Affirm Holdings, Inc. (AFRM) SVB MoffettNathanson’s Inaugural Technology, Media and Telecom Conference (Transcript)

Affirm Holdings, Inc. (NASDAQ:AFRM) SVB MoffettNathanson’s Inaugural Technology, Media and Telecom Conference May 18, 2023 2:00 PM ET

Company Participants

Brooke Major-Reid – Chief Capital Officer

Rob O’Hare – Senior Vice President

Conference Call Participants

Eugene Simuni – MoffettNathanson

Eugene Simuni

We’ll get going for our next session. We are very excited to have Affirm with us for the next hour, and we have Brooke and Rob. And maybe I’ll start with just asking you guys to introduce yourselves and maybe describe a bit about what your mandate is at the company. And I’m always curious, maybe a very short kind of story about when you joined Affirm and what motivated you to join. Maybe in a couple of sentence, just give us a sense of how you’re thinking about the company.

Brooke Major-Reid

Sure. Thanks for joining everybody, good to see you. My name is Brooke Major-Reid, I’m the Chief Capital Officer of Affirm. And effectively, what that means I make sure we have enough liquidity and capital to do the stuff we need to do. So that spans funding the business, so funding the loans it originate, managing the bank partner relationships for the originating banks because we are — we don’t have a bank charter.

So we have lenders of record, and we partner with originated banks, so managing those relationships, relationships with other bank partners that do things like debit plus, so that ecosystem. Then treasury, as you think about just the core corporate treasury operation that as well and the funding part of our treasury operations and capital markets, globally, so that Cole team.

And then last but not least, we have a quant group. Think of them as the folks who keep us on the right side of the tracks here in terms of managing risk from a facility and funding perspective. So that’s my mandate at Affirm. I joined Affirm about two years ago in the role.

The thing that appealed to me most is that the mission — it was so mission aligned, the culture was so healthy and filled with folks who are just really smart about wanting to solve real problems.

I come from the Caribbean. I came here for college. And so the opportunity to find different ways to provide access to capital, that was very appealing and to do it in a very honest, transparent way. So for me, it was kind of value and mission alignment along with culture.

Rob O’Hare

I’m Rob O’Hare, I’m Senior Vice President on the Finance team. I spend my time across sort of five subfunctions within Finance. So those include Investor Relations as well as our — what we call strategic finance team, which owns all of our forecasting and financial planning for the business.

I also work with our corporate development team, which owns all of our whole company M&A as well as integrating those businesses after the transactions. I lead a merchant pricing team, which sets sort of go-to-market rate cards for new merchants and also is at the table for renewal and negotiation discussions with large platforms and partnerships. And then I also lead a small procurement team that manages all of the vendor spend.

I think in terms of sort of what drew me to Affirm, Affirm firm sort of came on my radar. I had the luck of being an angel investor into a friend’s business, and that business was actually acquired by Affirm. So I had sort of the funny experience of being on the cap table while I was interviewing, which I’ve never had before. And I think what came through in the interviews, I was fortunate to speak with Michael, our CFO, as well as Libor, our President; and Max, our Founder, during my recruiting process, and there was just such a consistency and such a passion around the mission.

And for me, it really harkened back to sort of what I experienced when I was at Square previously of sort of democratizing finance and bringing financial services, in this case, consumer lending, to market in a really fair and honest way. So that was really what brought me over it.

Eugene Simuni

Okay. Great. So that’s very helpful background. Well, we’re very excited to have you here, Brooke, to get into some of the questions about the financing nitty gritty. I had a couple of questions about sort of high-level results from the quarter, et cetera.

But I’m going to leave them for the last because I really wanted to make sure we have enough time for the nitty gritty of financing since that’s the topic. So I’ll jump into that. And maybe first question for you.

