Rayna Kumar: Got it. That’s really helpful. And then just one follow-up. If you can just provide us an update on how the Shopify partnership is ramping and how that runway for growth looks like from here?
Max Levchin: We’re very happy with the Shopify relationship. Sort of the headline answer is, these things take a long time to build out. It’s just sort of €“ again, I love being our €“ just a little bit about the complexity of this business as a moat, but it really is that. It typically takes us two years to three years to get to kind of a full deployment because it’s such an interesting beast. You have to figure out how to promote the product the right way, and yet you can’t over promote it because then you’re going to be pushing people into death where they shouldn’t be. And so there’s a lot of finesse to figuring out how to get to a full sort of a fully deployed mode. And you know you’re there when you’re seeing kind of a 1% improvement and not better than that.
And we’re still in a really happy position where we can roll out an improvement or a project with Shopify; the meaningful improvements come out in GMV or in profitability of the program, et cetera. So we’re still very much at work. We have a significant percentage of our effort dedicated to what we call PBA Powered by Affirm , that’s the component come more in treat that powers both Shopify and several other platforms for us. And we’re still very significantly invested in building that out. There’s still quite a lot of opportunity there. So generally speaking, very excited, great relationship. Spend a lot of time talking to my counterparts there.
Operator: Our next question is from Andrew Jeffrey with Truist Securities. Please proceed.
Andrew Jeffrey: Hey guys. Appreciate taking the question this afternoon. Michael, by all accounts, it would appear that capital markets are maybe healing a little bit, and equity as a percent of the total funding platform is up pretty substantially quarter-on-quarter. So, I guess a couple of questions. One, how do you sort of assess the state of the capital markets from a funding standpoint? I noticed you expanded capacity. And two, do you think you’re going to be able to stay below that sort of 10% pre-IPO equity funding threshold through the cycle?
Michael Linford: Yes. So the first question first. The markets are healing. I think that the New Year did an awful lot for the debt capital markets broadly. And you’re seeing the ABS market open up. You’re seeing much more constructive conversations with forward flow partners. Max and I spent a lot of time over the past couple of weeks meeting with couple of partners of all stripes. And the tone is just markedly better than where it was as the volatility appeared to be reducing, and the New Year really did help. So, we feel much better today, and yet we are still very much humbled around just how difficult it is to execute and how volatile and uncertainty remains. You saw the whipsaw this week in around the Fed meeting. And I think that kind of volatility is something we’re just €“ we’re prepared to and comfortable at navigating, but it does reflecting us being very thoughtful and careful about how we run the business.
With respect to your second question, absolutely, we will stay below 10%. We think this is near the high watermark for where that number should be. We think that the seasonality of our GMV, specifically the holiday shopping season late in the quarter and then, of course, in the quarter itself, causes an increase, a pretty big step-up in total platform portfolio that we don’t think will continue to grow as quickly to the back half of the year, which means that our funding mix will probably be very stable through the back half of the fiscal year. So you wouldn’t expect any meaningful increases in that equity capital required. And we would continue to feel confident in our ability to execute both securitization like we did earlier in January as well as net new capacity with forward flow partners.
And so we feel good about our ability to do that right now as we sit here today, but nowhere near 10%.
Andrew Jeffrey: Okay. And as a follow-up, wondering about €“ pardon me, I lost my train of thought. Yes, on the loan loss reserve, I know it’s €“ you’ve admonished as not to necessarily consider that as we would a more traditional financial, but can you just discuss sort of the 5% reserve and where you think that goes in the current environment should it fall given the slowdown in growth?
Michael Linford: I think 5% is a really good number. I think it is obviously linked to delinquencies. And again, I apologize if this comes off as a admonished. It’s really not. It’s just a chance to learn about how this business works. We have a target €“ in my letter, I would really encourage everyone to look at it. It shows the delinquency trends at Affirm as compared to some of those traditional players whose measures, I think, some folks are wanting to apply to our business. We’re the only player with the line on delinquencies pointing down, okay? And some players are not as high as others, but the directionality is very different. And that’s because our asset turns over so fast that you’re not building for losses for loans that you have.
And it’s somewhat of a cheeky statement, but we can’t build allowance for loans that we don’t own. And so we can’t build ahead originations that haven’t happened yet. And what you see here then isn’t a judgment about how the back book will deteriorate in the macroeconomic environment. It is a reflection of the quality of loans that have originated recently given the velocity of the book. And so what you should interpret as the 5% is very much connected to that declining delinquency trend that you see. That’s a reflection of extremely strong credit performance, much more so than anything else. Lastly, we included a chart in the supplement that I would encourage folks to look at, it just breaks out where the allowance bridge two from September to December and then, again, where the last 12 months have gone.
And you’ll see the allowance build is a reflection of both growth and assets, but also the actual charge-offs in the period.
