator for Affirm. It’s both the data and the technology we have that we apply to the underwriting problem, but it’s also how we operate the business and how we think about taking risk and managing risk even thinking about the product as a risk product is something that sets us apart. And that is in part because of where we started. Affirm started with the highest average order value categories, and we migrated down to what we call Split Pay, which is the lower average order value divided by four type payment method.
Then we have aspirations that are going on everyday spend. And if you start with the hardest part, the higher AOV, longer term stuff. You have to do risk management, right, especially if you want to have the same depth of approvals that merchants need and aren’t willing to do all the tricks and anti-consumer stuff that we think credit cards do. And so we’ve invested in those capabilities, and we’re done since then, after we really demonstrated strong market leadership there is added on additional new payment average order values, which allows us to broaden the portfolio. So when we talk to merchants, we’re able to talk not just about paying for a scheme, but really a full set of pro-consumer products that enable that same consumer I was talking about to be able to pay for things over time, and all of that’s enabled by our world-class technology.
When you’re a company that’s founded and run by Max Levchin, we invest a lot in engineering and engineering capabilities and product and product capabilities, and those really do set us apart. We have the world’s best engineering team, and we have the – that shows up in our ability to win and maintain enterprise relationships. Part of the reason why these mega enterprises, who have all the resources in the world and could have done this on their own we got to ask the reason they work with us because we can do it. We can do it better.
Rob Wildhack
Yes that makes. And one more industrywide question for you just to follow-up on the topic de jure, which is the CFPB report out this morning, seems like the areas of emphasis for the CFPB they range from disclosures, to auto pay, to late fees, to data.
So first, what’s your initial reaction to the report? And second, as you think about compliance with all these things that the CFPB is focusing on, how do you think about costs both from a dollar perspective and a time perspective, to comply with all those things?
Michael Linford
So I’m going to start with the first and most important statement, which is the report is something, I think, everybody should go read. I wouldn’t trust what you may be read in some of the early journalist outlets. I think you should go look at the report, because, I think, it doesn’t necessarily match some of the headlines that are out there. So encourage everybody to read it. And it stops short of suggesting where they will be headed from a regulatory standpoint. And it really just is a good survey of where things are at and highlights a few areas of focus or concern for the bureau.
And our [indiscernible] is that we think the report validates that our approach matters not just to consumers, but also to the regulators. The areas that the CFPB spend a lot of time on in that report include things like late fees and other consumer fees. They don’t list each player’s fees to protect confidentiality, but we stick out in that report because we don’t charge them. And so when they list some people having zero fees and some people having as much as 50% of their revenue in fees, we’re the zero in that list. And that shouldn’t be news to anybody who has been following our name.
They talk about selling consumer data as being a real piece of risk. And we don’t get to work with enterprises like we do if your business model is built on just reselling their consumers’ data, we’ve always protected it and been very thoughtful about that. We have the same concerns the bureau does around stacking and lack of reporting. And we’re heavily invested in trying to get that right for the whole space.
And so when we think about compliance in the future, we think of this as we get to keep doing the things that we would do regardless of the regulator engaging, and our competitors are going to have to start investing. They are going to have to say, how do I build the compliance function? Now I have to show a truth of lending disclosure at checkout, and I can’t force AutoPay. How do I get my repayments and how do I get the same sort of smooth checkout? And these are problems that we put on ourselves. In a lot of ways, again, because we started with the hard thing, we put a lot of constraints in ourselves that allowed us and forced us really to innovate in a different way. And so we’ve solved all these problems already.
And so, with all the appropriate humility, because we don’t know where the regulation might go, we already had the report was that that the things that we care a lot about, have been talking to merchants about, talking to the investors about, are things that are on the CFPB’s mind. And we’re hopeful that that gives us an opportunity to continue to show real leadership into the future. And frankly, we’re not sitting around worrying about having to solve these things we already have them.
