- Affirm's Mission and Financial Products: Affirm aims to build honest financial products that improve lives by avoiding the pitfalls of traditional revolving credit. Michael Linford emphasized their commitment to aligning their success with the financial well-being of consumers, highlighting the company's installment loan approach, which offers clear, fixed payment schedules without hidden fees or compounding interest.
- Affirm Card and Consumer Adoption: The new Affirm card, which allows users to use Affirm's pay-over-time features for in-store purchases, has seen substantial growth. With over a million active cardholders, the card has contributed significantly to Affirm's gross merchandise volume (GMV). The consistent growth and high user engagement indicate the card's potential to become a major part of Affirm's business.
- Financial Performance and Earnings Highlights: Affirm's latest earnings showed impressive results, with a GMV of $6.3 billion, exceeding Wall Street's expectations by $300 million. Adjusted operating income margin was also significantly higher than expected. The number of active customers increased by over 2 million, and transactions per active customer grew, indicating strong user retention and engagement.
- Addressing the Bloomberg Article on BNPL Debts: Michael Linford addressed the concerns raised by Bloomberg about "phantom debt" in the Buy Now Pay Later (BNPL) industry. He refuted the claims, explaining that the rapid payback period for Affirm's pay-in-four loans means outstanding balances are minimal. He emphasized that Affirm's credit posture and underwriting standards are robust, and their approach is transparent, avoiding the pitfalls of traditional credit models.
Austin Hankwitz (00:00):
Hey everyone and welcome back to After Earnings, the show where we put the decision makers working at some of the world's most interesting companies in the hot seat. In this week's episode, we're sitting down with Michael Linford, the CFO of the popular Buy Now Pay Later company. Affirm Now Buy Now Pay later is a concept that took the country by storm during the pandemic. Their pay infor strategy allows consumers to break out larger purchases into four smaller payments over a six week duration. A firm recently came under pressure after Bloomberg published an article the day before their earnings call claiming Americans are carrying around billions in phantom debts. And because of it, economists are having trouble figuring out where the economy might be headed. Michael addressed those claims as well as walked us through their new Affirm card, how they use AI and LLMs to obsess over their customers, how they treat their competitors in much more. So let's get into the interview. Wow. Michael, thanks so much for hanging out with us.
Michael Linford (00:58):
Thanks for having me.
Austin Hankwitz (01:00):
So we like to kick off each episode by asking guests to break down their business, right? Specifically how it makes money, the problems they're solving for on behalf of their customers, things of that nature. But Michael, I found a really interesting quote from your 2023 investor day that I thought would be a more fun way to kick off the episode. So you said there's over $1 trillion of revolving consumer debt in this country and there's no reason for it to exist. What do you mean there's no reason for it to exist? What's a firm doing about it? Walk me through what that quote means.
Michael Linford (01:35):
Yeah, thanks. It gets to the heart of what we're up to here at Affirm. Our mission is to build honest financial products that improve lives, and we are a team of individuals who keep that mission at the core of everything that we do, and we look at a system of consumer credit and see it as fraught with peril Everywhere you have situations where the people who are providing credit and those who need it and use it are on the other side of the table. They're misaligned. And so there are situations where credit card companies enjoy the fact that you're late on your bills. There's a credit card CFO who made a statement at one of the conferences last year. I was like, well, obviously with more delinquencies we earn more interest income, so it's a good thing. And at a firm, these ideas are anathema to what we're up to.
(02:33)
We believe that there's a way to provide credit, which we think is a good thing without trapping people in permanent debt, which we think is a bad thing, that there's a way to get people to access consumer credit healthy and in a stable way, but avoid the pitfalls that are so common in revolving credit accounts. I like to share an anecdote here, and I don't think my mom would be too upset with me for it, but about the time I joined a firm, I found out that my mom, who was a school teacher had a staggering amount of revolving credit debt and I didn't know, and me and some of my siblings helped 'em out and got 'em sorted. But when I asked her how did that happen, the number was so much bigger than I thought she could possibly ever spend. And the answer was so typical.
(03:24)
So typical of so many consumers who carry meaningful credit balances. It isn't that they went out and spent $15,000 on something, it's that they spot a thing and it was $500 and then they didn't make the full payment. And then it began revolving. And then you had this never ending compounding loop where every transaction accumulated more debt, which in turn had more interest, which compounds back into itself. And before you know it, you wake up and you have $50,000 in credit card debt, and those paths are way too common and there's no reason for it. The core issue is that from our perspective, some of these business models take the view that we're going to be misaligned with the consumer and win when they fail, and consumers fail often enough that we have a good business. And our business model kind of upsets all that and says, no, we're only going to win if the consumer wins and we are only going to be successful if the consumer is successful and we're going to build a product that's honest and transparent.
(04:20)
And yes, profit's important to what we do, that we're not a nonprofit. We are out to make a profitable business here, but we're only going to do it in a way in which our interests are always aligned with the consumer. And so we do that today mostly with an installment loan. Installment loan is the primary product that we have. So we let consumers typically at the point of sale, finance the things that they're trying to buy, and they can do it from pay in for loans, which is for biweekly payments all the way out to 36 or longer monthly payments for large purchases, and they can do some with interest. Sometimes there's no interest because of the economics of the loan that we earn elsewhere. And we're able to do all that with an eye torts, giving the consumers a way to put those credit cards down and to not revolve the trillion dollars at outstanding elsewhere.
Austin Hankwitz (05:14):
Wow, what an incredible walkthrough. And what happened with your mother is I feel like a lot of people, that's their reality, right? To your point, it doesn't just start with a massive $15,000, I'm going to go buy a jet ski. What happens is, yeah, that one thing popped up. I had to go get new tires or that one thing that pushed me over the edge financially for the month, so I got to swipe the credit card and oh, well this other thing. It just continues to happen. And to your point, we know how these credit card companies make money. They have the late fees, compounding interest, high interest rates, things like that. I think what's so important about Affirm, and it says it right on your website, right? Take Affirm everywhere, never pay a hidden fee or a compound interest. You mentioned you guys want to make a profit, you obviously, we'll talk about the profits here in a little bit, but I mean, walk me through exactly how a Affirm generates revenue. How are you guys actually adding cash to your bank?