Question-and-Answer Session

Q – Eugene Simuni

I wanted to start at a high level. So you have a long career in kind of consumer credit. I think you worked in different areas. And you talked a little bit about in terms of the mission. But talk about your view of what Affirm brings to the consumer credit market? I think my fundamental question is, there’s a lot of consumer credit products out there. It’s not like consumer credit market doesn’t exist, right? We have credit cards. We have different kinds of finance and personal loans, et cetera. Point-of-sale financing is not a new thing. From like a credit professional expert perspective, how do you think about what is Affirm bringing to the table that’s new and needed?

Brooke Major-Reid

Yes. That’s a really, really good question. And I — when I reflect on kind of our model and how much I’ve learned about how we actually run the business, I could not be more honored to be a part of the team.

And I say that with a lot of humility and sincerity because when you — on the surface, we’re providing honest financial products with the thing that is honest about it is the transparency, no late fees, no compound interest, it’s stated very simply. And we meet the customer where they are, right?

So whether it’s a 6-week pay and for loan up to 60 months, we’re able to really offer access to credit in a way that’s unique. We — the second thing is that we underwrite every single transaction. So we do it in a responsible way, and that was the main learning for me in terms of how we use our credit models. We have a large machine learning team. We are very disciplined about not just treating the customer as a score, right?

We are looking at the item. We’re figuring out ways to determine whether the customer’s credit worthy, and there’s so many pieces of data that the team uses to do that. So we’re running this business in a way that’s good for consumers.

It creates higher conversion for merchants, and that’s been proven, because we are able to offer access to different goods, whether it be general merchandise, everyday spend, or like a highly considered discretionary spend, we’re able to create access to those products in a very responsible way. So the big picture for me is, how are you executing on these credit products? How are you doing it? Are you benefiting from a customer’s inability to pay? And at Affirm that — it’s so antithetical to how we do things, in that we’re providing credit. But at the same time, we are really serious and passionate about doing that responsibly.

So even before all of this happened with the Fed and the volatility and all sorts of things that sound familiar but are new, we have risk management in our DNA. And so I think that control for the consumer, the benefit for the merchants and the way we offer the products is very differentiated.

Eugene Simuni

Got it. Okay. [Operator Instructions] Great. So maybe diving a little bit deeper into the financing strategy. So you already mentioned Affirm is not a bank. So it doesn’t have kind of a large balance sheet. So you have a relatively diverse and, I’d say, complicated financing strategy. Can you give us an overview of the different types of financing that Affirm uses?

Brooke Major-Reid

Sure. And I’ll just so quickly so we can get to your questions. So we fund the business across three primary channels: warehouse funding, which everybody is very familiar with. We have a bilateral forward flow agreement where we just sell whole loans, and we’ve got a few ABS shelves. So we execute in the securitization market, and we’ve stood up that program now for about 2.5 years.

Our funding model relies on our ability to really optimize in a very prudent way around economics, but also — unit economics, but also managing the amount of cash that we use to fund loans, and that we refer to as just equity and loans. So our equity or ECR ratio, right, equity capital ratio. And so one of the things that the model allows us to do is really balance how much we have off balance sheet, on balance sheet, but doing that in a very principled way around economics and capital efficiency.

So heading into kind of fall of ’21, early ’22, I could not have been more grateful for two things. The model itself and how diversified it was, but also the fact that we have always been risk managers at heart. The portfolio duration is really short, which in this environment is a very attractive thing to all stakeholders in the funding ecosystem and the fact that we have earned our stripes with respect to demonstrating our ability to control credit outcomes by managing the profile of the book at any given time. So that has really boded well for us in terms of accessing ABS, adding forward flow capacity and maintaining and continuing to add bilateral forward flow. So we’ve always had excess capacity at hand because one of the things I don’t want to be, capital should not be a constraint to growing and running the business.

Eugene Simuni

Got it. Okay. Okay. Well, I want to talk about these different types of financing, maybe in a little bit more specificity. First, with the question, so you mentioned you kind of balance between holding risk on balance sheet and taking risk off balance sheet. Think — I was looking at about half of your kind of funding is on balance, I think, 46% last quarter. And that number varies a bit. So talk — I’m always curious, how do you decide at what level of risk they want to be keeping on the balance sheet? Because that seems like a fundamental question to kind of your model basically. Are you holding risk? Or are you basically selling it off?