Rob Wildhack
That’s very helpful. And now we can roll up the sleeves a little bit and dig in on a firm. I’ll start with the outlook for fiscal 2023. You’re calling for volume growth to be about 40% year-over-year, which I think, the market took is disappointing only because it’s down from 90% to last year. It’s obviously hard to grow 90% forever. So how much of the 2023 outlook is the business maturing? How much is the comp issue? Is there anything else that you would add in there?
Michael Linford
Yes, you’re right. It is hard to grow at 90% forever, but we – that is – I’m not saying that we wouldn’t grow in 90% some year in the future, we think this market is huge, we think our opportunity is huge in it. And when we started planning the year, and the guidance is a reflection of how we plan the year, we take a look at the growth rates and run rates on a sequential and year-over-year basis in the business. And we’re up against some really, really early comps in particular, in our fiscal Q2. And it’s not something that I’m going to apologize for.
We had an awesome surge of growth in our fiscal Q2 last year, where we on-boarded and rolled out on Shopify and Amazon in the same quarter. If you remember, we went live on Shopify in June of last year, but it wasn’t until early the September month that we began getting really wide distribution on Shopify.
And of course, just before Black Friday, Cyber Monday, we went live on Amazon. That’s 40% of U.S. e-commerce that got laid out in Q2. And even though, we had so much more opportunity there going from zero to something with those programs is a really hard thing to implicate, and we would expect that growth rate to moderate as we work out the comp.
And the other thing it’s really important to point out is that we are still lapping some headwinds associated with our formerly largest partner in Peloton. And so you put those two things together, and we see it as a really healthy business. It’s very growthful and has the ability to accelerate, but does have a couple of quarters of we think are tough comps.
And so we’re not, we don’t have anywhere near the same concern. I think that some people in the market do. And time will ultimately tell there, but we’re pretty confident about where we’ll get to by the end of the year. And I think a key stat for investors to go into is what we shared in our Q4 results, which was our top two partners grew 27% sequentially from Q3 to Q4.
And we put that set there for folks to really understand that the growth with our largest partners isn’t over. We have a lot of work to do, and there’s so many more things that we’ll be working on with them. And that will be a source of growth for us and yet going from whatever we’re at into a corp and adding employment to share a part there is awesome, but going from zero to that number is obviously harder to get.
Rob Wildhack
Definitely. And let’s stick with Shopify and Amazon for a minute. I wanted to ask about the new products with those partners. So that would be 0% APR and Split Pay with Amazon and then longer duration stuff with Shopify, how big do you think those could be relative to the incumbent product now? And then how do the economics on the new products with those partners compared to the same products with the rest of the business?
Michael Linford
Yes. We’ve not given any breakdown of partner level – partner product level economics, and I’m not going to do that here. But what I will say is that we really started with Shopify and Amazon from two different ends of the spectrum. And on Shopify, we started with our Split Pay product. And on Amazon, we started with our longer-term interest-bearing product.
And over the past year, we’ve been working with Amazon to test and iterate around both Split Pay and other 0% offers. In Shopify, we rolled out adaptive checkout and have rolled out other interest-bearing offers on their site as well. And we think those are still very early innings, both of those two next new programs. And so the way I would think about it is it’s a little bit too early to begin looking at the – trying to parse out how they will be and what’s the difference in economics and instead just put it in a bucket that we have a lot of opportunity to continue to grow these programs.
And none of that takes away from more commitment to deliver what we think are industry-leading unit economics and in that 3% to 4% range we talk about, which we’re going to continue to do regardless of how those two programs mature.
Rob Wildhack
All right. So it’s safe to say that your 3% to 4% sort of long-term outlook is well within range as these Amazon shop and new products grow?
Michael Linford
Yes. We feel good about our ability to continue to deliver those unit economics to the investors and enable our growth, a key part – I’m sure we’ll talk about it at some point, a key part in getting to profitability for our firm is scaling our revenue less transaction costs. And the way the – if we can be disciplined around delivering really strong unit economics, then the math actually gets pretty easy about how we deliver strong cash flow at scale.
