Affirm Holdings, Inc. (NASDAQ:AFRM) Goldman Sachs Communacopia + Technology Conference 2022 September 13, 2022 7:30 PM ET
Company Participants
Max Levchin – Founder & CEO
Michael Linford – CFO
Conference Call Participants
Michael Ng – Goldman Sachs
Michael Ng
Great. Well, thanks everybody. Welcome to the Affirm fireside chat at the Goldman Sachs Communacopia + Technology Conference. I have the privilege of introducing Max Levchin, Founder & CEO of Affirm and Michael Linford, CFO of Affirm, which is leading U.S buy now, pay later provider. My name is Mike Ng, and I cover Affirm as part of our fintech coverage here at Goldman Sachs.
We have 40 minutes for today’s presentation. We’re going to leave about 10 minutes for investor Q&A. So if you have a question at the end of this session, please raise your hand and we’ll get a mic over to you.
First, Max, Michael, thank you so much for being here and participating in our conference. So Affirm is the leading U.S buy now, pay later provider with about $15.5 billion of GMV in the last fiscal year. To start, could you help contextualize the market opportunity that affirms two sided payment network addresses, and how Affirm provides value to consumers and merchants in a way that should continue to help it gain share of commerce over time?
Max Levchin
As we normally do these things. Everybody hear me? How about now? Can everybody hear me still? This is a technology conference after all. Fortunately, I’m technologist. How’s that? How about now? All right. So, as usual, I’ll start and Michael will summarize because I’m incapable of short answers.
If you look at where we came from where we are today, it’ll give you a pretty good idea where we’re going. We started almost 11 years ago basically helping people buy things that require consideration. So couches, peloton bikes, mattresses, all sorts of things that require you to make at least a basic mental budgeting calculation.
The idea was that we could be less expensive, more broadly less confusing, safer than a credit card all stemming from a study that I read almost 15 years ago now describing how millennials are opting out credit cards because they are confused by the fine print and they have no time for it.
About 5 years ago, as the whole momentum of this genre picked up, we decided that this actually works just fine for less than [indiscernible] considered purchase. So we shifted into things like apparel, beauty products, anything that sort of [indiscernible] down from several $1,000 down to sell for the $100 and then down to several dozen dollars.
The announced product that we’ve talked about a lot debit plus, which is our foray into physical card, it’s really much more than that. It’s our assertion that we deserve to play in every transaction type. Building a network means you want ubiquity of coverage for merchants and consumers. There also has to mean ubiquity of transaction types. If at any given time you tell the consumer hey, we’re really useful not for this, you’re ultimately damaging your story, damaging your brand, damaging kind of the comprehension of business [indiscernible] every day spend.
And so the — by that logic should be obvious that we’re going after the totality of consumer spend in the U.S., small number. The good news is that the NPL even under today’s definition is massively under penetrated there’s no single digits. And so we have trillion dollars to address and going pretty strong so far.
The way of value, so we’ve already described the consumer side of it, but it bears repeating we’re until Apple’s announcement in space are the only player that doesn’t charge any late fees. Certainly no origination fees, no deferred interest, all the sort of schlocky things that our industry is infamous for. We opted out by design on this idea that if we build an honest product, treat the consumer right. We’ll build a brand and a preference and that’s borne out to be true both in consumer preferences also, consumers willingness to pay our bills, which is going to become progressively more important as we head into a downturn.
And then on the merchant side, the simplest explanation back from the earlier days when I did a lot of the merchant selling myself was merchant fee discounting. Like when you go in to a store, it’s at 10% off, it’s not meant for you, it’s meant for anybody who’s passing through. A much, much, much smarter way of doing this is individual pricing and discounting in the form of 0% [indiscernible].
A huge percentage of our volume is in consumer pays no interest because the merchant is subsidizing it, it allows them to preserve integrity of price, improve conversion, improve customer satisfaction, because they know they’re not paying any interest. In the case of Affirm, they’re also not paying any fees. So we help merchants convert. We also help them build their brand. At this point, we’re big enough where we accrete to most merchants brand building versus [indiscernible] merchant validate us. I’ll stop there.