Brooke Major-Reid

So like I said, going back to our risk management posture, we like all our cooking. And my job is to make sure that the vehicles are standing up. And there are a few exceptions where I will set up something to fund like our Pay in 4 or 0%.

But generically, the goal is to have all the channels open to everything that we are able to produce, sum of two mine’s. The business needs to do what it needs to do. And on the end, I need to make sure that I’m not out of limiting the right product or by scale. And so from my perspective, it’s really important that we kind of understand that part and the dynamicism of the model. When we think about on or off balance sheet, I’m grateful to my finance partners that we don’t guide or put out a number because it limits the flexibility, right?

So if something has happened in the market, which a lot has happened and continues to happen, we want the ability to make disciplined decisions about how we fund. And there are times when I may have to lead into warehouse funding on — like we did in Q2, maybe that’s a little higher. It runs a little hotter than I’d like to, and I want a normalized level.

But at the same time, I want to be disciplined about adding capital in the right way, and that may mean forward flow. It might take a little bit longer, so you’re onboarding new people. And in ABS markets, the pockets may not be available. So fall of ’22, unfortunately, we ended up in a pocket where we weren’t able to execute a deal. But in January, guess what?

It was 9 A.M. on a Tuesday, and the market said it was fine. So that sort of dynamic in the market, the model helps us to make those decisions without being beholden to having to make a decision about maybe adding capital at a cost that may not be good for the business in the long term. That’s not to say that we are, at market, takers of capital because things have changed.

But the way in which we do that, the model really just provides our ability to kind of lean in and out and balance things over time as opposed to being restricted or constrained. And we believe that the fact that we have had to prove to the market rightly so that we can control credit outcomes, we’ve maintained short duration. We’ve done all the things that we can control to deepen that access.

Eugene Simuni

But maybe — kind of maybe strategically, philosophically, is kind of that 50% on, 50% off, is that the general marker that Affirm has and we should be expecting? Or is that more an outcome of the current financing environment that might significantly change?

Brooke Major-Reid

I think as we scale, we reserve the right to manage it. But at the end of the day, I want to continue — I would want us to continue to be capital efficient, for example, with our cash. So coming off before we actually got to the last couple of quarters, we were at like 2%. And then people would ask “Is that sustainable?” I would say that probably wasn’t. But at the same time, where we are today is a lot higher.

So do we want to manage that? But at the end of the day, you’re trying to create a balanced approach in a very difficult market, and you’re looking at capital efficiency as well as unit economics. So it’s that optimization that you will constantly have to be attending to rather than just the pure split of on versus off.

I really don’t want to have a lot of cash going into funding loans. But I also want to make sure that from an economic perspective, if we keep a loan on balance sheet, like I said, we like the risk profile of our loans, partners get a vertical slice. We don’t cherry pick. So there’s no adverse selection or anything going on, it’s a vertical slice. We keep — it looks the same.

And so if we keep an interest-bearing loan on the sheet, we get the benefit over time, right? When we sell a loan, we hold for that revenue and get the gain on sale. So it’s actually more accretive for us to hold a loan on the balance sheet. But I just think, in these markets, you have to have a level of both flexibility and discipline around unit economics and capital efficiency.

Eugene Simuni

Yes. Got it. Okay. Okay. So let’s talk about your outside financing. And so I’d be curious, maybe to start with hearing your thoughts on when you go out to the market, whether it be ABS, maybe forward flow agreements may be a little different, may be the same. What differentiates Affirm? What do third-party investors like about Affirm paper or opportunity to get exposed to Affirm?

Brooke Major-Reid

In this market and I think historically, our weighted average duration is pretty short, five months. And as Rob likes to say and others internally, we get to work our way through any sort of footfalls we have made around credit, which — that has been something we’ve been very, very disciplined around.