Rob Wildhack
Got it. Okay. Let’s actually jump right to profitability and talk a little bit about revenue less transaction costs, the outlook there for this coming fiscal year points to RLTC as a percentage of volume, like 3.7% at the midpoint. To start, what are the moving parts between that and the 4.3% you reported last year?
Michael Linford
Yes. I mean I think there’s a bunch of moving parts, but maybe one of the easiest ones to really think through is just the mix of business. Our business is – there’s a hundred different ways that we can make our business more complicated. Some of these some very broad strokes to simplify it.
And we really have two sets of products. We have this Split Pay and then we have everything else. And you think about Split Pay driving low single-digit kind of 1%, 1% to 2% transaction margins. Then you have core business delivering something that can be as high as 5% or 6%. And as those two mix between the two, and we continue to grow Split Pay business, we will see that number naturally drift down a little bit. That’s in addition to the macro environment we’re in. Obviously, we are in the middle of a fundamental shift in both the consumer and the rate environment, both of which do show up in our transaction costs.
And so I think those two things are probably the two biggest things to think about when looking at that number. We got asked the question a lot over the past year. We kept getting asked 3% to 4%. Aren’t you going to be above that – and I think I got – it goes literally every quarter and I keep telling people now 3% to 4%, 3% to 4%.
And there will be quarters we’re going to be higher and maybe or are going to be on the lower end of that. But we look at the total ability to generate revenue and the cost of scale in this business and feel really good about that range, and we’re at the high end of that range and which means that we have a lot of room to continue to absorb more macro headwind.
And we have a lot of room to continue to mix in this Split Pay and still be safely in that range. I think the only other thing to think about is, again, we do have a little bit of a seasonality thing to think through with respect to our Q2, which we would expect to continue to be seasonally a little mark for both the margins of the business as well as the revenue contribution, given the timing of originations in the quarter.
Rob Wildhack
Yes, yes. You make a good point though, declining from 4.3% to 3.7%. As rates ratchet higher, and there’s a lot more concern around consumer finances, broadly speaking. The long-term guidance there is, again, between 3% and 4%. So in light of everything that’s happening this year, you’re still at the high end of that long-term range. What would have to happen for that number to be 3%?
Michael Linford
Yes. I think we have to see a substantially higher mix in Split Pay in our business, or a rate environment that’s, again, moves very rapidly. Although, we talked about this a lot. The rate environment moving on us inside the year really doesn’t impact us. So that’s more of a long-term statement, meaning at some point, rates do impact us, but not usually in the short-term. So that’s happening in this fiscal year. It really would have to be a mix of business driven.
Rob Wildhack
Got it. Got it. And then if you move down the income statement, you’ve committed to exiting this fiscal year. So that ends June 2023 with positive adjusted operating income. What’s driving you to reach that breakeven point now this year?
Michael Linford
Are you wondering like what’s the motivation behind it? Or what is the – how do we get there?
Question
Rob Wildhack
No more than how, but you can hit on both for sure.
Michael Linford
Yes. I think the motivation is pretty straightforward. We really have a lot more confidence that we think is being reflected in some investors’ minds around both our cash position and also our long-term profitability, and we really believe we can take an issue and concern off of people’s minds by scaling into it.
And that how is really scaling into it. I mentioned before, we have so much conviction around the quality of our units. We have so much conviction around the quality of the assets that we generate. If we stay focused on that, we stay focused on a disciplined approach to risk management and underwriting, we generate strong new economics and be compensated by our merchants and our consumers for the products that we have. We’re confident we’ll generate enough scale to be able to absorb what is a very large company non-accounting term fixed cost base and we think about our non-transaction operating expenses, those are more fixed.