Michael Linford (06:12):
Yeah, great question. So the way we make money today is either from the consumer or the merchant and from the merchant side, we earn a merchant discount rate or an interchange rate if it writes one of our virtual card rails or physical card rails or we earn an interest from consumers today, a meaningful portion of our loans do our interest bearing and the interest that we charge is stated upfront, it's fixed. What's really interesting about the way we think about the interest expenses, we communicate it at the time, consumers are checking out as a dollar amount, and so we'll see it as $17 for this 500 purchase, and that's a fixed dollar amount. If a consumer is a few days late, it's still only $17. And in fact, the only way it can change, it can go down if a consumer prepays the loan to get the money back.
(07:07)
And for us, we've taken this view of we never want to be in a situation where we're celebrating consumers being late. We always want to be in a situation where our interests are totally on the side of the consumer, but today it's interest and merchant fees. And then to make things a little more complicated is sometimes we sell loans. So for loans in our balance sheet, we'd earn the interest or the merchant fee. We also sell loans sometimes, and so when we sell a loan, we'll make a gain on that loan and forego the interest income on it. And so if you look at the income statement, you'll see merchant network revenue, which is inclusive of the merchant fees and the virtual card revenue streams, the card network revenue streams, as well as gain on sale and some servicing income streams for servicing the loans that we sell.
Austin Hankwitz (07:51):
And so for, we're about to jump into the sort of earnings here in a moment, but you mentioned the income statement for the retail investor listening right now who's trying to dig into a affirm's numbers for the first time, maybe they just opened up your earnings presentation, the supplemental info there, what should they be paying attention as it relates to trying to understand the income statement? Is it more on the GMV side of the equation where sort of that interchange fee might take place? Or is it on the gain of selling these loans? What do you think is most important for someone to understand as they're really beginning to dig deep into this company?
Michael Linford (08:23):
Yeah, so first of all, I think our business has a lot of, for a really simple thing, when you think about what we do for consumers, it's actually really part of the reason they love it is it's really simple, right? We help you get the thing you want, there's a fixed payment schedule, and that's kind of it. And consumers really value that simplicity. I confess that for such a simple business on that side, we have a pretty complicated income statement due to a variety of some really arcane accounting that we have to go through. But what I like to consumers on or focus investors on is on the revenue side, just look at the total revenue. A firm is super agnostic as to what the revenue sources are. We don't get fussy over which of those dollars come from which source. That's a view that's somewhat contrarian because a lot of folks want to dissect it and understand each of the pieces really well, but that's not how the business operates.
(09:20)
We really approach every transaction, every merchant relationship, every consumer relationship with the idea that all the money that we can make on a transaction is fungible. And sometimes we'll reinvest that into a different a PR offer. Sometimes we'll reinvest that into longer duration, and so those can have different cost structures to it, but we really are super fungible with all the revenue sources. And then where it shows up in margin, which is the number that we actually more closely run the business to is this concept of revenue less transaction costs, and lemme explain that for a second. So all those revenue sources are the gross, and we have some transaction costs. These are costs that we directly associate with the transactions. And the difference between the two is the transaction level profit, it's the amount of net proceeds that we get when we do these things.
(10:09)
And so those are where everything gets netted out. And maybe a small example here, we may have a loan that has a lot of revenue but also has a lot of costs to think about longer duration loans. If you have a long duration loan, you're got more time that you're borrowing, you have funding costs that cost of capital for a longer amount of time in that loan. And so on a dollar basis there's just more cost there, but there's more revenue too. Maybe you're earning more interest on that loan on a dollar basis, but the two met out to some revenue as transaction cost number that's pretty consistent across the portfolio. And so we like to think about that number and we talked about that as being three to 4% of GMV. And so I think for investors, retail or otherwise, I think understanding the scale of the network, the GMV helps you do that.
(10:54)
Understanding the profitability of the network of the units is that revenue less transaction costs. And it's important to note that all of our costs of credit losses are inside that revenue less transaction cost number, which is important because I think a lot of investors really have a hard time figuring out the credit part of the business. And we believe very strongly that you should estimate the losses at the time origination and that should be reflected in your transaction economics. And so when we think about three to 4%, that's a firm's cut of every dollar GMV process on the platform inclusive of what we think are all the transaction costs.
Austin Hankwitz (11:30):
That makes a ton of sense. I appreciate you walking us through that, and that leads us right into some earnings results. So congrats on the awesome quarter. You all just reported the other week, a few things I want to call it that caught my eye. First one is your GMV gross merchandise volume came in $300 million higher than Wall Street's expectations at 6.3 billion, your operating income margin came in 5.3% higher than Wall Street's expectations generating nearly $79 million. Total number of active customers grew by over 2 million while transactions by active customers also accelerated, which means not only is a firm attracting more and more customers over time, but your existing customer base is using the product more and more frequently as well, which is really exciting. So Michael, walk us through some of these results. What happened during the quarter that led to such a strong beat? How did Affirm's new debit card perhaps play a role?
Michael Linford (12:28):
Yeah, great questions and thank you. We're really proud of the results this quarter because they were really strong results. The GMB growth, as you mentioned, was 36% for the quarter, and that's really where a lot of the conversation starts because our ability to create profit and transaction margin, the business is tied to how much volume is flowing through the business. And so we start the conversation there usually, and that number, like you said was 6.3 billion. That's a 36% year in year growth. That's somewhere between eight and nine times the growth rate of e-commerce overall. And so you think about a way to measure is a firm taking share in the payment tender of our primary market, which is e-commerce. And we're growing many, many multiples of where e-commerce is growing. And so feel very, very good about that growth rate. Sorry, I said eight to nine growth rate.
