The one thing that’s really — that we have to mention, so we said it last quarter that we’re on track to broadened our EPR range from 0% to 36%. Obviously before we were between 0% and 30% as we broadened it to 36%. The natural consequence of that is we’re able to approve a little bit more books. And that is a great tool to have. Obviously, the number one job that we have vis-à-vis consumers is to offer them access to credit in a transparent fairly priced way. Having a wider range of prices available to us does allow us to say yes to more people. So, all these to people — you’ll see us probably on the margin be slightly more approveful, if that’s a new word. I made that up. I thought I’d start a word go. But, being able to price the risk in allows us to say yes more often.
Operator: The next question is from Rob Wildhack of Autonomous Research. Please go ahead.
Rob Wildhack: I wanted to ask about the higher allowance quarter-over-quarter, maybe follow-on from that last question. Can you speak to the drivers there? And then, given the short duration that you’re emphasizing, I’m curious the degree to which you think of changes in the allowance as proactive, i.e., we receive credit versus reactive, i.e., things kind of started looking worse than we expected?
Michael Linford: It’s definitely not reactive, meaning things look worse. It’s very mathematical for us. So, we make an estimate of the losses for all loans we have on the balance sheet at any point in time and we make sure that we have an allowance appropriate to support that. As you change the mix of on- and off-balance sheet a quarter-over-quarter, so the increase in sold loans does drive the math to be higher this period, given the fact that you’re selling more early stage loans. And so, you naturally have a little bit of shift there. But we don’t view that as a bad thing. It’s certainly not a reflection of underlying credit performance. We think the underlying credit performance remains exactly where we’d like it to be.
And when we have the kind of unit economics that we have this quarter, which is really strong at the high end of our 3% to 4% range, obviously, we’re very comfortable with the amount of provision needed to support the growth in allowance.
Rob Wildhack: And then, maybe one on the regulatory front. The CFPB has been pretty active with respect to buy now, pay later and even fintech more broadly. So what are your latest thoughts on their role? And then how do you see that evolving going forward? Thanks.
Max Levchin: Yes. So we’ve always viewed them as one of our key regulators. I’ve spent a fair amount of time on their advisory board a few years ago, so on. So obviously being subject to supervision from our point of view is a formalization of the relationship between Affirm and bureau. We think we may be somewhat unique in this, but we think it’s a positive step for the industry, most importantly, sort of normalizes the engagement with the regulatory bodies. It’s also good for consumers for obvious reasons and good for us because we think it levels the playing field in quite a number of centers. We’ve been in contact with the bureau for a long, long time and certainly expect to continue being engaged with them. Our priorities remain exactly what they have been.
We are everything, if not transparent and clear with the end borrower and that certainly aligns very well with the mission of the bureau. So, I feel — generally speaking, feel quite good about the regulatory engagement.
Operator: The next question is from Ramsey El-Assal of Barclays. Please go ahead.
Ramsey El-Assal: Hi. Thanks for taking my question this evening. I wanted to ask about the competitive landscape in general. It seems like the stability and the merchant fee rates that you guys lay out in the slide presentation points to a pretty rational environment there, but you mentioned taking some market share. How are your conversations with merchants going — merchant partners going and how is this sales pipeline kind of progressing in that context?
Max Levchin: It’s more rational now than it was before. I wouldn’t call it fully rational just yet. I think it’s harder — with every passing moment, so long as we agree that the overall economic reality is not on a positive direction. And as I said in a previous question, we have not seen sort of a dramatic turn for the worse, but we are very, very active in managing credit. It is a competitive advantage for us and I think, if I’m completely honest, it’s a bit of a soft spot for some of the competition. And so, what this does to merchants, if our competitors are rational, is they have to tighten approval dramatically. They can’t separate risk as well as we can. The only way to not have losses is just decline indiscriminately a lot more.
Our strength is ability to separate good and bad risk and therefore we can maintain high approvals. That has served us really, really well over the years. There’s lots of stories to tell from the earliest days of Affirm where some extremely valuable logo merchant would come to us and say well, the competitor of your just showed up and they offered us half the price, so we’re going to clue you and go there. And during those times, I would sort of stress and worry that this means everything is broken about this company, and we always maintained with much urging and occasional head slapping from Michael. We maintained a discipline of saying, look, if this is an irrational deal, we will not sign it. And most often those merchants would come back to us and say, actually the weirdest thing happened, we are paying a much lower price, but the approvals suck.
And it’s not an accident. If you are good at managing risk, you know how to price it, and if you know how to price it, you can then deliver it at a fair price to both the consumer and the merchant. And so, as it becomes a little bit harder or for some folks obviously a lot harder to underwrite, it’s a little bit easier to prove to our partners that being rational on a pricing side is really important. So, this conversation will become a little bit easier. To sort of break it down even more and I promise I’ll stop in a second, but it’s an obviously super important topic that I spent a fair amount of time on. The thing that really becomes interesting is you talk to folks that run these merchant companies and some of them are still very, very focused on bottom line, others are on top line, and sometimes it’s a function of having inventory, sometimes it’s a function of trying to meet growth targets for investing purposes.
Depending on that, their goals change. And the thing that we’re really, really good at is tuning financial offers for consumers to meet merchants’ financial targets. If they are if the merchant is very focused on driving inventory out of the warehouse or off their virtual shelves, we’re very good at creating consumer offers at no APR, fixed low APR that we can dynamically price for the merchant and the consumer and make those transactions happen. If the merchant is very focused on their own bottom line, we’re very comfortable working with them to reduce or to drive their MDRs down to make sure that their costs are under huge degree of control and passing the cost on to the consumer. Because we are so transparent with pricing to both sides, it’s never a mystery and never this sort of a black box negotiation where everybody feels like they’ve been somehow hurt by this whole process.
We’re very, very clear with our merchants. Here’s exactly what you can get in the current environment with the current approvals. And over the years, that’s built a reputation for us that just worked time and time again. And so, the conversations have always been rational with the merchants that we have and that’s why you see our MDRs quite stable and our merchant base quite well retained.