And again, the economics and it’s not in the accounting sense. And so it’s things like our payroll for our engineers. It’s things like our legal and compliance teams. As I mentioned before, we had already invested in those things and those things do need some scale to absorb those cost basis too. And so it’s – it may seem like you’re really easy answer, but it’s just continue to scale the enterprise with strong economics and at our operating expenses at a lower rate.
Rob Wildhack
Got it. And then similar to revenue less transaction costs, your long-term guidance on adjusted operating income is for a 20% to 30% margin. I’m not going to ask you for a time line there, so don’t worry. But I do conceptually and qualitatively, what happens from this year when you get to breakeven? And the long-term, when you get to what’s a pretty chunky margin there, what level of scale do you need to get there?
Michael Linford
Yes. And we’ve not given that either. But what I would say is that we have a lot of conviction around the scale points that we can get to. Again, we’re in very, very large markets. And we also have a lot of conviction around our ability to rightsize the organization to get there. But we’re definitely not going to strive to get there anywhere near the near-term.
While we can’t grow at 90%, wherever we can grow at really high rates for some period of time, and we’re going to keep investing in what we can in order to go chase that opportunity. And as a result, we really don’t want investors to think about measuring us to growth in adjusted operating income once we get to that breakeven point, we want them to think about it as a commitment to not need to raise additional capital to be very careful with the shareholders’ money.
But to be very focused on continuing to reinvest those margins back into the teams that we need to build great products and capture what we think is a really big market opportunity. And it isn’t until we feel like we start to saturate that, that we would actually turn to leaving that back down in some sort of a profit margin.
Rob Wildhack
Okay. Got it. Got it. Let’s pivot over to a couple of your favorite topics. Do you want to do credit or funding first?
Michael Linford
We can do either one.
Rob Wildhack
All right. Let’s start with credit. I think we talked about a little bit, there’s a lot of high-level concern around consumer credit, consumer finances and especially with the lower-end consumers. So just to kick it off, what does your average Affirm user look like?
Michael Linford
Yes. Our average is really representative of a younger, but nonetheless, very wide distribution of the U.S. American consumer. We’re not – some other players in the space are really over-indexed in super low income, Gen Z, demos, and we’re wider than that. And we’re wider than that part because of just the breadth of product offerings, right?
So if you think about the consumer who’s using a 0% offer at room and board to buy furniture for their house, it’s a very different consumer that he’s using Split Pay to buy a new dress. And they are very different to consumers and we serve both. And as a result, we end up just hitting a more representative sample.
And so it does look like a slightly young group, but nonetheless, very representative, wide swath of consumers. And I think about the only segment we don’t have a super big business [indiscernible] which we are all of that. But as the coastal the Chase Sapphire card customer, the super high FICO, super high income consumer who doesn’t think about their credit card as a borrowing device, they think about their credit card as second device. And we over – we under-index substantially in that demo, but if you go to anywhere in the middle of the country where we’re really keying a pretty representative sample of a younger consumer in that geo.
Rob Wildhack
Got it. And then on your earnings call in August, you guys kind of highlighted some signs of stress from a credit perspective in April and May. And also highlighted at the same time, all these different levers that you have and use to navigate that. So can you talk about that experience and exactly what you did there?
Michael Linford
Yes. And we’ll continue to do it. And some – I got a question recently, which I thought was it thoughtful. It was like how have you changed your approach to risk management in the current economic environment. And the short answer is we have in, we thought about through the cycle performance as we built the business, and we’re simply executing the plan that we had, which is that we’re going to be really thoughtful about it right now.
So we have stepped up the rate of monitoring. Max likes to talk about it as our leadership team would get together once a month and really go in detail on credit stack as a leadership team, of course, the working team was in it many times a week. But now the leadership team to a person is engaged on a weekly basis looking at our credit performance.
And that’s really important to us because whether you’re in the commercial organization, working with merchants every day or you’re in our customer operations team, or you’re in our technology and product teams, it’s important to have the context for where that consumer is at. And that’s a really important insight just who Affirm is. It’s embedded. Risk management is embedded in everything we do.