So job number one, folks like the fact that we are really good at underwriting and that we have proven quarter-over-quarter, over many quarters now that we control the credit, okay, we define what would be the tolerance. And the fact that we underwrite every item, it’s not an open line like a revolving credit card. So unfortunately, at times, when we think it’s the right thing to do to say no to a customer, we do that.

So that approach really, from a partner perspective, creates this like alignment of interest. Nobody wants to be heavy with risk in a time where the consumer and the fitness or the state of the consumer is being questioned. We are now waiting for this proverbial shoe to drop for now 18 months. And like I like to say, nobody knows whether it’s going to be a sandal that just gets your hair blown, or is it going to be a construction boot that knocks us all out, right? So no one wants to take that bet.

So when you can prove to investors that you really have a handle on credit and that your duration is short, even if they don’t always believe that it will stay that way, your duration is short and the fact that they understand the model is differentiated around risk and that there’s a risk management posture across the board, I think that really attracts and maintains the stickiness of the current investor base, and it attracts new folks who say, “I’m not — even if I’m not heavy into consumer, here is a place that the Affirm portfolio is well structured.” Our ABS deals are well structured. And so it creates this kind of virtuous cycle in terms of alignment of interest and a risk period of volatility and also attractive returns.

Eugene Simuni

Got it. Okay. Okay. So maybe then now since we’ve lived through a lot of volatility over the last couple of years, I’d be curious if you can give us a little bit of a kind of historical time. I think you’ve been there for two years, if that’s right. So maybe since the time you came, I guess, right, we went through hot period kind of at the end of 2021, the markets were open, then starting to close out, then into the crisis that we have the spring. Would be very helpful to hear as you interacting day-to-day with kind of third-party providers, how has that evolved? How has that changed there?

Brooke Major-Reid

Just in terms of…

Eugene Simuni

Their willingness, their demand. Their willingness to — how difficult it is for you to basically get them interested?

Brooke Major-Reid

Yes. It’s interesting because we’ve — on the bank side, we’ve actually had quite a bit of interest. We added a couple of net new partners on the bank side. Our spreads on warehouse have held in tremendously well. If you look at our Q — we’ve got the range. The higher range is actually the one outlier. Our spreads and the quality, the attraction of folks to provide warehouse capital has been very, very robust.

Forward flow, like I said, we continue to have those conversations. Folks are very interested. But I would say, the difference maybe 12-ish plus months ago was that it’s just taking more time for us to do our jobs in kind of deliver the story to — for folks to get comfortable, given the uncertainty of the macro. And so we’ve had a lot of interest there, but I would say, it’s the tail and then making sure that folks understand from an economic perspective how we can be competitive for net new. With respect to the ABS market, you’re absolutely right.

There’s just been windows and pockets of volatility that were sometimes unexplainable. And sometimes we ended up in a pocket where CPI, we’re in the middle of a Fed, pre-Fed meeting or CPI print. What we’ve actually learned throughout this is that if you’re scaling a program, and then this is quite a basic first principle, you have to be able to weather the storm. So we want to be programmatic. We’ve issued just under $5 billion in ABS.

We are called what people refer to as an esoteric issuer in a nascent market. In order to build that liquidity and depth, we need to be able to provide more paper to the market and be more programmatic, and that’s something we’re willing to do in a disciplined way. So while we’re not overly reliant on any one channel, I think what’s changed is the kind of the bringing along of folks around how — why we’re differentiated, how we manage the business from a credit perspective.

And I think just people have to answer to somebody. They want to make sure that they truly have the picture straight, and they’re convinced that of all the things that we’re doing, that risk management is going to be — continue to be at the forefront. So we’ve deepened the investor base in ABS, but we’ve got ways to go in terms of managing the program for scale and being more programmatic.

Eugene Simuni

Got it. On the — as you’re doing this work to generate demand, especially over the past kind of 12 months, we’ve gone through volatility, what changes did you need to make to the actual product, meaning to the actual loans? So I’m thinking, for example, the pricing changes that have been implemented, like how much of that was the requirement that basically came from the financing markets, where you need it basically to raise the prices on your interest-bearing loans to get demand?