Michael says it’s good enough.
Michael Ng
Sort Affirm has done a really great job of diversify business and product mix. Peloton, a couple of years ago was 30% of revenue. Now it’s less than 10. There are a couple of things I want to explore here. First, on underwriting. There obviously have been a lot of questions around the robustness of underwriting standards among all the NPL providers. I would think that Affirm’s history with peloton and longer duration to your point earlier higher AOV loans, has probably led Affirm to be more diligent in that process. So could you talk a little bit about Affirm’s underwriting practices? Why that’s important? What are the implications for origination volumes as we think about going through a cycle.
Max Levchin
There’s a lot of rich things to explore there. So I’ll be [indiscernible] little bit, but feel free to guide me, Michael, interrupt me. So the reason we started at the high ticket items was very much by design. I’m a big fan of moats as in things that prevent competitors from just cloning you and selling your product at a discount. Huge moats that you can build if you have the time and the data and lots of reps in underwriting. It matters less insurance from transactions. Simply put, if you are lending money over 6 weeks, you have four opportunities to default. You’re lending money for a peloton bike, on average that’s 39 opportunities to default. And so your underwriting decision and you say yes, you’re betting the person has the means today and also have the means 3 months from now. And they will be willing to prioritize your bill, if something changes about their ability to pay back with no stress.
So even in the best of economic times, there’s always an opportunity to screw up underwriting simply by taking more risk. We made it harder on ourselves by saying we’re not going to have compounding interest, we’re not going to have deferred interest, we’re not going to have late fees. So we made the model down to you’ve got to be really good at underwriting or you will lose your [indiscernible]. And we did that for a very long time. If you like the microphone [indiscernible] somewhat functions. We did that for a long time before we entered lower ticket items, which are easier to underwrite. We also make less money because merchants recognize that you’re taking less risk and therefore are less willing to compensate for it.
The fundamental risk management approach we have at Affirm is we have to get it right today. We have structured the product. So that they’re generally speaking very short duration relative to credit cards, relative to any other form of lending. About half of our loans are paid up in 4 months, about 80% in 8 months. So these are very, very short-term assets that allow you to focus on the front book as the jargon has it, not so much in the backlog. That still means you can’t screw up your underwriting decisions, but it gives you a lot of flexibility.
That allows us to focus on two things very broadly speaking, the quality of the model. So this is my favorite topic. So I’ll try to keep it short. But this is really something I can spend several days talking about probably a great model is one that doesn’t decay, doesn’t lose its ability to rank risks in the times of economic change. So there’s no world in which when people lose their jobs, they will still pay you on time because people eventually need to find money. And if you don’t have it, don’t have it. The best you can hope for, the best you want interest model is when you look at a collection of applicants asking to borrow, you want to have pretty good certainty that today, tomorrow and ex months from now your model will rank order the risks roughly to what the outcomes will look like.
As models [indiscernible] here, that’s when you sort of find out who’s actually bad at underwriting. It’s easy to be a good underwriter whenever they pays you back. When that becomes a little shaky here, if your models still [indiscernible] orders or risks really well, that’s a great model. That’s where we spent the last 11 years convincing ourselves through all sorts of experimentation through the short recession of — the brief COVID recession, we feel very, very good that our risk ordering is quite robust, it hasn’t deteriorated, it’s been performing to spec. And we continue getting better and continue launching new models, literally every few weeks at this point, because it’s just something that we’re really quite engaged in.
The other part of risk management is we set cut offs. You look at the model and you say, there’s always a grey zone of people that may or may not keep their job through the recession. And what you’re doing is you’re trying to make a prudent yet economically viable decision about maybe a loan today, given a short-term as our, given that you have conviction, your risk model ranks well within the grey zone of people who may or may not become viable at the risk.