It’s not something that happens in a room over on the corner. And as a result, we don’t solve the problem like maybe a traditional financial institution by just flipping a credit dial up and down, we can actually deploy product and innovation to solve the proud line. So we talked a lot about on the call the kind of leverage that we’re able to pull right now include things like increasing the down payments required to extend credit.
And that allows us to say yes to the consumer to give them an approval even though we do see signs of stress in some consumer cohorts. And so we’re trying to find a way to be able to extend credit responsibly in this environment and maintain our unit economics. A down payment is a really good example, but we can mix term lengths, we can mix product types. And again, we just have so many more levers than what a lot of the competitors do.
And yes, we can also type in our credit box. We can actually choose for a specific program or specific area of our business. We can say, we want to take a little bit tighter approach to this, and there’s a real power in that. We don’t have one instrument, we have a lot of surgical tools and we – you combine that with a view in the business that’s hyper inspecting or looking at it on a regular basis. And then you sprinkle the true piece of magic here, which is a super short duration asset.
And then what you get out is, is a situation where macro’s going to happen, consumers are going to get stressed, that stress is going to go through the system. And the question is, how can you manage it? And I think that we’re going to demonstrate to the market over the next year, that our approach is differentiated and it really does do a better job in the long run. But that’s not to say that stress doesn’t happen.
And I think what we’re trying to tell the market in our last earnings call is that the stress is there and we’re not immune to it. We haven’t invented some way for that consumer to not be stressed instead, it’s about how we manage it and we really like the leverage we have.
Rob Wildhack
Yes. And as I hear you talk about managing that, it sounds to me personally, like you saw some softening trends, we’re able to pivot quickly and still finish the quarter higher on volume and lower on the provision. Is that a fair characterization?
Michael Linford
Yes, that’s right. And that won’t – it won’t always be that easy. I think we know that there are going to be moments when we’re going to have to have the trade off be more severe. But in the Q4, we talked a lot about how the trade off wasn’t that hard for us, because we were able to be very careful only on the margin. We have a slide in our investor presentation that I would encourage everybody to look at.
And it shows, we talked a lot about the steepness of our curve and what we mean by that is the credit losses on the last approved consumer are substantially higher than on the first approved consumer. And credit underwriting is all about ranking of risk. And if your curve is completely flat, it means it’s like throwing a dart against the wall. It’s a random distribution. And if your curve has a lot of steepness to it, it means that you can be very thoughtful about not taking the worst pieces of risk.
And then you combine that with, again, all the leverage we have, where we can actually move consumers up and down the risk stack by offering them different products that gives us flexibility to manage it very differently. And that’s why in Q4, we were able to be well ahead in our margin outlook and still deliver really killer growth. And why we don’t have the same concerns about credit as some of our competitors do.
We have some competitors who took their growth rates down to low single digits, or maybe even super low double digits, 10-ish percent growth rates. And that’s because they don’t have the scalpels that we have. They kind of have crude hammers and they just slap the credit box down and try to figure out a way to truly stem or could be a loss set of business. And instead we can be pretty nimble and dance around it. Rob has the chart up here, but you can just see the sharp decline in that adjusted charge-off or actual credit loss as you get top decile of credit.
Rob Wildhack
Yep. Yep. And thanks Rob for sharing that. It’s great. Last one on credit. What metric do you recommend? We as public market investors and analysts who can’t see the day to day movements internally at a firm. What should we look at to view how credit and losses are trending?
Michael Linford
Yes. So I think a couple things are really important about our business. The first is, is any measure that’s nominated by the principal balance outstanding, like you might see within the credit card company really has pretty poor comparison to our business. The way I keep on talking about it, hopefully rising the folks is the unit of some lender’s business is how much loan is outstanding. The unit of our business was actually the transaction amount because we force every loan into amortization. That is to say, it’s repaid on a very straight line. And so our job is to turn over the loans as quickly as possible. That’s a good outcome for everybody, right? Loans being repaid as a great outcome from a credit standpoint.