(13:24)
E-commerce is eight 9%. It's four times not eight times. So it's about four times the growth rate of e-commerce. And we did that because we partner with some of the best platforms in the world. And despite the fact that these platforms have been lagged with us now for many years, there's so much opportunity for continuing to engage consumers. You mentioned the growth in consumers in the platform and the growth of frequency, and those are not the causes. Those are outcomes for the hard work that we put in with all the merchants that we partner with and are able to go build better experiences for consumers, which allow them to put that credit card down and use Affirm instead on their sites. The card is so exciting for us right now. We have a chart in our supplement that maps out kind of the growth in users on the cards. We were thrilled to announce
Austin Hankwitz (14:15):
That it's insane.
Michael Linford (14:17):
We just crossed a million active cardholders and while a million doesn't sound like the biggest number, that's from almost a dead standstill. Last year we were still hanging around in the sub 200,000, a hundred thousand ish cards or so last year. And so you're seeing this kind of very steady rise and what's most impressive to me is how consistent that is. The growth, the card has been very consistent. Usually with these new products, you see a surge in the beginning and then it tapers off. We're not seeing that tapering either with respect to adoption cards or spend per user. Both of those are really holding in and spend per user is actually growing. And that's a really counterintuitive and important insight that many folks may have missed. When you adopt a new product like this, the users who adopt it first are the most excited to use it and they're the most engaged on your platform.
(15:15)
And so we fully expected there to be some moderation in spend per user as more users started using the card, the less loyal affirmer and less engaged Affirm users, you'd expect there to be some attenuation in spend. And it actually is inflecting up right now, which is a testament to the quality of work that our product and engineering teams are putting into the product right now to make it easier for consumers to use it. And it was part of our GMV growth. It's still pretty small though. So last quarter our GMV on the card was about $370 million in GMV, which is still a really small part of that 6.3 billion. It's an important part though because of it's quick growth and we feel that one of the biggest pieces of upside at a firm is taking this thing that we know works really well in an online experience and translating it to more use cases.
(16:07)
And the Affirm card is a way to translate that same affirm experience to all the times you use a card. There was a debate at Affirm since the day I joined six years ago where we were debating whether or not a physical card made sense and you said it well at the top that another piece of plastic really like does the world need another piece of plastic? And one of our technology leaders at the time said, a piece of plastic felt like a horse and buggy. We're a modern technology company, we build digital experiences. And to be clear, this is a digital experience in the app, but I think where we ended up in the end was it's not horse and buggy. The better metaphor is it's a wheel and you don't reinvent those. You just use those and consumers know, they know the card modality really well.
(17:03)
They know how to use it in the store. It works in a multi-lane checkout environment offline. It works online of course as well. And so much of the potential for where we can continue to engage users I think sits in products like our card and our direct direct-to-consumer business broadly. But I'm meandering a bit coming back to the quarter, I think the strong growth in our largest platforms had a lot to do with where we're at. We've been through a lot of intense effort over the past 18 months to get the business tuned correctly to this rate environment. The volatility of interest rates is so high and it's been was that way for so long that I think a lot of people have lost sight of just we're still lapping meaningful increases or a meaningfully lower rate environment last year than this year in our third quarter. And it was even more meaningful in Q2. So a lot of the work has been getting the business tuned correctly. And then once you get it there, the power of the right settings in the business is on display. And our growth rate's really a function of having done all that hard work. And then the tailwinds that we see, the tailwinds really around the consumer adoption of a category that the desire to not be using their credit card.
Austin Hankwitz (18:23):
I think the Affirm card is powerful because it not just takes this awesome technology of paying for off of a computer screen or off of your phone, your smartphone, but it's now being taken into real life. And so if you want to go buy a couch at home furnishing storefront, you can just use the card and it's the exact same thing, even if that company wasn't an existing Affirm merchandiser, which I think is a really powerful concept there. And Michael, you talked about the relationship that you guys have with your merchandisers, and I want to dig into that a little bit because despite the strong results shares of Affirm stock did trade down a little bit after the earnings announcement and JP Morgan actually speculated this was because of Shopify's weak guidance and margin pressure considering they're your second largest partner. So do you want to speak toward that a little bit? Maybe how investors should be thinking about not just that relationship with Shopify and your GMV, but also maybe the ones you have with Amazon and Walmart?
Michael Linford (19:26):
Yeah, I'll stay away from speculating on the market's reaction. I think one of the things that maybe a lot of folks, maybe especially retail investors don't have an appreciation for is how important it's for management teams to build a great company and to make sure we can communicate what's going on really well and that's where our focus sits. And so we really do try very hard not to try to figure out, well y did the stock do X on Y day? Because it's just oftentimes the answer is it's cool,
(19:58)
It's really hard. Now in the long run, it matters a lot in the long run. You create a viable company, you're valued on your future expected cashflow, and if you do the right things, it'll sort itself out. And so won't touch the short term. But to reframe a little bit about the quality of partnership we have with Shopify and our admiration for them, Shopify also has I think one of the coolest and most impactful businesses out there and its mission. It is just so dang special. They enable the smallest of small to the largest merchants in the world to serve their customers today, mostly online. And when we first partnered with Shopify, we did this little project, it was called Choppa Palooza internally, and that's because we had to go through and manually validate that every merchant that we were going to onboard Shopify our shop payments product onto was compliant with some of our policies.
(21:01)
There's certain things we're not allowed to provide credit for just by credit policy pharmaceuticals being an example. And so we had to just go through and make sure that everything was compliant. And it's funny what a difference four or five years makes nowadays. We can write large language model chat, TPT style scripts, so go do it for us. But at the time, we were actually human beings going to sites and the whole company went through and had to basically manually check off several hundred thousand sites. And that gave us an opportunity to spend a second looking at what that mix of merchants were. And they have some very big enterprises on their platform, but they also serve. And I mean the smallest, my favorite example, there was a girl, I think she could not have been over the age of 18 for sure, a young girl who had a lip gloss business and she sold three.