We feel very good about our policy setting. The major change that occurred to us, in the last, call it, 9, 10 months, so we started doing this even before the year began, is we review our policy and our posture as managers much more frequently. So our risk teams meet every week, multiple times reviewing all the metrics, because we have an abundance of data coming in. As a management team, we used to look at our risk situation and the performance of the book and all the leading indicators and the back book performance, probably once a month.
As of a couple of quarters ago, we’ve shifted into much higher gear. So all of us are paying much greater attention, in part because, frankly, it’s fund, maybe a very strange fund. But we — that’s where we bet the entire idea of this business, we will be the best underwriters in the space. As the tide recedes, we’ll do swimming naked, we will — we’re making sure their [indiscernible] extra good. But we will feel quite good about it. Our chances of survival, but it doesn’t obviate the need to stare at all the metrics in to policy much, much, much more frequently than we were a year ago.
Michael Ng
On a related topic, you guys have also been doing a great job of merchant diversification. And you know as Affirm diversifies beyond peloton it’s also getting a lot of exposure to different industries. One category that’s been really promising has been general merchandise and it’s been supported by Amazon and Walmart and Target. So could you talk a little bit about your merchant and industry diversification? And then as an adjacent question, could you talk a little bit about what Affirm’s points of differentiation are that will cause enterprise merchant to go select them over other buy now, pay later providers and I’m sure underwriting plays a big part of that.
Max Levchin
You can think of the merchant strategy really, really simply, it’s a march to everyday utilization. So we start out in kind of [indiscernible] of connected fitness and if [indiscernible] businesses, everyone’s got it. That’s sort of [indiscernible] device, but 10 years ago, when we just looked at it, it was very strange that you might want to have something like this in your living room instead of your gym. But that’s a thing you buy once every 5 years. To increase frequency, you have to go towards everyday purchases. So we’ve marched down the AOV and up the frequency ladder very, very deliberately.
We added a massive number of users, even last quarter and yet, even with these new users, our overall transaction frequency still went up from 2.7 to 3 and I think that shows that we are successful at our teaching of our consumers that we’re not just for pelotons and Casper mattresses, we’re actually available for all sorts of things. General merchandise being kind of the thing that you buy every week, there’s still the completely under penetrated largely offline market, which in of itself is under penetrated, but largely under penetrated market of groceries both online and offline, that’s an everyday or at least a couple of times a week purchase. And so that’s another really major area of opportunity for us.
The reason, and by the way, the efficient way of distributing into those verticals is obviously partnering with giant platforms. It’s very, very hard to convince every local merchant that tells the groceries that they should take Affirm. But if Walmart decides to do it that covers a vast majority of the United States, there’s a Walmart 90 miles from literally every single person. And so, general merchandise push has been all about ubiquity. The reason we have a right to win those deals is at least tri-fold. One, we are actually better at underwriting, which means that we can say yes to more consumers. And we have lots of tools of sticking with yes, even as the economy worsens. For example, we can ask for a bit more down payment. We can change the term length that we’re willing to take a risk on. But generally speaking, we have been improving or increasing approvals even as a posture or point of view on credit has worsened.
Two, probably something that’s truly critical for a lot of the merchants [ph]. [Indiscernible] platforms, very few of them are in the business of selling you a bunch of $10 items. Most of them are selling some $10 items, some $50 items, some couple $100 items, and a few $1,000 items, you’re coming in to buy some groceries at Walmart, you may or may not be in the market for a set of tires. We’re the only player in this space that has been able to put our model without the fees with the approvals with all the goodness of Affirm to every [indiscernible]. We do not have limitations on only 6 weeks and only $150. Like we work at $150, $1,500. And in some cases $15,000. So being able to go up and down the entire AV stack has proven a very powerful proposition for our partners.
Within that, when you’re selling a huge number of what essentially financing programs, it starts to look like integrations across multiple different products. Probably one of the most important reasons people purchase through us is we are technically exceptionally strong. We are a technology company founded by four computer science majors, we build this thing like an engineering stack, not a slap together financial services product from the 80s.