And when you look at things on a percent of portfolio outstanding basis, it necessarily says, “Well, we’re not going to give you any credit for what’s been repaid.” We’re going to focus on what has it, and it compounds the error. And then when you have a super short duration asset like ours, I think some folks are extrapolating like they shouldn’t.
And so I would really portend to look at everything denominated on a transaction basis because that’s how we operate the business. When we think about improving or denying a transaction, we say this transaction is going to generate this much revenue, it’s going to generate, it’s going to have this many costs and the cost of credit is one of them, and we make a decision based upon the profitability of the transaction, not the impact on the future portfolio balance outstanding.
And so I would look at things like our provision rate as a percentage of GMV to get a good view and look at our allowance rate changing as a good view of the quality of the assets that look over. And then lastly, if you want to look at charge-offs, which is an entirely reasonable number to look at, you just to denominate them by the right amount, which isn’t the current outstanding balance, it’s the cohort of originations that those charge-offs are associated with.
And remember, our charge-off policies of 120 days. And the way the average life of our loans is like five months. And so you do end up in a scenario especially in the growth for where any of these comparisons just aren’t that insightful if you try to just denominate charge-offs by the portfolio outstanding.
Rob Wildhack
Yes. And let’s move to funding costs now. In August, on the same earnings call we were referring to a minute ago, you mentioned that a 100 basis point move higher in rates beyond the current forward curve would weigh on your revenue less transaction cost as a percentage of volume by 10 to 20 basis points. In February of this year, that same language pointed to a 40 basis point headwind RLTC as a percentage of GMV. So what changed in the last six months?
Michael Linford
Yes. Thank you. I want to clarify because the way to think about it is was going to tell you for the next time period what the impact is going to be, and so in February fiscal 2023 was further away. And so in February, we were talking about the impact in the near term as being 10 to 20 bps in the longer term and very long-term meeting beyond fiscal 2023, then is being in 40.
So the way to think about it is the total impact in the very long run is something on the order of 40 basis points. And there are step down the closer and you get. Like the impact on rates to our business tomorrow is almost nonexistent. The impact on rates six months from now is controlled. The impact of rates a year from now is controlled but still pretty high, as you saw on the 10 to 20 basis point number we guided to, the impact of rates on the very long term is less controlled.
And this is an important point where I think we do have an exposure to rates. It’s a very real cost in our business either in our funding cost or it goes up in the yields that we’re able to sell loans at – and I think we’re not denying that, and I hope everyone understands what we’re meaning to say that. It just doesn’t flow through as quickly as people think.
And what that does for us is that gives us time and time is a super valuable asset for us because our asset turns over so fast, we can replace the economic content with either more revenue sources or other cost mitigates that allow us to still deliver our unit economics in a higher rate environment.
If we were subject to the rates impacting us day to day, you’d see a very different posture from us or we wouldn’t be as confident in our ability to absorb and react to the higher cost markets, the higher cost environment. But because we do have that shockers over built into our capital strategy, we’re able to look ahead and say, okay, we see some cost headwinds coming, but we can absorb it and plan around it.
Rob Wildhack
Okay. So it’s about the timing and the ability to offset as much as anything else?
Michael Linford
That’s right.
Rob Wildhack
Got it. Okay. And let’s double-click on the forward flow agreements because or, I guess, what you guys would put as off-balance sheet non-securitized broadly speaking. And we’ve been an audience question too because it’s related – so you’ve added a lot of capacity. Have you been adding new partners? Or have you been increasing capacity from existing partners? Is there any new demand from maybe other Fintech lenders who investors are not as keen on buying their paper. What are the dynamics with those forward flow agreements and with your funding capacity?
Michael Linford
Yes. So we shared is that was pretty compelling on the call, which is if you look at our forward flow capacity, very little bit is subject to renewal in this fiscal year, which means that the investors that we have are signed up to be filled up through the entirety of our fiscal year.