(21:55)
Oh, that's so cool. She sold three flavors of lip gloss and she had a little picture of herself on the site is one of the ones I approved. And it was, that's it. She was selling lip gloss from her garage and it's the equivalent of a lemonade stand in my mind turned online. And is that a big business? No, but man, that is such a cool thing when you can take a young entrepreneur who wants to try something out and you take away all of the difficulties and struggles and she can just go get a storefront up online with no hassle. And that's really the core what they do. What they do is they help small businesses in particular, but enterprises too, they help them bring their product to life and a really great experience. And so we are just incredibly big fans of what they're up to, how they're going about it and the good they're doing for the world.
(22:46)
And when they came to us now, I think it was now over four years ago to build this product, what they saw was the same thing. We saw the long-term trends of consumers preferring pay over time, buy now, pay later type solutions. And they wanted to build a product that was a great experience for the consumer embedded in the Shopify ecosystem. And after a lot of work with them, we got it built and we're able to launch it. And I think we went to a general availability sometime in 2021 and we're here three years later and it's still growing at many multiples of e-commerce growth rate. And that's why one quarter doesn't, we don't get fussed over one quarter, what's the margin outlook next quarter because you just zoom out. And this is now a really big business with really strong growth despite its really large size because we think they have the fundamentals right?
(23:43)
They're serving the customer and the merchant really. They're building products that convert better. They're building products that consumers love and want, and the adoption has been really strong. So I think we take a longer term perspective and I really would encourage investors to do the same. I think if you get too short term, you're going to miss the forest. And I think the big picture stuff is very much aligned there. And so our product today powers shop pay installments, which is a phenomenal experience and we are really proud of that. And we think there's a lot of growth left here. We're still in the early innings here because they have underlying growth in their payments business and we're beneficiaries of that. I think if you confuse the overall aggregate Shopify business with the portion that we play with, you're making a mistake. We really play within the shop pay installments, which we think is still very, very, very early and it's adoption.
Austin Hankwitz (24:39):
I really like that answer. Yeah, that's a great perspective I have. I totally agree. I think investors should be thinking about the longer term, right? I think Shopify processes nearly 1% of us, GDP and GMV, it's insane how large of an enterprise this company has become, which is really cool and that you guys are the backbone of that sort of pay in for technology on shop pay is powerful. Want to switch gears here. We talked about 2 million active customers added during the quarter. Let's talk about this Bloomberg article. The article conveniently was published one day before your earnings call and it claimed 43% of those who owe money to buy now pay later services like a Affirm claimed they were behind on their payments and 23% stated they were delinquent on other debt because of their spending on these types of BNPL platforms. Adobe Analytics claims 19 billion was spent as pay in four during Q1 of 24 here, which is up 12% year over year. You all obviously aren't reporting a spike in delinquencies. And as your CEO said in an interview last week, if we don't get paid back, we don't make money, right? It's just that simple. So what's going on with this claim of phantom debt that Bloomberg is talking about here?
Michael Linford (26:01):
Yeah, it's interesting. One of the common experiences that we've had, most consistent thing since we've been public is this is a new industry, it's a new thing and it's a thing that's growing very quickly. And so you have a new business with lots of consumer engagement that does threaten those who are providers or traditional credit products that we are out to tackle that revolving credit balance. And so it isn't surprising that those who are in the driver's seat there are most worried about what might happen. And so there's one of the consistent things about being public since we've gone is the number of flareups of various memes that have just turned out to be completely wrong about Affirm since day one. But my favorite one has really been the attempt to indict our credit and underwriting capabilities. There's a comment that gray hair investors will always pull young companies like us aside and say, you've not been through a cycle yet, so you've not been proven. We can't trust you. You're not been through a cycle. And nowadays my quick back is, well, Silicon Valley Bank had been through a cycle or two and they still didn't
(27:29)
How to manage the liquidity. I would not confuse experience with wisdom. I think sometimes institutions actually lose their ability to think about problems if they're only looking back about how they managed the last situation. And so I think we're a very different business and anytime it's new and people don't understand it, it causes them to get nervous and want to worry. And then they put menacing headlines, phantom debt, and usually we let that stuff roll off our backs and we ignore it. But I think the management team in particular Max and me, and we really wanted to correct the record because we thought we can handle criticism. We've certainly been dealing with it, but when people are out when we think are willful misstatements of fact, we thought it was important to go correct the record. So we actually put a blog post up written by me that just walks through the map of what's actually going on right now.
(28:31)
And to put it very bluntly, I think the authors of the reports were confusing things in a way that either they're so unfamiliar with how it works that I'm not sure we should be listening to them anyway, or it was intentionally misleading and I don't really know which, but my conclusion is that the math is just wrong and that there's not anywhere near this problem. And so let's break down the math for a second. We'd estimate that there's roughly 50 billion of paying for volume being done across all the players. It's a rough number. Estimates vary because the reporting isn't perfect, but we're obviously no, just
Austin Hankwitz (29:10):
One on the same page, just not to interrupt. 50 billion, is that a year?
Michael Linford (29:13):
Yeah, 50 billion over the past 12 months.
Austin Hankwitz (29:16):
Cool.
Michael Linford (29:17):
That's a rough number. And you can be off by a lot and the math isn't going to be any different, but just take $50 billion and that's actually the number that the report cited was using as well. It's a decent estimate for paying for volume. And I should note that paying for is a unique thing because it's the one thing that doesn't today show up in people's credit bureau data. The thing people really need to understand about this product is it goes away really fast, meaning that the payment schedule for these things are so quick that by the time you go around to reporting on it, it's gone. It's a six week product. And so a fun fact is alone that was taken out on day one of my fiscal quarter is not in my balance by the end of the quarter because by the end of the quarter it's fully paid back.