It really helps you when you’re coming in to partner with the likes of Shopify or stripe, or [indiscernible], Amazon, and more traditional players like Walmart value ability to deliver engineering solutions on-time with robustness scaling through Black Friday, Cyber Monday, type events. All that adds up I don’t think there’s anyone else in the U.S or worldwide that has nearly the quality of engineering. Our underwriting function, incidentally lives within engineering, which is sort of telling you how we think of those things as well.
Michael Ng
It makes a lot of sense, yes. The engineering, the broad product portfolio, the adaptive checkout, you can certainly see that. I have one for Michael. This is one on guidance. So, Affirm has guidance for the quarter GMV of $4.2 million to $4.4 billion full year $20.5 billion to $22 billion. Could you just talk a little bit about how you’re pacing towards those targets? And what do you see as the biggest swing factors that could affect your ability to achieve it? Underperform, outperform.
Michael Linford
Yes, so we’re obviously not going to talk about the quarter here. But I think we’re really pleased with the traction that we have with our largest platforms, and they’re going to play a really big part in this year’s [indiscernible] business. Things are moving so fast in our industry, I think a lot of folks have forgotten that we launched with Amazon in November of last year, it’s not even one years old, it’s still an infant. And we have a lot of work to do to continue to grow that program and the team is busy at work with a very long list of optimizations that are small tweaks to the user experience that can have huge impacts on end-to-end conversion.
And similar with Shopify, I think we have a lot of opportunity to continue to grow our share of their total process volume. And so we have a lot of wood to chop just with these kind of scale partnerships. I think that, obviously, is an opportunity for us to continue to grow our user base alongside that. I think one of the biggest pieces of upside for us is really engaging those users throughout the year. And as proud as we are driving that frequency measure up, we really do think that we have a lot of upside to that as we continue to grow our loyalty business.
Michael Ng
Great. And, Michael, could you talk a little bit about how you expect the shape of the year to unfold and any comments as you can make to GMV revenue less transaction expenses EBIT?
Michael Linford
Yes, so we have a seasonal business. That was controversial a year-ago. I really hope folks understand that retail is a seasonal business, and we definitely have a seasonal business. We do a lot around Black Friday, Cyber Monday and through holiday season where a lot of considered purchases happen. And what that means is our Q2, our fiscal Q2, calendar Q4, has some pretty acute seasonality factors that shake out by the end of the year, but are really important for the quarter.
We do expect more GMV, sequentially higher GMV and that seasonality to show up in the total process volume. But the revenue and associated unit economics, we call that revenue less transaction costs, will be lower on a percentage of GMV in Q2, and as a result, your adjusted operating income will also be lower in Q2 seasonally. A lot of it has to do with the surge in GMV and also the timing of it, a lot of shopping happens in the December month in the quarter.
And when you back end in the quarter a lot of volume, it results in a lot of the costs and transaction costs showing up in the P&L like provision without all of the revenue there. And that happens and is earned over a longer period of time. And it just creates a little bit of a back ended [indiscernible] to the P&L. And we would expect that to be the same thing that we saw last year. We would expect the same kind of trends to play out in this year. And that has a lot to do with the big category we continue to expect to see growth, we are also growers for us last year. And we would expect that the same underlying trends to play out again.
Michael Ng
That’s great. Just while we’re on the topic of guidance and the numbers, so the full year guidance implies revenue less transaction costs margins of 3.7%. Some of the questions that we’ve got in post earnings is whether or not there’s enough provisioning in those numbers. Given that, charge-offs have gone up a little bit, though, obviously, you’re growing. I-tax [ph] has gone down a little bit lower on the spectrum.
The flip side allowances have gone down. But obviously, you guys have a very unique product that affects that. So maybe you can help just clarify some of the expectations around credit provisions for the year and talk about how you feel about loan performance at this point in the cycle.