And to answer the question about new versus upsizing we’ve done, but we like that. We like making our existing partners happier, and we also like bringing on new partners who are diverse. We think a lot about the correlation between all of our funding partners. We don’t want to be in a world where we have five regional banks buying all of our paper and we don’t want them all thinking about the world the same way. And so we have a diverse set across pension plans and insurance companies and hedge funds and banks. And we really seek to try to get a diverse of capital.
And that’s important because this environment is teaching us anything it’s that – it’s really difficult to be able to look around corners and see what’s going to happen next. And there’s no way to be perfect in bulletproof, but if you want to maximize your chances to have really durable capital, you make it diverse, you make it committed, and you don’t treat your partners as just money. You treat them as really important partners and you make sure they get their returns. We think it’s very important for us to deliver the returns that our investors are signing up for and take that really, really seriously.
And so the forward flow capacity is committed. We have very little up for renewal and we’re going to keep adding it. And then – and we have – I had said this on the call. I don’t remember the exact wording I used, but something to the effect of, we just have the very fortunate position where funding is just not a constraint on our business today, and that’s not easy, it’s because again, our approach to risk management combined with our exceptionally strong team have allow us to execute very well.
But it is the case that we’re not constrained today based upon funding capacity. We – and that’s true for forward flow and for warehousing. And it’s also even true for ABS [ph] market has proved to be really volatile this year. But ahead of this most recent inflation print, we were able to go execute and expansion of our 2022 A deal. And that deal was very well received by the market. And I think it’s a testament to – we have a lot of confidence in which is that we will be a differentiated, will be viewed in an undifferentiated basis versus a lot of our other assets that are out there and that’ll serve us well on the end. And the key to all that is staying really focused on making sure we manage risk appropriately.
Rob Wildhack
Yes. And as I think about the forward flow agreements and the warehouse lines, could you just talk about how the maturities and renewals are staggered? Should we be worried about a “cliff” when funding costs take a material step up?
Michael Linford
No, you shouldn’t because we manage that pretty aggressively. And so one of the reasons why so little of the funding capacity comes up this year is because we’ve been thoughtful about running ahead and renewing and extending and upsizing where we can. I think that may not always be the case, but much like with rates, these things don’t happen to us overnight. So we’re able to plan ahead in a pretty thoughtful way to make sure that we’ve got the capacity that we need. And therefore staggered renewals are pretty important to us.
And so we don’t like to put a lot of expiring capacity to one bucket. And that’s important because look, there will be partners of ours, who for reasons, not at all related to a firm may have to change their view of this particular asset and that’s okay. We don’t ever want to be in a situation where one partner matters so much to us that they’re doing something bad for them as a result and that means that you got to add more, got to add diverse, and you got to add staggered renewals, so that no one’s getting caught in any window, but it’s bad for everybody.
Rob Wildhack
Yes. Yes. Thanks for that. Let’s turn in the last six minutes or so to some more fun items and I’ll start with the 3 billion in cash and securities on the balance. That’s fun for anyone. How much of that is run the business cash? And how much of that would you consider a buffer? How much of you that would you consider excess?
Michael Linford
Yes, we’ve not given the framework for the market, so I’m not going to do that here. But I’ll give you a broad brushstrokes is that we definitely don’t feel like that’s capital we need to run the business. Quite of our profitability commitment was to take, to communicate our confidence in the lack of a need to use that to run the business. That’s a huge strategic asset for us, both because a lot of the stress that CFOs have in these kind of environments, we don’t have, like, I don’t wake up worrying about liquidity, the way I think some other people have to right now, because we were really fortunate and how we execute it in the capital markets last year. The timing of our IPO and our convertible raise allowed us to really create a lot of non-dilutive capital for us.
