Max Levchin: Just I don’t mean for it to be admonishment either, but I will attempt to say exactly what Michael said in a probably less careful way, but I think it’s really important to understand the whole point of including this chart. It’s not as though our consumers are experiencing less or more stress on average, is that we have through the really short-term nature of the product that we print, and the fact that we decide every loan individually where we think we are not able to take the risk, we don’t. And the downward slope of delinquency is a direct result of our action. We changed our credit posture sometime starting maybe nine months ago, and we’ve done it again several times since, sometimes with finesse and other times somewhat more actively.
But the point is, we are in control of the credit outcomes and we’ll continue controlling them. And that’s really, really important to understand. We’re not building allowances for the mistakes we made that we couldn’t have predicted three years ago by giving someone a credit card. We make the decision every single time they choose to transact, has a direct consequence of GMV might be lower because we decided the GMV that is coming to us is higher risk than we want to take on. But we do rank risk really well. Reducing GMV a little bit eliminates a tremendous amount of potential loss, and we are in total control of what kind of loss we take on. That is the reason we included that is to just drive the message home. We’re not interested in building up giant piles of cash for losses that will make from loans from three years ago, because we don’t really have a whole lot of loans left from three years ago at all.
I hope that didn’t sound too admonishing.
Operator: Our next question is from Bryan Keane with Deutsche Bank. Please proceed.
Bryan Keane: Hi, good afternoon. I guess just thinking big picture here, Michael, what surprised you versus the guidance you just laid out last quarter Was it the pullback and consumer spend? Was it that you thought the pricing would get all pushed through? Was it the mix of loans? I’m just trying to get a handle on the reduction in the guidance going forward and kind of the surprise in that caught you by surprise?
Michael Linford: Yes, I think it really is the overall consumer demand, which shows up both in the aggregate GMV, but also the mix underneath that. And I think there’s some good progress that we made. So for example, we were pretty happy to get our business with Peloton to actually to be ahead of where we thought it was going to be. There’s a lot of strength of that program as they returned to some of the programs that we had from years before. And then there was a lot of real legitimate slowdown in the broad line merchants that we are very proud to partner with in some more of the durable goods categories. These are the larger considered purchases. And so I think we were surprised about that. And then frankly we continued to manage credit very tightly and we were probably and continue to be as Max alluded to, we’re going to manage credit first, and that shows up on the positive side with really excellent credit performance, which ensures that we continue to access capital and our capital is not a constraint on the growth in our business, and yet it does create some short-term top line headwind.
Bryan Keane: Got it. No, that’s helpful. And then Max, I’ll take debate and ask about Debit+ the rollout there and the prospects of profitability. I know there was some hesitation worried about the profitability of Debit+, so maybe you can update on that as well? Thank you.
Max Levchin: You couldn’t have helped me out. Could not have set me up better for that one. Thank you. All right, so, sorry. All right. So the €“ I’ll spare you the long story. But €“ so sometime about eight €“ seven or eight months ago, we rolled out a first kind of a seriously sized batch if you will, of cards to our existing users and began observing. So obviously you’re rolling out a completely new set of credit programs, you’re taking overnight or multi-day risk on PayNow transactions and a whole bunch of different things that we needed to watch. And it’s the kind of thing that you can’t really model because you just don’t have any real background information. And so we did that and much to my chagrin, sometime by mid-summer, we knew that transactions we knew how to do, which is longer-term interest bearing and short-term pain for us.
We’re generally performing fine, but we encountered a whole bunch of types of transactions, and I certainly won’t get into the details, but there are multiple modalities of using the card that were just fundamentally unprofitable. And as we were looking at the usage and the fact that the product is so sticky, consumers would literally shift from using Affirm in any other mode to using the card. The second they had access to it sort of debated the responsibility of rolling out a product that was inherently less profitable and in some modalities unprofitable to users who were very hungry for it. But we’re not going to transact with the €“ our other product. And so we spent the last six months just drilling into profitability of Debit+, and there are people who know who they are.