Michael Linford
Yes, so — this is, it’s a bit of a curious question for us. Internally, it’s hard, I think, for folks outside to really think as we think. And I think maybe the most important insight is, we don’t think about our business on a portfolio outstanding basis. That’s the rhetoric, you’d hear from a lot of credit card companies, companies whose business model is get you to buy something and then get trapped, paying it off forever. Our business model is really built around the unit of our business as a transaction. So we think about for a transaction, what’s the economic content in it.
I think a lot of folks looking at the charge-off number, for example, are trying to denominate it by the current portfolio outstanding. And they ignore the fact that it goes back to originations that probably happened in Q2 or Q1 of last year, where we had really strong unit economics on a horizontal basis. And we seek to make underwriting decisions and credit approval decisions to ensure that we have enough economic content at the time of the origination.
The way the provisions roll through is a lot more mathematical and mechanical than it is judgment based. We don’t sit around as a management team and think about, hey, we need to increase or decrease the amount of the allowance. Instead, we use our models, which is Max talked about are still really good at sorting risks, to help us understand what the probability of loss content is on the loans that are on the balance sheet. And we look at that off balance sheet too, because it’s obviously very important to our capital partners as well.
And the math tells us how we need to think about the total amount of allowance needed. And the last thing to mention, again, because our unit is the transaction, and because the velocity is so high in our business, it is just not the case that most of the provision, which is the unit economics hit is tied to what’s left at the end of a quarter. It’s actually what the flow through was throughout the quarter. And so, the lost [ph] numbers, I think some folks have anchored around or just not where the business is at. And so I think that concern comes back to somewhat of a disbelief that we’re able to run our business with really healthy lost numbers.
And yes, it’s the case that if loans deteriorate, if the delinquencies rise in such a manner that, we call flow rates that people go from being four days delinquent to 30 to 60, then the — we would take additional allowance that would show up as additional provision. And if the opposite is happening, if consumers are on time and making their full payments, or making payments consistent with the expectations at the time of origination, you’re not going to see any increase or decrease in the back book associated with macro environment. You’re going to see it just the function of the front book or decisions you make going forward. And as Max mentioned, we’re very mindful right now. We’re definitely two hands on the steering wheel, really thinking about every day what — how much risk that we’re taking, right.
Michael Ng
Well, let’s shift gears a little bit towards partnerships. Affirm extended its partnership with Shopify, we’ve seen some really good momentum in split pay. Could you talk a little bit about how much more room and opportunity there is for the Shopify Affirm partnership? How are you thinking about expansion into other products beyond split pay with Shopify, like long-term zeroes and interest bearing?
Max Levchin
So I think on the GMV basis, you can — I think we disclose exactly where we are. But if you squint [ph], it’s not hard to do the math. It’s pretty early. There’s a lot more to do there. And both by way of Shopify, still growing very rapidly as a company, as a merchant base, but also because split pay within Shopify is gaining traction. So at a pace its faster than Shopify is growing. The — we’ve long promised to roll out more than just split pay the Shopify, that’s now the case. So adaptive checkout exists on Shopify.
It’s definitely the case, not just Shopify, but across every one of our partnerships that these things take a while to deploy not because of a technical reason, but because you have to optimize both the conversion, end-to-end conversion depends a lot on everything from time it takes for us to make an underwriting decision all the way to user interface placement. Adaptive on Shopify is a first of its kind in a sense that it’s an API [ph] driven adaptive. So normally, when we do adaptive for merchant, we say, here’s a box of pixels, we will help you optimize the perfect financial transaction [indiscernible] frontier cost to you and conversion to consumers.
[indiscernible] Shopify the same product, but it’s driven fully by our APIs and their user interface. And so the optimization is actually a dual company affair. They have their design standards, we have our underwriting standards, there’s a lot of things that have to go right. And so before that is in full and total deployment, we will take the necessary time to make sure that it’s financially accretive to both sides, and obviously increase the merchant. And, importantly, to not push consumers into more debt that they can handle, but they had a nice benefit of very, very, very short duration, it’s easy enough to tell if we’re making too many loans or [indiscernible] too much risk, adaptive goes quite into the long-term.
