Young man holding a credit card and using a laptop to shop online.
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Americans who shop online after midnight often make riskier transactions and are more likely to default on their loans, according to Affirm's CFO. Michael Linford.
The fintech company uses the hour a consumer attempts a transaction as a key data point to help determine whether or not to be approved for loans, Linford told CNBC in a recent interview. Other factors include the user's payment history along with confirmation and transaction data from the credit bureau Experian.
“The local time of day is the signal we use in underwriting, and most times of day have the same credit risk,” Linford said. He added that between midnight and four in the morning, something changes.
“Humans don't make the best decisions at 2 a.m.,” Linford said. “It's clear as day – credit delinquency rates go up around 2 a.m.”
While the data is so clear in late Time of night Financial decisions are more risky, and their reasons are less serious. Shoppers may be intoxicated, under financial or emotional stress and desperately seeking credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing with bank-issued credit cards. The buy now, pay later industry offers installment loans that typically range from short-term interest-free transactions to interest rates of up to 36% for long-term credit.
Companies including Affirm, Klarna and Sezzle have integrated their services into retailers' online payment pages.
Key to their business model is the ability to approve or decline customers in real-time and at the transaction level, using data to help judge payment probabilities.
“We don't need to know if you'll be working in two years,” Linford said. “We need to know if you're going to be able to pay off the $700 purchase you're making now. This is very different from credit cards, where they give you a line and say, 'God bless you.'”
The use of buy now, pay later loans has grown alongside the overall rise in consumer debt. While the industry touts lower upfront rates and fees compared to credit cards, critics say they enable users to overspend.
Linford said Affirm manages repayment risk by either declining transactions or offering short-term loans that require down payments. Last week, he confirmed mentioned 30-day delinquency on monthly loans has held steady at 2.4% over the last three months of 2023. Compared to the previous year, even as total purchase volumes rose 32% during that period.
Affirm has little incentive to let users rack up debt, according to its CFO.
“If you can't pay us back, we lose, unlike credit cards,” Linford said. “We don't charge late fees. We don't spin or collect.”
Prices at Affirm contrast with a credit card Delinquency In the four largest US banks, which have been rising since 2021 as loan balances grow. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, an increase of $50 billion from the previous quarter amid rising interest rates and persistent inflation, according to a new report. New York Federal Reserve Bank report.
“The business environment is good, so the question is: Why are credit card delinquencies on the rise?” Linford said. “The answer is that they took their eyes off underwriting and, in my view, they became aggressive at a time when consumers were starting to show nervousness.”
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