Affirm CEO Says Next Recession Will Silence Fintech Lender Skeptics

Max Levchin says the market is wrong about Affirm Holdings Inc.,

the buy now, pay later company he co-founded a decade ago. One recession might be enough to prove it.

To affirmit is

AFRM 6.00%

the stock is down 77% since hitting its peak in November, compared to a 9% drop in the S&P 500 over the same period. Investors worry about future borrowing costs, growing competition and whether Affirm’s borrowers will fall behind on payments in a downturn. The company’s total valuation is around $11 billion, down from a high of $47 billion.

Mr. Levchin is confident that Affirm has safely cracked the code to subscribe to more consumers than banks would. Like many lenders, Affirm tightened underwriting standards early in the pandemic. Last year he started loosening them.

Affirm says merchants will continue to want its plans as a way to increase their sales.


Gabby Jones/Bloomberg News

“I can swear on a stack of Bibles or your favorite book of choice, until we go through a full recession, I’ll get partial credit when I show the numbers I said I will,” a he said in a June interview with The Wall Street Journal. “But once we’re back in a rapidly expanding economy and we’re still here, still lending money, still getting our debts under control, I think I’ll get full recognition.”

Affirm is one of the largest buy-it-now, pay-later companies in the United States, offering payment plans that allow consumers to spread the cost over time for purchases large and small, including makeup , clothing, furniture, travel and training equipment. walmart Inc.

and Inc.

are among hundreds of thousands of merchants offering Affirm plans to shoppers.

Unlike credit cards, buy-it-now and pay-later plans are for a specific item and payments have a clear end date. Some plans do not charge interest, which has helped increase their popularity in recent years. Affirm said it does not charge late fees.

Affirm has grown rapidly in recent years while touting its ability to approve more people who may be excluded by traditional lenders, including those with limited or no credit history. The stock closed Friday at $39.19, down from a low of $14.63 in May, but still well below its high of $168.52 in November.

Levchin said investors are bundling his company with other relatively new fintechs despite big differences in their overall lending models.

Affirm underwrites consumers based in part on their credit reports and scores. It also analyzes other information, including where they shop and what they are trying to buy. Items such as jewelry are potentially more prone to fraud, as a buyer could resell them for a profit and then default on the loan. Furniture and other large objects used daily tend to pose less of a risk.

The company typically charges merchants a higher fee if they want Affirm to approve slightly riskier consumers. Those who miss a payment on one Affirm plan generally cannot be approved for another until they have caught up. Riskier borrowers or those financing a big ticket item may be required to make a down payment on an Affirm loan, but others may walk away with a new mattress for $0 down.

Affirm offers more payment plans for small ticket purchases. The move, along with the easing of underwriting standards since last year, has helped boost Affirm’s volume growth and put the company at the center of growing consumer credit concerns. While missed consumer loan payments have generally been near record highs for much of the pandemic, they have recently begun to increase at a considerable pace at Affirm and other fintech lenders.

Rising interest rates are another challenge. Because Affirm is not a bank, it cannot finance itself with deposits. Instead, it relies on securitization deals, warehouse lines mainly from banks and the sale of loans to a range of investors, including insurance companies and asset managers. About 20% of its funding has variable interest rates, the company said.

To cushion the impact of rising rates and delinquencies, most of its payment plans are short-term, according to Affirm. They range from six weeks to five years, but on average five months.

The stakes are high if delinquencies increase. Affirm borrows from around 20 banks, pension funds and other companies, and its most conservative lenders typically require that its three-month average for late payments at least 30 days be no more than 6%. That figure was around 2% in May, down from around 1% in its 2021 fiscal year, and is in line with where it was pre-pandemic.

It’s “my main thing that I watch as a hawk,” Mr Levchin said.


How well positioned is Affirm to handle an economic downturn? Join the conversation below.

Competitors include Afterpay, Klarna Bank AB and PayPal Holdings Inc.

Some major banks have introduced programs that resemble installment plans. Mr. Levchin told Apple Inc.

The recent decision to enter the industry confirms that these types of payment plans will grow in popularity.

Affirm remains committed, Levchin said, to the same broad vision it had when it launched: to reduce credit card use. “I think the greatest evil in this world is revolving credit,” he said.

A slowdown in retail sales could pose another challenge, especially since businesses that buy now, pay later often charge merchants higher fees than credit card companies. Merchants also have to pay more to offer Affirm payment plans that charge no interest, especially when rates rise.

Mr. Levchin said merchants and manufacturers will continue to want Affirm plans as a way to increase sales.

“In a recession,” he said, “0% is very attractive.”

Write to AnnaMaria Andriotis at [email protected]

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