The next thing on the horizon is things like long-term zeros, et cetera. And so with every partner this is true way, way more than just Shopify, we take the necessary time, especially as we go into longer terms, because we know that at our scale, the cost of screwing [ph] it up is just prohibitive. And we know the world is watching. So we’re quite keen on delivering good [indiscernible] numbers. But the vast majority of our [indiscernible] partnerships are an absolute [indiscernible] where we can just have so much more with the job as Michael puts it.
Michael Ng
One thing that I think is, is really exciting that I don’t actually think it’s enough air time is, BNPL as a tool for lead generation and also brand sponsored promotions. Could you just expand a little bit on some of the product ideas when you’re thinking about this opportunity, and when that will be available to the public? On the last earnings call, you also talked about eventually building out a self serve platform, which sounded really interesting to me. What does this all look like?
Max Levchin
It’s actually the two are intertwined. So I’ll talk about both BSP [ph] and a quick review on terminology. So lead gen is a little bit of a dirty word in my mind, at least, and it’s because no merchant wants to know that their buyer is going to get sold off as a lead to potentially compete merchant. That’s an easy way of running [indiscernible] of your contract and at the very least, the spirit of your contracts that nobody wants to be clear that they’re and we have some competitors that are unabashedly hate your shopper is my marketing lead. So back off, I’m going to sell it. I think it works really select pockets of merchants, they don’t expect to be in business for too long, where they don’t care if the user goes back to them because they might be nothing to come back too. Most of our customers, most of our partners, our businesses have been around a very long time and expect to be for a very long time. And so we’re very, very careful not to turn into a lead gen business.
But we do have is a lot of opportunity for engagement and discovery. Our consumers come to us to pay their bills. And in the case of peloton, it’s 39 monthly opportunities to speak to the customer. So obviously, a lot of communication that we send out, telling them that their auto pay is about trigger, its telling them that they might be delinquent. All sorts of comps and surfaces that we own and operate, a large percentage of our volume originated on our own surfaces where consumers come in to pay the bill, they say, oh, you have a whole catalogue of merchants, we’ve now introduced, very, very nascent, but still pretty cool. I do say so myself, search box where you can actually search for merchants that we want an amazing idea, people like want to search for merchants that have Affirm supported on the site [indiscernible] thing for quite some time.
Maybe now that we have thousands, maybe we should tell people where to shop, or at least help them find where Affirm is accepted. And sure enough, we’re now generating more than a million of these searches a month in our own app. And that’s a huge opportunity to not so much say, [indiscernible] merchant actually should pay me for that lead. Let’s say, hey, merchant ex I’m sending you, someone who is fully preapproved, they know their limit, they wanted to see you because they search for your brand. That’s what [indiscernible] merchant at the brand new customer with pending budget that has been given to them [indiscernible] of Affirm, that they’re quite excited to go put to work.
And so that’s a very interesting business opportunity for us [indiscernible]. Now really interesting variant of this idea is when the consumer then says, oh, yes, I would love a 0% loan, but the merchant that I’m going to is actually a broad line merchant, they’re not really manufacturing their own things. They’re just reselling cool brands. Something that our scale allows us to do is we can go to these brands and say, hey, if I sent a shopper, as they search for a retailer, and they choose to buy your item, would you be willing to basically subsidize their interest? For a lot of brands this is a great opportunity to introduce someone to a brand they haven’t tried, or just the chance to push a new model or model they no longer want to stop.
