Moshe Orenbuch: Thank you.
Operator: Our next question is from Kevin Barker with Piper Sandler. Please proceed. Kevin, please check and see if your phone line is muted. Okay. We will move on to Chris Brendler with D.A. Davidson. Please proceed.
Chris Brendler: Hi, thanks. Good afternoon. I want to try the volume question one more time, just to make sure I’m understanding correctly. Just relative to your expectations three months ago, is it fair to say that there was probably a little bit of consumer moving away from discretionary items, especially discretionary items that would be of a ticket size that would make an Affirm product? Is that €“ that’s only part of it? What about the sort of the offset of increased consumer demand in a stressed macro environment? Is that still a factor? Or is it overall net negative what consumers are choosing to spend today? And I have a follow-up.
Max Levchin: It’s a great question. The pullback from discretionary spend is exactly right. I think I already rattled off a bunch of category drops that we are seeing year-on-year. And so that’s certainly factual, and we do expect it to continue. Nobody knows when the trough of consumer demand has hit, but I don’t feel like people are running out and buying couches all of February or January. But the demand for the program, I think, dropped a juicy stats in the opening part of my letter. We see about $1 billion of demand every week and I think that’s not the same thing as well, great, why don’t you guys take it because each one of these loans or each one of these applications has to be underwritten for €“ through the lens of what’s responsible for us to take a risk on and what’s responsible, frankly, for this person to borrow.
So increasing consumer demand is certainly there. I think if we were careless, we could probably grow GMV to astronomical numbers quite quickly, but that is most certainly not what we’re going to do. We are unique in a sense that we don’t charge late fees. We do not profit from delinquencies. We did not celebrate late fee increases. And I’m glad there’s some pressure downwards in that particular part of the world recently. So hopefully, the playing field is getting a little bit more level. But the demand is a good thing to have. I think we are now big enough where the overall consumer sentiment makes a deference to our business a little bit more than it used to. We’re still growing 3 times the U.S. e-commerce rate. But as people walk away from buying more TVs, for example, it will have consequences.
And so long as we are responsible lenders, we will feel a little bit of that.
Chris Brendler: Okay. Great. And then the follow-up would be sort of a clarification on sort of putting all these factors together, and correct me if I’m wrong here. But it sounds like consumers are experiencing BNPL burnout. To the extent that your last question or last answer suggests that there’s still very much a lot of interest in BNPL, especially in this macro environment is not really consumers tiring of the product. It is more your line of skirmish calls on making sure you’re using profitable loans. And because of the higher interest rate environment as well as higher sensitivity to credit costs, you pulled back maybe potentially at the bottom of the funnel, not at the top of the funnel, but more at the bottom of the funnel. And as you make pricing changes, that you could see a better conversion rate in the next fiscal year potentially. Is that fair?
Max Levchin: That’s exactly right. And actually, Michael, I’m stealing his line in this one, but he loves to remind everybody that our loans are ranked in profit €“ correlation between profitability of our loans and the internal credit score or FICO score, if you will, more or less, are tightly correlated. In other words, the highest credit quality loans are also most profitable for us. We are not using €“ pardon the craft statement, poor people to subsidize great deals or rich people who are actually attributing the cost and profitability quite directly, which means that any time we need to or we decide to improve the profitability of the book, we end up taking slightly less risk at the very bottom. The overall demand for the product is still very strong.
We’re not seeing any €“ I’ve had enough BNPL during the pandemic back to my, I’m not sure which credit card we’ll step on here. But not seeing burnout. If anything, on the margin, I feel like there’s demand for more flexibility. I think the one thing that we’re probably seeing €“ this is a little bit more anecdotal, so take it with a little bit of grain of salt, but any experiments during Debit+, we looked at sensitivity and consumer demand for longer terms. And obviously, people always want longer terms because just a little bit less cash flow hit on a monthly basis. But as the overall economic environment softened and consumer pulled back, it seems that at least part of the full pullback is actually cash flow dependent versus kind of a general decluttering trend, which is also by the way happening.
Michael Linford: Yes. And again we don’t talk enough about this, but we should. We’re growing at somewhere between 2 and 3 times. We estimate the U.S. e-commerce growth rate to be, and that’s despite posting 115% growth in GMV last year. And so I think it’s easy to think about €“ thinking that the industry has slowed down, but you have to put into context the overall scale that we got to and how we kind of got there a little bit more quickly. We still feel like it’s underpenetrated, and we’ll get to the kind of numbers that we talked about. I think some of the quarter growth rate numbers are a reflection of the comps. And again, the growth rate last year was buoyed up by the launch of three major programs, all happening at the same time.
And we’re quite proud that we were able to do that, but that doesn’t mean that some of the growth rates need a little bit wider aperture to get an understanding of what’s really going on. The fact that transaction counts are up 50% year-on-year suggest that consumers are not at all being burned out by very high demand for. We are figuring out a way to profitably serve those transactions.
Max Levchin: Should have just quoted the transaction growth. I think that’s the single highest growing metric actually in this quarter.
Operator: Our next question is from James Faucette with Morgan Stanley. Please proceed.
James Faucette: Thanks. I want to ask a couple of follow-up questions, particularly the one that was just asked. It’s understandable in terms of tightening the bottom of the funnel, as you said a little bit where appropriate to manage that. Any sense for how much that then cost you or introduces incremental friction to bring those people back, whether that’d be first-time applicants or people that have taking out multiple loans in the past, and for whatever reason just don’t meet the criteria you’re looking for, for that incremental one?
Max Levchin: That is a great question and something that is extremely top of mind for me. So I spent a lot of my time staring at reengagement stats, which is why you see it in my top three priority, both in my letter and certainly communications to the company. So the good news there €“ so first of all you’re exactly right. If you tell someone, sorry, no loan for you and it’s the first transaction that is not agreed, first impression and we will have to work harder to get the consumer back. Perhaps even worse, you can imagine a, I’ve been a loyal customer for a very long time, and now he can no longer serve me. So we invest a tremendous amount of resources to both the communication of the clients and also trying to make sure that we can bring folks back where appropriate.
And part of why we know so well that the rate sensitivity is not actually a major problem for our consumer, certainly at the bottom part of the credit funnel is because we tested tremendous amount of those communications and just various forms of reengaging the consumer in our own services where we have total control where, of course, we are able to raise prices and ask for significantly higher down payments and optimize the overall experience instead of saying no, we can say, yes. The long and short of it is the results are good. Probably not worth getting into without a whiteboard. But perhaps when we see each other in person, I’ll show you. We’ll probably have to publish a charge for everybody to see, but we’ve tested what happens when we re-contact the consumer that we have declined.
And what do they do when we tell them, hey, you’re now approved or when we tell them here’s a different form of transaction that we can approve you for. And they’re very encouraging in the sense that consumers, especially those that have used Affirm before, are not particularly hurt or offended by the decline because we think we do a pretty good job explaining what happened and are quite willing to come back and reapply. So I’m, on the margin, confident we’ll be able to continue engaging those consumers, and you’ll see us actually invest quite a lot in products that enable that reengagement. That’s a huge push within the product road map in the next couple of quarters, really, but it is very much top of mind and not something that we think is just going to be available to us and take it for granted.
So it’s an area of extreme focus for me.
