Max Levchin: I’m going to try to answer, but feel free to tell me that I’m answering their own questions. So I think you’re asking — I guess, the way I’m interpreting this overall, at least try to answer is, does the card availability to consumers create new pools available transactions for us to take on? And the answer is yes. Our off-line usage with the card versus without the card is drastically different. And so all of those transactions are entirely incremental. It’s not really all that magical why transactions of the cardholders are significantly higher than average transactions for non-cardholder from user, it’s because these people are for, they’re more committed because they requested a card. And two, they’re bringing it to stores.
So it’s it just touches a larger open field opportunity. In terms of underwriting and sort of our exposure on the credit side, et cetera, there’s no change in the sense that we — and we talked about this before, but for the longest time, our sort of calling card in the underwriting world was this thing called ITAC, which is the internal transactional Affirm credit score. And that allowed us to do really precise underwriting at the transactional level. Some number of quarters ago, we have augmented that with a user credit score which allows us to underwrite both sort of a more holistic consumer in addition to every individual traction. We still underwrite every transaction, we still reserve the right to say we cannot lend money to you. but we have a score that we feel very good about in our ability to say what’s the overall capacity to borrow and pay us back and willingness to do so.
And we lend on the card and off the card using the same set of scores and the same set of variables and limits. And so you can borrow from Affirm using an integrated point-of-sale solution you can borrow on the card with two different modalities of borrowing on the card, but all of it goes against the same set of variables and the same set of observed behaviors that governs our ability to approve the next transaction. The thing that’s created about the card is that it’s optimized for convenience in everything like multi-land checkout environments all the way to online shopping. So it’s an expansion of opportunity, but not an expansion of our willingness to take on more risk I think that answers it, but I’m happy to provide a lot more details if you like.
Michael Linford: I think the other thing to say is I don’t think we’re anywhere near the limits on what we think we would think about exposure limits for these users and we’re nowhere near some sort of cap there for the population. We think there’s a lot of frequency that we can drive with the existing users.
James Faucette: Yeah. Great. Appreciate that. Thanks, Michael.
Operator: Thank you. Our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.
John Hecht: Afternoon, guys. Thanks for taking my questions. Like, just thinking about kind of the appetite for selling versus retaining the loans that you guys generated this year, I mean, you have interest rate, at least the curve is going down. It looks like sales execution is getting better, but you guys had an ABS transaction, I think, yesterday and the execution there was good. So how do we just think about kind of balance sheet movement versus marketplace movement over the course of the year?
Michael Linford: Yeah. Thanks for the question. So we did price an ABS deal, and we did so at an all-in cost of capital, 100 basis points lower than a deal we did in December. So in a very short period of time, you’re seeing the market really give us credit for that. And that, we think, is a really healthy sign for the capital system and ecosystem overall. And we think is a reflection of both an improved macro outlook for everybody, but for us, more specifically, the disciplined approach to credit that we’ve taken over the past year is getting valued we think, in the debt capital markets. And so we feel very strong about that. When we do the revolving ABS deals like the one we just did our 248 (ph) deal, those do end up on the balance sheet.
And so while we do think about that as a really important funding channel, it isn’t off balance sheet. Our off-balance sheet strategies involve mostly selling whole loans, although we do some non-revolving some term securitizations. With respect to the whole loan sales, we feel really excited about both the existing partners expanding and the pipeline of new opportunities that we have. Those conversations have gone very well. I think very consistent with the reaction that the ABS market has had. There’s real value being given to us for the kind of credit outcomes that we’ve driven. And frankly, the yield that we put into the asset has allowed us to continue to be able to sell at prices that aren’t really good for us. As is always the case, and we’ve said since day 1, we don’t have one strategy that’s better than the other.
The things that we do are first and foremost, enable the growth in the business, and I’m extremely proud of the way the team has been able to support the capital program over the past year through all the volatility remaining enabling all the growth that we’ve delivered. The second priority is to deliver our unit economics. Clearly, if we’re running the 3% to 4% range like we did this past quarter, we feel very strong about that. And then we begin to want to manage the capital efficiency of the program. That’s the third piece. And obviously, whole loan sales are more efficient but it’s the third of the three priorities. And so we wouldn’t really want to overuse that lever. And then the last comment is each of our capital strategies really exists and reinforce one another.