(30:08)
And so if you think about you can't confuse what people have spent to what their balance is, those are very different things and they may spend $50 billion, but the way it works out, if you do the math, that's about 3 billion in average balances, which is a big number. I don't want to be dismissive of it, but it's 3 billion in a sea of 1.1 trillion of credit card debt. And so I think we're talking about obsessing over a 0.25% of the problem and not talking about the 99.7% of the problem. That's the revolving credit part of the problem, and that's where the focus needs to be. And look, as an underwriter, we take it really seriously that we only extend credit when people can pay us back. As Max said, it's core to our DNA, we care a lot about that, but a rational underwriting decision is focused on the 99.7, not focused on the 0.3. And therefore I think the whole thing is intentionally confusing the facts and or doesn't understand the distinction. And I think either one of those things are good reasons to ignore it.
Austin Hankwitz (31:18):
I appreciate the walkthrough and I'm sure so does everyone else. And back to the idea of delinquencies, right? I think I read in your transcript that you guys modeled during the summer times for delinquencies to tick up ever so slightly, but that has nothing to do with this Bloomberg article claim. Is that correct?
Michael Linford (31:35):
Yeah, that's right. And I think, again, I think you need to think about if this average is here for a second, even our most engaged users, they don't have balances that rival the balances people have on their credit cards. And so it is all this inverted logic of like, well, this little thing that's new and different and it's people walking away from credit cards is the problem, not the fact that they're carrying $6,000 in revolving balance. That's the problem. I mean, the problem is the revolving balance and it's it's not the other thing. And I think it's just really, really weird that we're focused on the thing that's the better way that doesn't have compounding, that has a fixed fee schedule that caps its interest, and importantly has a payment schedule that forces you to amortize quickly. One of the things that is truly confusing to me to this day, I still get confused about this and it's like the thing I love most about Affirm is if you wear an Affirm piece of gear, I'm not wearing one today, I'm sorry, but usually I have a piece of a firm gear on and I'm out, I'd be walking around town or whatever and people will stop down and tell you how much they love the product.
(32:48)
And so I can't help myself but to engage in the conversation about why they love the product. And one of the words that I hear all the time is that our product gives them a sense of control. And that confuses me for the longest time because credit cards are this product where you can pay the minimum payment, you can pay the full amount, you can pay anything in between. It's choose your own adventure. You have complete control in quotes, but really you don't because what happens is in the case we talked about where it becomes easy to make mistakes and the frog can boil with one swipe after another, and it is the recklessness of your own behavior sometimes that can get you tripped up. So it's really interesting to me because when they say your product gives me control, I'm like, no, we tell you you got to make your payments $157 and 62 cents.
(33:38)
That's your payment. We don't give you a choice. It's like you got to pay the full amount on a fixed schedule. And what they really mean by that isn't that they have more choice in terms of their payment amounts, it's that they know that when they use our product, they're not going to lose control. That using our product doesn't let their car drift it to the ditch that they can stay on the financial life safe road. And that shows up in our delinquency data for sure. And I think again, stands in pretty stark contrast. There's a chart that we put in our earning supplement that we started adding a few quarters ago that tracks the Affirm delinquencies against three or four other credit card issuers as well as this index called the DVO one Index. It's a data source that tracks a lot of people who provide loans of all kinds, and there's only one line that has been down into the right while everyone else is up into the right over the past year.
(34:39)
And it's a firm. And again, if the logic behind this analysis, if it were true that people's obligations on BNPL are ruining their financial lives, you'd see it first with the Affirm loans and you're not and can't speak to the other people, but I know that we have our credit posture and control. And so we think about where we're at credit wise, we feel like we've done an excellent job in controlling credit outcomes that you mentioned that our chief capital officer was at a conference yesterday or this week, maybe days ago, and talked a lot about how the capital markets, which is how we fund the business, is really seeing that and giving us value for it. And for us, that's always job one if we can't deliver on the credit outcomes of the business that our investors need and the rest of it doesn't matter, so we say focus on it. So yeah, I think all of the report from the headlines really doesn't land with us as being all that accurate.
Austin Hankwitz (35:43):
Well, just to linger on this for a little bit longer, do you guys feel any sort of responsibility to want to report positive payment history to the credit bureaus or is there any sort of change that you are predicting will happen because of this that might be coming down the line? Obviously the current framework has worked really well. To your point, people feel in control, but I don't know,
Michael Linford (36:12):
It's an exceptionally fair question. And I think our view has been very consistent and I really think the industry overall has the same view, which is we want to get to a spot where everything is furnished. That's a thing that is good for everybody, so we want that. We're not pushing back on that at all. And the how matters, these are not things you do haphazardly. And so we're out making sure we do it right. We do it right with the credit reporting agencies directly. We do it right with the score creators we mentioned a few quarters ago, we're working with FICO right now to really figure out a way to get the right way to incorporate these things into the models. And I am very convinced that we will eventually as an industry be in a position where everything is furnished. I don't think there's any real downside to it given the fact that these things do, again, amortize so quickly.
(37:07)
I think people are, once they see it in the data, they're going to shrug this off and stop talking about it. So I think that's where things are headed. I think it's also takes time. There's always a sentiment of it should happen yesterday. And there's a lot of really good reasons why these things need to be measured and thoughtful, and I think that's where we're at. I should note that we do furnish today on all of our monthly installment loans, which today is the majority of what we do. And so consumers positive and negative payment events are furnished and that remains part of engagement with the system. And so we're very furnishing we have been and we're very engaging with that. We just think that in particular with some of these and stumbled loans that have a little bit more velocity, it's important that the models that are out there consume the data correctly and they don't interpret the wrong thing. An age old problem in traditional credit scoring models is there's an idea that the number of loans is a bad thing, more loans is bad. And so it says a revolving credit account that is swiped 10 times a day is better than 10 installment loans. And we don't agree with that. I think that isn't right. And I think we want to make sure that gets reflected accurately in all the models.