Brooke Major-Reid

Do you want to…

Rob O’Hare

Sure. Yes. I mean I think one of the jokes internally is that our largest supplier raised prices on this pretty well over the last 18 months, right? So I think using APR as a way to offset the interest rate increases that we’ve seen. I think that we feel like that’s the lowest friction way to get a pricing increase rolled out in mass.

And we also think that we’re doing it in a way that is still healthy for the consumer, right? When you take our $300 average order value and think about a 12-month loan, which is about our average, moving from a 30% APR to a 36% APR ends up being about another $0.75 a month for our consumers. So we think it’s a change that’s going to be really impactful for our economics and good for our P&L, good for our funding partners, too, but also one that isn’t going to hurt consumers’ monthly cash flow and also isn’t going to hurt merchants take up rates or growth.

Eugene Simuni

Got it. And does that — did that move help generate demand for your ABS product, the price increase?

Brooke Major-Reid

Yes, I would say so. It wasn’t — I mean, I think when you think about the units and the economics, you have to share, certainly. So it has led to a very robust constructive conversation, given the fact that there’s more yield now in the asset. And therefore, that will help with loan sales pricing.

I think generally speaking, yes, it did help, but I don’t think people were so focused on when and how much is flowing through. It happened to be something that made the asset more attractive. But I wouldn’t say that we had less demand before and more demand now as a result. I think it just creates a healthier construct for folks to see the discipline that we want to have around pricing. We want to be competitive. But at the same time, we want to make sure that we are being disciplined around the economics of the asset, which that helps with.

Eugene Simuni

Makes sense. Okay. Great. Last question on this topic, and then I wanted to hit a couple of other ones. Forward-looking. So yes, I guess, as you sit here and you’re kind of looking at the current environment, obviously, nobody has the crystal ball, and who knows about the economy. But yes, how do you assess the current environment? And your job, I think, is very forward-looking because you’re trying to make sure that the capital is available. Yes, what’s your outlook? And what actions are you taking to make sure that Affirm kind of remains in a strong position there now?

Brooke Major-Reid

Yes. Job number one is credit risk management. So the folks, they were being too conservative, and there’s room to run. We are not going to go out and sacrifice credit for the benefit of growth relative to access to capital. We understand that our ability to control credit outcomes and demonstrate our performance is what’s paramount in this environment and also duration.

So the way I’m thinking about the next several months is how do I press the advantage, do our jobs a lot better with respect to communicating the value, reinforcing the fact that we are fully in control as we are, and that’s been proven out, and really adding capital in a way that’s thoughtful and disciplined, but also flexible. I may not be able to do the 2-year agreement, but I could do a one year with some sort of evergreen. So really taking the model in a way and refining it so that it remains resilient, but that we are also not sacrificing anything around credit and underwriting in a way that would benefit growth and have a trade-off or downside effect on capital access.

Eugene Simuni

Yes. Got it. Okay. Okay. Brooke, so you mentioned you also oversee the bank relationships. I just want to spend a couple of minutes on that. First, maybe to level set, what is the — what’s the needs for bank partnership, just for those who are maybe not as familiar with the model? What — I mean you’re not a bank, but why do you need a bank to do what you do?

Brooke Major-Reid

So we originate most of our loans, I mean the pain for we have for lending services which we originate through, but we have different licenses that we — state license that we can originate certain loans through ALS. However, for the vast majority of our loans, we need a lender of record from a regulatory perspective. And so we use bank originator. So banks basically provide Banking-as-a-Service, and then we partner with them to originate our loans. They originate the loan.

And within a few days, we repurchase the loans, and it sits on our sheet for a hot minute or it goes — and it goes directly into a funding channel.

So we have two bank partners. We have line of sight to adding another one, as we’ve announced. But it really does create resiliency with more than one bank partner. The ability to go up to 36% is also very important to us in this environment. So managing kind of an ecosystem of banks that has that — have that ability is paramount in terms of how we scale and grow the business.