So there’s a really amazing potential for marriage [ph] of consumers that are keen on buying something specific to a brand at a retailer that wants to give them an extra special deal. And we do this today already at places like Walmart, where you can get everything from tires to TV, where the brand is actually subsidizing the interest for the consumer. But we think there’s a lot of opportunity for that specifically within our own app as consumers are telling us what they’re into. So that’s a major area of focus for us. Super nascent in my joke about who would have think that searches the thing is only half joke. We found out that our consumers were interested in searching on the app. So we’re there.
Michael Ng
Right. I mean, it does feel like there’s some sort of gap in merchant discovery and diligence outside of maybe some deal sites and aggregators, and sorts of things like that. So …
Max Levchin
Yes, exactly. I think there’s a full and thoughtful way to do it. And there’s a way to sort of turn it into a kind of a marketing hammer. And our DNA is definitely very [indiscernible] marketing hammer. So we will be very thoughtful and careful. And ultimately we aim to provide confidence and control to consumers. Our job is to say, yes, the TV you really want is in fact available to you on the terms you can really understand at this retailer that you’re looking for.
Michael Ng
Great. I do want to open it up to investor questions, if there are any. So if you have a question, raise your hand. We’ll get a mic over to you. And while we’re gathering up those questions, maybe I’ll sneak one more in. Let’s talk a little bit about the competitive landscape. U.S BNPL competition is intense, some very large BNPL providers have been very aggressively expanding into the United States. Some things have changed. There’s Apple, as you mentioned before, so how do you think about competition in the U.S? Is that a good thing? Because BNPL awareness needs to grow, this is bad thing, because it just makes it tougher for unit economics. What’s your general view?
Max Levchin
So at the moment, the space is massively under penetrated in the U.S. So in terms of — the game has not come anywhere near close to zero sum. So that’s on the margin that’s just a good place to be in. We’re still very much educating the consumer that this is really cool and converts really well for the merchant. So that’s the backdrop. Competition has changed towards a lot more rational thoughts, which is a nice favorable change from my point of view, on behalf of the providers were no longer are facing off with people that are willing in small barrels of cash and offering merchants bribes to select them because they can’t compete on value.
The competition around value is something we’re very comfortable in because we are the only engineering shop. I think pretty soon and maybe now, we’re certainly not waiting. The competition will become about can you innovate? Can you build new things that are profoundly different and add value to both consumers and merchants in ways that they didn’t expect.
BNPL is a 10 year old idea. And we, you can, I think after [indiscernible] the term, I’d like to believe we reinvented the genre, after people who came before us in the U.S., [indiscernible] who made it for 10 years that existed, more or less in this form. My primary time as a product manager is spent on debit plus, which I think is the coolest thing that we built and will be majorly important for our consumers and for merchants, and for all sorts of other constituents. Because it is the everyday spending device, it is something that once you understand how to use it, which we still have to fully sort of breach the comprehension gap because it’s such a new idea, a lot of consumers going to go like I love it, but I don’t understand exactly what it is until we sort of do the right thing.
Explain to them, once people start using it, it has near perfect retention. So we’ve clearly hit something profoundly important for the customer. I don’t think it’s for everyone, I’m not sure my mom is ever going to switch to debit plus from her black card. But I’m not trying to sell it to everyone, I’m trying to sell it to the generation that wants confidence and control in their finances. And so building new products, delivering new ideas, to both the consumer and the merchant is where I want the competition to be good. I have a lot of confidence that we’re quite good at that. I filibustered long enough. But if there are questions from the audience, Michael loves to answer them.
Michael Ng
Right? Well, that leaves an opportunity to have a follow-up on debit plus. The transactions per active I think, last disclose was 2.7x weekly, incredible numbers both offline and online. Strategically, what is debit plus? Is it an engagement driver, a profit driver, both and is there anything you could talk about as it relates to timing?
Max Levchin
its engagement driver, its ubiquity driver. It’s a whole new set of challenges. It has things like insufficient funds, which is not normally the risk we have to run, but it’s now a thing that we have to care about. It’s a completely new frequency model, which means what used to be the velocity, so as a simplistic way of managing credit is, for example, to have velocity control model. So if you’re overspending, maybe something is wrong, we need to slow down. You’re giving somebody a daily spend instrument, you better get out of their way when they’re trying to use it daily. And so velocity controls don’t work anymore, you have to build a very different model.