Austin Hankwitz (38:21):
Well, speaking of installment loans, you recently spoke with the folks at Mizuho Securities about how the fed's higher for longer narrative helps your competitive edge. I think it has to do with those installment loans, but I would for you to walk us through that. How exactly does this hire for longer narrative benefit a firm?
Michael Linford (38:41):
Yeah, so first I think it's important for people to understand everything that we do is more viable in a high rate environment. If you think about everything that we do is about extending credit to consumers, helping merchants with their conversion and their sales cycles, these things are all, as the cost of capital goes up in our economy, what we do is more valuable. Now the trick is is that's great, but can you still make it work with all the different constraints? And that's why I mentioned before, we spent the past year making us the business tuned correctly to this current rate environment and that was a lot of hard work and I'm so proud of the team's effort behind it. We've got the credit performing, I think in really excellent ways. We've got our pricing work done, so the unit economics are really strong right now, well within our three to 4% range we talk about.
(39:42)
And so that puts us in a position to say, great, that work is done. Let's go back to scaling the network. And a lot of our competitors don't have as many levers as we do. They maybe just offer pay in for loans and pay in for is an important product in the ecosystem, but it's not. The only one of the things that we are truly different on is our ability to offer an infinitely diverse set of products where you can do pay in four or we're now testing with products like pay in six or pay in 30 days, or obviously 3, 6, 12 monthly installments. Some have interest, some don't. Some have a fixed low A PR and some have the full a PR for the consumer. And our ability to configure all of those products to meet the consumer, the merchant, and the macroeconomic environment to be relevant at those points in time is really different.
(40:38)
And to do that, it's hard. You got to be a really good underwriter, got to have technology platforms, you got to have a consumer who understands what you're doing and why. And we have all that and we really feel like our competitors don't. If you only have one tool, that tool better work in this environment and this environment has shown that it's more difficult to put all of the burden on the merchant because consumers understand now more than ever the value of money and time, value of money that they see a mortgage rate now and they think that money seven, 8%. And it's interesting, you talk to people who buy houses 30 or 40 years ago and they're less fussy about it, but the younger consumer, they're like, no, no mortgage are supposed to be free. What am I doing paying this number? It's completely staggering to them. And what that's doing is it's slowly reeducating the consumer and merchants alike on, look, money costs something, money has a value in its time. And when you get there, it opens up a lot that we can do that our competitors really can't. And again, we can control credit outcomes and you can price to the right macro environment, you're in a very different spot
Austin Hankwitz (41:53):
And I appreciate that walkthrough a hundred percent. And yeah, don't even give me start on mortgage rates. Dude, insane stuff right now. I bought my first property, I think it was like a 3.2%, right? And then now the house I live in right now is like 6%. I'm like, what the heck? Six. It's crazy.
Michael Linford (42:11):
Six is a great number right now. And again, in a lot of ways I think there's going to be a reeducation of a lot. I mentioned my comment on SVB, it's a good example. For the longest time we talked about risk as a credit risk problem. So we spent the 2008 happened, the great financial crisis, real focus on credit quality between now and then, but we stopped talking about duration and rate risk management because we were in such a low rate environment for so long. And so I think the past year has been a reminder that risk management is more than credit risk. We're talking about risky loans. It's not just the credit risk side, it's the rate risk inherent and everything. And we're slowly understanding that it's a different environment and we're not macro economists. We don't have our own prediction and we won't, but we really feel like a lot of the indicators do suggest that we're going to be settling into a higher rate environment for a longer period of time and that serves as well because what we do is more valuable in that time and we've done the hard work to get the business in its position to manage through that.
(43:14)
And I think consumers and merchants alike are going to be reeducated on the fact that money actually is valuable.
Austin Hankwitz (43:20):
A hundred percent. Yeah. Great stuff. Alright, let's keep rolling. This is fun. Okay. Alright. All right. So now switching gears away from earnings into a little bit more of the leadership style of your C-suite, specifically how you adapt to change in the markets and your competitors. Klarna was all over the news in February and March for successfully handling two thirds of all customer service chats right over 2.3 million with ai. According to the press release, their use of AI led to a 25% drop in repeat inquiries. Customer's problems were solved in only two minutes compared to 11 minutes using humans and most importantly estimated to drive a $40 million improvement in profits to their business. So my question one, considering they're such a close competitor, what did your C-suite think in the moment about what was going on with Klarna and how to act? And then also two as the CFO of a company like this, what AI initiatives is a firm leaning into right now to drive that profit improvement perhaps over the next 12, 18, 24 months like Klarna has done today?
Michael Linford (44:24):
We try really hard not to focus on what other people say in publicity tours. We're focused on driving productivity in our business, not talking about it as a small example, we've never used the word AI to describe our underwriting ever, and that's because we don't think that it is ai. We think that it's machine learning and data science and sure if you wanted to have a really expansive definition of AI, then sure you can call my Excel model ai. But I think the reality is what we're talking about with these advances in large language models are truly innovative, truly groundbreaking stuff. And that we've never talked about what we do in machine learning and data science as that. We've never talked about what we do there as being part of the underwriting challenge for a lot of reasons, not the least of which is we think is not.
(45:19)
You think the deterministic nature of what we do is important for regulators, consumers, and how you run a business. But the work going on right now with large language models is very exciting and we are very excited to find all the ways in which we can apply the technology to our business. We're doing it in the context of customer service. Interestingly, it's as important to being able to understand what the issues are as it is to actually solving them. So sometimes even ai largely there's bottles today are turning out to be excellent enhancers to productivity for humans. So not replacement for humans, but ways to enhance humans productivity and the developer context that shows up as products like copilot, which helps developers write code faster by taking out work that frankly takes a human being more time than a computer to go ahead and fill in for you, an assistant to fill in for you.