Eugene Simuni

Got it. And so you mentioned you’re adding — I think the two major ones you have is Cross River South Bank, right? And I think you’re about adding a third one? And is your relationship with these two remains strong as well. Are you using both of them? Where is it shifting around?

Brooke Major-Reid

So most of our volume is with Celtic. Celtic can go to 36%. because they’re domiciled in Utah. Then we have Cross River who is New Jersey state chartered, and they can only go to 30%. So most of the volume — a vast majority of the volume has shifted to Celtic Bank. And as we add bank partners, that will be an important part of the consideration. And we also do savings through Cross River. So those — we maintain partnerships in a way that’s kind of beneficial for the business in terms of what we’re trying to accomplish.

Eugene Simuni

Got it. Any possibility that Affirm would move together banking license and become a bank? Or is that kind of fundamental counter to your long-term strategy and philosophy?

Rob O’Hare

I think in the long run, it may make sense for us. I think in the short run, there’s certainly some blockers to that. But I think even if we were to have a banking charter and have some sort of depository base, I think it’s — I think we would keep our existing three funding channels, and it would be the fourth.

And just at the scale point where we are today and the scale point that we envision in the future, I don’t know that it would ever be the majority of sort of the funding that we would rely on, but I think it could sort of help maybe take a bit of volatility out of the system.

Eugene Simuni

Sure. Got it. Okay. Okay. Great. Well, this is a very interesting discussion on the funding. I do have a number of other questions that I did want to hit. So I’ll start going through them. Maybe taking us back to one of the short-term issues, so your earnings report from a couple of weeks ago, a lot of interesting developments. But two things I specifically wanted to ask about that are kind of top of mind for me.

One is just GMV growth. So in the quarter, it decelerated to about 20% year-over-year, which I know there’s a lot of factors that are influencing it. But kind of taking a step back as all of us are watching BNPL industry and really wondering what’s the gross trajectory of the overall — like are people actually interested in this product? And so when we’re seeing a deceleration, that’s a little bit of an alarming sign that, “Hey, is the interest in BNPL industry decelerating?” So I was curious if, Rob and Brooke, you can talk a little bit about how you’re thinking about it? What’s caused this deceleration? And what do you believe is trajectory to maybe reacceleration? I’m talking about not necessarily next quarter, but kind of over the next 12 months.

Rob O’Hare

Yes. I mean I think when you sort of double-click into the quarter, I think there were a lot of really positive signals from a GMV growth perspective. I think the first one that comes to mind for me is we did see actually a reacceleration in Shopify growth, and it improved faster in the March quarter than we did on a year-over-year basis in the December quarter. And Shop’s been a really amazing partner for us, but also a partner that’s driven a large share of our new-to-Affirm users, right? So it’s been a really great consumer on-ramp for us. And to see a pickup in acceleration 1.5 years into that program, I think, is a really, really positive signal just in terms of this is a way that consumers want to transact.

So I think that’s been a positive — we’re continuing to do, I think, really good work within the Amazon program. And obviously, the potential of that program is almost unbounded, just given how important they are to e-commerce at large. So I think we’ve got a got a lot of headroom in our sort of marquee programs. And also, I think like other lenders, consumer lenders, in particular, we had tightened our credit posture over the last 18 months, and we’re comping against looser credit periods. And as we start to sort of have a normal like-for-like comparison period, I think you’ll see a natural reacceleration as a result of that.

Eugene Simuni

Got it. Okay. Okay. And then the second kind of metric that we are watching very close, I know you guys as well and all investors are, is your revenue less transaction cost yields, it’s a mouthful, out of C yield? But again, a lot of factors go into it, but it’s an important metric of your unit economics at a kind of variable level. So that actually has done very well this quarter. It was up to about 3.5%.

But then your guide, I think, for the fourth quarter indicated that it’s going to dip below 3%, if I have done math correctly. Again, and kind of 3% to 4% is yours is the level that you set for the medium term. So when it kind of — we’re seeing a dip again below 3, some questions.