So I’m not going to name them and embarrass them. But they spend an uncountable number of hours figuring out how to optimize. This is primarily machine learning work where you’re figuring out things like probability of insufficient funds in someone’s settlement accounts. And so it’s a major body of work that was actually in the end faster than I expected. But the punchline is that I’m very happy to report that now every class of transactions in Debit+ is profitable. And so to an enormous amount of optimization, again, one of these things where you look back and say, no one else will go through the trouble, they’ll just print out some revolving line and move on. But our consumer doesn’t want a revolving line. They won Debit+ and so very excited that this thing is profitable now.
And the other thing a little bit less, but kind of even more in the weeds, we saw really good stickiness of the product once you comprehended the value proposition. But there’s a bunch of wrinkles in onboarding in particular that lost too many people as we were trying to onboard them. And so we spend the remainder of the time in the last six months just figuring out how to make it as easy to get live with a card, like eliminating a huge number of steps while not losing anything in KYC and all the other things that we have to do. So both of those projects are basically completed. The way you know €“ you will know that we are mashing the pedal through the floor, as Michael likes to say, is you’ll see Debit+ ceased to be its own separate application.
So up until now, it’s been a standalone app that you have to download. So we purposely put in a bunch of friction so that we would be able to control the spread. Now that we feel very good about the economics and the comprehensibility of the product, we’re actually going to integrate it directly into the mainline app. I am not going to make the same mistake I did in the past and put a number out there. And I will do that internally, but the team knows exactly the pressure and excitement we have for the product. So, extremely bullish you’ll see it in your app soon as the rest of the team is looking at me angrily. So that’s all I’ll say.
Michael Linford: And remember, the Debit+ product is another one of these channels that we control entirely. So some of the profitability of the product is a function of that, and we feel really good about where that fits right now.
Operator: Our next question is from Moshe Orenbuch with Credit Suisse. Please proceed.
Moshe Orenbuch: Great, thanks. Most of my questions have been asked and answered. Could you talk a little bit more about the €“ how much of your GMV you think will be on the balance sheet? You sort of talked a little bit about some of that versus what you’d be able to sell and the idea of what in those discussions you were talking about that you’re having with your capital markets partners. How much is their pricing to you changing and how much do you need to raise pricing to keep them perhaps where they had been prior to this range of interest rate increases?
Michael Linford: Yes, it’s two factors. There’s interest rate increases and then there is credit. And I think we spent a lot of time on talking about why controlling credit is so important for the yield those investors get. And that is a point of pretty big differentiation when thinking about us versus some of the other alternatives that some of these forward flow partners could be buying. And as that differentiation grows, we know we’ll get rewarded for it. And yet also we need €“ we do feel the need to increase the revenue content in the loans that we’re selling in the form of higher APRs, for example. I think the €“ we’re not giving specific guidance to the balance sheet or to the funding models through the back half of the year.
But we do expect the mix that we saw in our second quarter to be pretty consistent with the mix that you would end the year at. So, I think it’s safe starting point is to assume that we’re flattish, which means we still have our largest funding channel is still going to be the forward flow market. That’s where the most of the total platform portfolio will be sitting as a single channel. We did the securitization in the beginning of this quarter, which will allow us to grow that line item and yet that still is on the balance sheet with slightly more leverage than yet with the warehouses. So anyway, I would assume flat within €“ certainly within modeling errors is a good assumption, which means that our affordable partners are at the table and still dealing constructively and maintaining their level of commitment throughout the back half of the year.
Moshe Orenbuch: Thanks, Michael. Maybe just as a follow-up. When you gave the guidance for revenue less transaction cost, did you factor in kind of a better, worse or comparable level of gain on sale on the assets that’ll be sold?
Michael Linford: That’s a great question. It’s worse. So we’ve contemplated that we would continue to have yield pressure with respect to our forward flow partners. We saw that in the pricing conversations that we’ve had and been having. And while we’re very confident about our ability to control the asset yields, as Max talked about it is the case that the rising rate environment has put the yield threshold higher for all of these programs.