(46:16)
In the case of customer service is oftentimes about understanding the issue. There's a communication gap always when two human beings are engaged with one another, written or verbally. And one of the things that these language models are really good at is understanding what's being said and what needs to be said back. Even if a human being still needs to ultimately make decisions, you can have the conversational pieces figured out in a way where both people can understand each other better. And so it's a way to enhance the quality of the conversation with the customer and to assist our customer service teams. And sometimes, and ideally, yeah, take the human being out of the loop if possible, but not always. And we've always said that customers will always get access to a human being if they need it, but we can make those humans a lot more productive if we give them the tools to help that translation.
(47:04)
What's interesting is that our approach to the customer service problem generally is to make sure we're identifying the primary reasons for customer engagement and then giving the customers tools to not have to reach out to us. It's certainly the case for me. I'm guessing it's the case for you and I'm sure it's the case for all your listeners. The last thing you want to do is pick up the phone and call anybody, let alone a customer service rep. It's just, it's painful because you just want to be able to go onto your account and fix your own problem. And the idea that you have to call people is just not the younger generations thing. Older generations still very much want to talk to human being, but the younger generations, we really started with millennials and it's certainly true with Gen Zs and I am pretty sure Alphas won't even have the phone feature on their phones.
(47:53)
They wouldn't even call 'em phones. They're going to lose it. They don't want to talk. They would like the ability to just engage with the system the way it should be built. And that's good for everybody. We customers are happier when they solve their own problems. Customers are obviously going to solve it more quickly and they have less time spent on it. And I think all of these are ways in which we can apply some large language model AI type approaches and we're doing that. There's also a lot of work we can do on personalization, on engagement with the customer and knowing more about what they want to see. Max mentioned it, but thinking about the right offer to show a consumer is a thing that's enhanced with better modeling. And we think that's a thing we can do today. We have a product called Adaptive Checkout that lets us take a given application.
(48:44)
I would like to buy this bicycle, and it helps the consumer get them choices around how they like to structure the payment today. Usually we offer three different pay options when they're going through adaptive checkout. And it ranges from I think, pretty hard configuration parameters where we've preset these are the three things you're going to see to some level of flexibility around the context. And I think the opportunity for us to continue to personalize the offers consumers see that, meet them with where they are, and there's really not a one size fit all here. The consumers needs vary widely. Consumer can want a low monthly payment amount or a consumer could be wanting to pay less interest or a consumer can want to actually just be done with it as quickly as possible and they still need a little bit of help smoothing it out. And all of those are really valid things and being able to better understand what that consumer's preferences are and give them offers that meet those preferences are another great application for this technology.
Austin Hankwitz (49:44):
I think it makes a ton of sense. It just sounds like you guys are hyper-focused on making sure that your consumers are happy if that is with customer support or with different types of offerings at checkout. You're just a very consumer focused and centric company. I know we only have about 10 minutes left here, so I've got two more last questions for you. One has nothing to do with consumers, but actually back to the idea of competitors, right? Walmart's majority owned FinTech company. One recently rolled out a new buy now pay leader product in late April. I believe a Affirm was Walmart's exclusive provider of installment loans. Maybe until now I think we might have a competitor here. So how does your team navigate competition just popping up like this? How are you guys thinking about them? Is it something you're focused on or back to the idea of being a consumer-centric company, you just focused on relentlessly obsessing over a happy customer.
Michael Linford (50:36):
Yeah, that's it. And customer here means both the merchant and the consumer. We know that the path towards success is not contracts that prevent competition. Our path to success is on making sure we delight the consumer, we meet their needs, and that we drive better business outcomes for our merchants. And if we do that, we know the rest of it will take care of itself. And that has been true since the day we've been here. And sure we have contracts and we do seek exclusivity because we should, but we don't rely on that. We know that if we ever get to a spot where we're telling the customer they can't do something that's good for their business, then we've lost. And so our stance with any merchant is we want your business to be successful and we do everything we can to make it successful.
(51:23)
We may have a point of view about we playing an important role in that because obviously we believe that what we do is good for the merchant, but we believe that it's our job to make the merchant successful. And for a partner like Walmart who's been a partner for us with us for so long, that is unquestionable. We're out here to help them be successful and we start and end every conversation with that and think about them first. We think about ourselves last in that equation. So we're out to make sure the merchants are successful, we understand their problems can help them solve them. We also have a lot of confidence in what we do. What we do is very hard. It's not easy for a lot of people to come along and replicate what we do. And as evidenced by the discussion we just had around our diversity of products being a real asset in this environment, it's really hard.
(52:09)
You need the duration of technology trust and data assets that we have in order to do that. When we first launched with Amazon, we got a lot of questions from investors around the level of exclusivity there. And I think it's weird to talk about level of exclusivity because you either are or you're not. And if you go look on amazon.com, you've never not seen other financing offers on Amazon since the day we launched. We had other offers there. And our answer then is the same as it is now in any merchant context, which is we're not intimidated by that. We know that we have to earn our spot. We have to continue to drive better conversion and better outcomes. If we're not doing that, we expect our merchants to want to create competition. If merchants want to create competitions for other reasons, maybe they have other ambitions, we want to help them in that. What we want to make sure we're doing though, is driving the right outcomes for consumers and the merchant. And I feel like we've done that quite well here.
(53:12)
We've recently launched with a few of these super high growth brands that already had some of our competitors on the site and when we launched with them, so we were now the third BNPL offer on the site. And when we launched with them, I was as A CFO, I was a bit skeptical over how impactful these were going to be. I was like, look, they already had two a third going to do. And what we saw was really strong, really strong, really early adoption on the site, mostly from people who already knew our brand. The increase in frequency you talked about at the beginning, our brand means a lot to the consumer and our brand. When consumers understand what we do and they understand it's different and they see us available, they seek us out. And so again, that's an asset that we, if you keep the consumer as your north star, that asset keeps growing in value and that allows you to operate in competitive environments.