And so you really won’t see us pivot to one or the other. We’re going to continue to scale all of our channels. That means continued ABS execution, continued forward flow and continued use of our warehouse lines.
John Hecht: Okay. My other question was asked and answered, and I appreciate the color. Thanks very much.
Operator: Thank you. Our next question comes from the line of Kevin Barker with Piper Sandler. Please proceed with your question.
Kevin Barker: Thanks for taking my questions. So there was a little bit of a tick up in the net charge-off rate in the quarter. It seems like you built reserves last quarter that may have preempted the charge-off coming through or could be partially seasonality as well. Is there anything to point out there? And would you expect that charge-off rate to drift lower just given you’re seeing a larger portion of GMV being driven by Affirm card? Thanks.
Michael Linford: No. I don’t think the card is going to drive different credit outcomes for the whole portfolio. I think the level of repeat usage might where you do see better credit outcomes on repeat users overall, but I don’t think the card is big enough really to affect the total portfolio numbers yet. Obviously, when it gets much larger, it will begin to have a more material impact. But for now, I think it’s small enough and yes, there’s really nothing to point to specifically on the charge-offs. Again, I think about our charge-off policy, we charge off at 120 days. Delinquencies once they get to past 60 or 90 days are overwhelmingly likely to go towards charge-offs. So we have a pretty good sense of that and full allowance at all times to handle the future charge-offs that we estimate.
Kevin Barker: I think you mentioned that you were leaning in a little bit last quarter. Are you opening up the credit box to attract more users. It seems like it’s an opportune time to do that just given your acceleration here and profitability that’s being generated?
Michael Linford: Yeah. I think the strong units give us permission to do that more than anything. So we talked about 3% to 4% in the revenue less transaction cost as a percentage of GMV. That’s the real constraint for us. And so if we’re in that range, we can continue to be very aggressive on acquiring and reengaging new users. And that’s really the constraint much more so than anything else.
Kevin Barker: Thank you.
Operator: Thank you. Our next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.
Michael Ng: Hey. Good afternoon. Thanks for the question. I just have two. First, a housekeeping question. Could you just help explain the uptick in the merchant fee rates for the long core zeros and are there any initiatives or mix dynamics that may affect that going forward? And then second, just a bigger picture question. Transactions per active have obviously been growing 4.4% this last quarter. You’re also seeing really strong repeat customers. What does that tell you about the loyalty or engagement of customers and the durability about the installed base of users? Are these customers using this because it’s become more habitual and it’s a better experience or is it out of a necessity of credit? Thank you.
Michael Linford: So on the first question, it really is just a function of the mix in our business. And that’s always been true for merchant rates. We always talk about merchant fee rates as being mix driven. That’s why we began breaking it out in the supplement. The slight tick-up you see on one of the categories is really just a function of mix within that category, but also as duration goes up, so does the price, especially in this rate environment, where it’s pretty duration sensitive in terms of the price you charge. I don’t — again, I don’t think there’s a broader trend to be read into there. And on the frequency question, I’ll let Max answer that.
Max Levchin: I think it’s a reflection of the fact that the product is becoming more widely available more than anything. I think as we sign up some of the partnerships and expand them, the Shopify reference I made earlier, it does result in wider availability. The product is popular. It’s well liked by the users. One of our top questions in customer service is why isn’t Brand X supporting Affirm right now, and we work very hard to make sure there are fewer and fewer of those. And so as we become more available, also as we become available offline in the form of the card as well as some of the integrations that we’ve done, you’ll naturally see more transactional velocity and frequency increase. The product is a better product in my highly biased opinion than that of a credit card and credit utilization goes up broadly, I think we are the under beneficiaries of that usage given the chance or choice, consumers opt in for more Affirm spend than private card spend and they’re rewarded by having no late fees, no compounding interest, all the good things that would bring.
Michael Ng: Thanks, Max. Thanks, Michael.