And yet we still want to be mindful about getting to profitability. And so we’re not intending to use all that in operating the business nor do we think that’s the capital we use to grow the balance sheet. That’s not the – that’s the strategy here, which means that, okay, so what’s left.
The things that are left are we’re really doing something inorganic, and you heard Max talk about it on the call. We certainly are – we’re being very thoughtful about it. We will not do something that we’re not the natural owner for it’s an accretive to the business and how we view what’s important to the shareholder. And then yes, this is a really good time to be very long on cash and vary and have the market, especially medium to late-stage private companies who probably got ahead of their skis a little bit on valuations that are having to wrestle with that. And we feel like we’re in a pretty good position to help be the right home for these assets.
And that is because we’ve all the hard things onto the risk management underwriting stuff and we’ve done the capital stuff really well. And so companies that maybe don’t have the same scale of us could potentially be a really good fit, where we can actually add a lot of value and synergy to those transactions. And yes, we’re going to be very careful, last thing what I do is create distraction for the management team or take our optable on executing the core opportunity ahead of us, which we think is enormous.
Rob Wildhack
Yes. Let’s stay with M&A for just one second because I certainly noticed that you and Max sounded more positive there. What can we learn from your past deals like Returnly and PayBright? And what have you learned from those deals? And how can you apply those learnings to M&A in the future?
Michael Linford
Yes. I think you can learn that we’re going to be pretty aggressive. We closed the PayBright transaction on January 1, 2021. We launched our IPO on January 5. I promise you very few finance teams are willing to try to stack that up, but we have the capacity to do that. And that deal was a true home run for us. It was – delivered a lot of growth. Its immensed our market leadership position in Canada. And we’re currently in the process of completing the migration to our platform in a way where we really like it.
And I think it’s a really good example of what we might do in other contexts. I think for Returnly, the big lesson there is that we have a right to do more than just buy now, pay later. And we think there is a wider set of things that we will have a right and ability to do and yet like the scale of the firm business, the core thing we do is going to weigh on the numbers in the biggest way.
So we – need to do something that’s not located directly in the center of paying for things over time, it’s going to be something that doesn’t weigh on the P&L in such a way where people are going to really see it as quickly, whereas when we do something that’s closer to PayBright, you do see the impact of that pretty quickly, and you’ve heard us talk a lot about that transaction over the past year.
Rob Wildhack
Definitely. And I’ll just fit in one audience question that came in to wrap things up. Can you stack rank your products by credit risk? You’ve made some comments about Split Pay losses as that product scales, but I think a lot of folks think about that as a lower risk part of volume, lower credit risk. So how do you stack rank those products by?
Michael Linford
It’s really – if you measure it as a loss in a percentage of GMV, then we lose – we have lower credit losses on Split Pay as a percentage of GMV but the durations very short on that asset. And so, when you annualize it, the losses are actually higher, and it tends to appeal to a wider set of consumers.
And that’s unfortunately a piece of complexity that you really have to reval in to understand the credit problem of the firm. Duration matters a lot in the risk of – edge. Very long-dated assets need less risk in them in order to be profitable, very short assets, you can be more risk on, both from a risk management posture but also from a unit economic standpoint, we’ll make mid-single-digit merchant discount rates for a very short duration asset, you maybe make 15% merchant discount rates from 43-month assets.
And so you think about the credit losses you need in those two scenarios in order to be profitable. And therefore, we can dial it up and down. I think the most important thing isn’t so much is it high or lows like can we actually predict it? Can we underwrite it successful and can price it in such a way where we can be profitable when we do approve those transactions.
Rob Wildhack
Got it. That makes sense. We’ll leave it there, Michael. Thank you very much for your time. We covered a ton of ground, got into a lot of depth on a lot of different topics. So I really appreciate it. Rob, thank you for jumping on, too. To the audience, thank you for listening and stick around. We’ll take a quick five minute break, and Ken will be back to host Visa. Thanks again, guys.
Michael Linford
Thanks, everybody.
Question-and-Answer Session
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