(54:09)
In our shareholder letter, max mentioned this anecdote, we went to visit a store as a management team and a store associate there saw us wearing the Affirm gear and was just gushing about us. And when you had one of those conversations, it's anecdotal, but you quickly understand why Affirm is able to win in a competitive environment. The consumers actually love us. They actually love what we do and do we need to do better? And we don't take any of that for granted. We have to keep working hard at it. But if you keep that consumer as your North star here and you do right by them, it pays huge dividends. And they will tell you things like Affirm has my back and there's nothing more fulfilling and mission enriching for us than consumers expressing back to us that they understand what's going on and that they appreciate what we do.
Austin Hankwitz (55:02):
I mean, I can count 6.3 billion reasons why that you guys are preferred by your consumers. Wrapping up the interview now with a little bit of a couple personal questions here. You were the VP of Merchant Strategy at Academy Sports and Outdoors about a decade ago. According to your LinkedIn, you worked at HP for a few years. How did you find yourself at a firm? I think somebody even told me you were the founding CFO. How'd that happen?
Michael Linford (55:29):
I was the first CFO. I was way away from
Austin Hankwitz (55:31):
That. Okay.
Michael Linford (55:32):
When I joined the company, the company was going through a really cool pivot from early stage startup feeling around it. They got an idea, the car had started and they needed to get a lot of the corporate stuff sorted out so they could continue to grow to scale. And that was great. I would not be a good CFO at the super early stage. That's not my skillset at all. But it's been great to see us grow so strongly from when I joined today. It's incredible the amount of volume we were doing in a year. We're doing it a month and those kind of fun facts, it's just like the whole context is just so different. And every year goes by. There's another fun fact about these new points of scale that we've reached. I was, HP and I helped do, HP was going through a big, big, big change.
(56:28)
They were one giant company and we broke them up into four different companies. They had the consumer business, which was printers and laptops, and you had the enterprise business, which was IT services across the board, hardware, software, and then outsource services. And we went through a process to split up the consumer and enterprise businesses to then spin out and merge the enterprise services business with a company called CSC and created a company called DXC. And then the software business was the last one to peel apart from the hardware business. And we spun that out and merged it with a UK company called Microfocus. And so that was a really intense, super enriching experience in helping get these assets in the right home. And they went well together. They had a much better chance of thriving apart from one another. And at the end of that, to be honest, I was tired.
(57:23)
I was ready, I was tired. And so I remember I took the summer off at the end of that last piece. We just had our second kid and I was hanging at home. Best shape of my life. I was living the best life ever. And I got a phone call from a friend of mine and he's like, you should talk to this team at a firm. And I was so skeptical on it and I was like, I really like this not working thing. And then I had one conversation with Matt, and then I had one, I was like three months of not worked. It was the first time in my life I had not worked for 90 days. It was great. And had a conversation with Max. And those moments in life, when you have that 30 minute conversation and you're like, ah, dang it, I don't have a choice on this.
(58:06)
The thing that resonated with me so early, so quickly was that this was a real problem, that we had a real solution to it. That we had a real chance to change the world. And those are the moments you can't pass up. And I said, let's go. At least let's go try this out. And it's been by far the best six years of my life and career and working alongside my teammates here at a Affirm and building what we're building right now. And I know that I'm a better person for having spent time with this team. And I go to work every day with close to 2000 people who are out to make the world a better place. And just tell you, there's nothing better than that. And so any of those listeners out there who find themselves in those career moments, my only advice is make sure you take those conversations. And the way I word it is walk through the doors when they open up because you're going to be shocked. And if you're too cynical and skeptical, you're not going to be able to take advantage of it. And I certainly am super fortunate that I did,
Austin Hankwitz (59:07):
Michael, what an incredible interview and conversation here. I've learned a lot. I appreciate you letting me dive deep into both the earnings, your background, this Bloomberg article, everything in between, man, super, just transparent and authentic conversation. And we're super, super grateful. Anyone listening right now who's wanting to learn more about Affirm, go check them out. They've got a bunch of cool information on their IR website as well as affirm.com/card. If you want to go check out their new Affirm card and its capabilities, a little QR code here on the landing page. Michael, I really appreciate it, man. And I'm sure we're going to have you back very soon. Thank you, sir. Wow, what an awesome conversation with Michael. And thanks everyone again for hanging out with me solo on this episode. Katie was definitely missed. I think a few of my largest takeaways from the interview are, one, affirm doesn't care about their competitors because they know their brand equity is the driving factor of growth and retention in their business.
(01:00:06)
We see that not only in the example that Michael had mentioned with being the third BNPL product offered at that merchant, but also their increased frequency with existing customers. So I think that's a pretty powerful strategy to lean into. Two, their Affirm card is an absolute game changer, right? It's paying for, but anywhere you want to shop. And I have a funny feeling it's going to make up a material amount of their GMV in 2025 and beyond as millions and millions and millions more consumers begin using it. And three, this Bloomberg articles to be pretty bogus if you ask me. Sure, you can't really argue with survey data, but I totally forgot about that six week payback period that Affirm uses with their sort of pay in for strategy here. So making this phantom debt, something that's essentially negligible over a longer period of time when you compare that to carrying a balance on your credit card or something like that.
(01:00:55)
So I don't know. I think Affirm's got a pretty cool business and Michael was an awesome person to talk with. As always, everyone, thanks so much for hanging out with us on this week's episode of After Earnings. I'm really excited because Katie's coming back next week. Can't wait to have her by my side interviewing the decision makers at these awesome, interesting companies. If you've not yet subscribed on, if it's YouTube or Spotify, apple Podcasts, wherever you listen to your podcast, do that. Follow along. And don't forget to also follow us on social media. We're all over the place. Thanks everyone, and we'll see you next week.