So there’s a lot of things you have to get right. But the visible reality of the consumer is, it’s somebody who thinks a firm can replace all other cards in their life, it’s a de facto top of wallet product. It’s a — we’re just about to start adding features to it that are beyond kind of very basic BNPL that we launched it with. And it’s a software programmable card, not a credit card, it’s not debit card, it doesn’t exist. [Indiscernible] spend lots of time talking to both regulators and various folks in the industry trying to explain what this thing is. It’s like, much better than debit, but not quite as toxic as credit cards. So excited to build it out. But it’s fundamentally a way for our consumers to just fully embrace Affirm way of life.
The rollout thing with 14-ish million consumers that we think all wanted, love and deserve it, we have a massive wait list of people that raise their hand and said, give one of these to me, as soon as we have it. We don’t get a lot of shots to get it right. If we deliver it and the comprehension is like I don’t get it, it was kind of cool on the brochure, but I’m not sure where to use it, or it just doesn’t work because we had a blip somewhere. We will regret because this is the biggest opportunity that in our very immediate future anyway. And so we’re being very, very deliberate as we roll it out. But all the metrics that I’m seeing today about it make me very excited about what’s going to be.
Michael Ng
Right. I’m sure the innovation roadmap and the product roadmap certainly helps with that competitiveness to differentiate yourself, among other BNPL providers. Can we talk a little bit about the regulatory environment in the U.S.? Obviously, there’s the CFPB open inquiry around BNPL issues like credit reporting data privacy, consumer merchant protections. Can you frame what the regulatory landscape looks like today and how Affirm is positioned to address them, perhaps even relative to some other providers?
Max Levchin
Obviously, the CFPB query — inquiry is ongoing, so too early to comment on something we know not very much yet. We were highly engaged and excited, frankly, to educate the regulators about how we do business. We count ourselves in a fortunate — among the fortunate few where we literally have absolutely nothing to hide. We respect consumer privacy. To the extreme degree, we don’t sell data, we are extremely careful to be more than just a little compliance with every applicable law. And then we take the extra mile to make sure we actually feel good about our decisions. Within our products, we disclosed our entire fee schedule on a spreadsheet full of zeros and things that compare compares very favorably to the industry.
So on sort of, do you have anything to hide? Have you done something untoward? The short answer is no. We’re quite excited about the way we’ve been running our business since inception. We never had to clean up something that we weren’t proud about. There are a bunch of things that I think are going to be truly beneficial for the industry, most importantly, a unified push by the regulators to report performance of the shorter term. So we already furnish everything, but a product, which is the BNPL paying for [indiscernible] in part because the Credit Bureaus just have no idea how to ingest it. And there’s a fair amount of bottoms up pressure on the Bureau’s and other participants to ingest this data correctly.
I think regulators coming out very clearly saying, hey, this is the way you do it. And that’s what the expected behavior will be based on performance would be excellent, because it just set the record straight for a lot of people. Once again, I feel very comfortable in our ability to do better than average and expectation in that domain. In terms of the rest of the regulatory landscape, again, I think it goes a really long way that the closer you look at Affirm, the more you realize that we are profoundly on the consumer side. There’s just not — there’s plenty of people that had a bad version experience, merchant didn’t ship something and merchant screwed up, we step in and try to help them out.
But ultimately, if you look at the core of who we are and what we do for the end customer, be the consumer or the merchant, we’re ultimately helping both and we do it with great gusto for positive outcomes for all involved.
Michael Ng
Great. Well, we’re a couple of minutes over. That was fantastic. I wish we had more time. Would you please join me in thanking Max and Michael for their time, thoughts and insights. Thank you.
Question-and-Answer Session
Q –
[No formal Q&A for this event]
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