But my question actually — maybe you can help us understand what causes the volatility of it because that’s a thing — one of the things folks aren’t comfortable with. Why is it 3.6 one quarter and then down to 2.9 just a quarter after?

Rob O’Hare

Yes. I mean I think there’s a lot of drivers and there’s a lot of mix shifts that go on at Affirm from quarter-to-quarter. I think one of the biggest drivers that’s impacting the Q4 guide is just frankly the sequential growth in GMV.

I think at the midpoint, we were guiding to something like 18% quarter-over-quarter growth. And where we have periods of sort of pretty significant sequential growth, that will compress margins because for loans that we hold to maturity, we take an allowance against those loans on day 1.

And then we need to hold those loans to the end of their life to sort of fully recognize the revenue and profitability from those loans. And so when you’re only looking at a quarterly slice, you’re going to see all of the provision, all the expense and not all of the interest income that we’ll collect. So it creates a bit of a J curve.

We’ve had a similar dynamic in the December quarter for the last two years, where it’s been more pronounced. And that’s sort of the biggest driver that’s going on here in Q4. And the good news is that I think Q3 in the March quarter was a good example of this, where we did have sort of the seasonal low in revenue less transaction cost yield in the December quarter. But then we got the benefit of sort of the interest income from those loans that we originated in December. We got the benefit of that in the March quarter. And so we would expect a bit of a rebound or normalization in the September quarter coming out of this sort of seasonally high quarter.

Eugene Simuni

Got it. So for investors in Affirm and folks who are watching the company closely, would your recommendation be to pull away maybe from really looking at the quarterly level of RLTC and start looking over like a 12-month period? what’s the right way to approach?

Rob O’Hare

That’s the dream. I mean we were originating loans that have roughly a 12-month weighted average life. And I think it’s really hard to sort of focus on a 90-day vertical slice. I mean when we make underwriting decisions, when we make credit decisions, we do tend to take a horizontal view of the quality of the loans. And just — given some of the vagaries of U.S.

GAAP, like there’s a lot of expenses on the front end and the revenue recognition just takes time in our business. So I think our full-year guide is still comfortably in the 3% to 4% range for RLTC. That’s how we try to run the business.

I think though being in that range is really important to us from a capital markets perspective, so we don’t think that anything has been impaired in terms of the profitability of the portfolio, and we would encourage investors to maybe take a longer view if possible.

Eugene Simuni

Yes. Got it. Okay. Okay. Well, pulling back up a little bit more to ask a couple of key strategic questions I have on my list. So one kind of hot but miss competition, I think, in BNPL. And of course, you have your kind of specialist competitors like of the world. But you also have Apple coming out with a BNPL solution. You have PayPal that have a BNPL solution. You have Walmart that’s getting into consumer finance and potentially talking about maybe something like that.

So I think the competitive question is top of mind for folks who are watching the space. maybe say a couple of words about what’s your current view of Affirm’s kind of positioning against this big set of competitors? What still differentiate — what gives you confidence that you can still win when the environment is getting so competitive and players like Apple are getting into it?

Rob O’Hare

Yes. I mean, I think for me, the differentiation starts at just the aperture and the breadth of products that we can bring to market, right? We can finance loans anywhere from $50 in size up to nearly $20,000 in size. We can go from six weeks to 60 months, and we can do zero consumer interest all the way up to 36%.

And I think when you sort of double click in to that matrix of offerings that we have, there’s a lot of complexity underneath the hood, right? We just spent 35 minutes talking about sort of the funding bits and the complexity there. And so I think we do see a lot of competition in what I would call the less complicated part of the market. Pay in 4 is probably the best example, where it tends to be lower average order values, it tends to be a 6-week loan. There’s just — there’s not the same underwriting and financing considerations in that pocket of the market.

But more than 2/3 of our business is actually happening in loans that are three months or longer and tend to be at higher average order values as a result. And so I think we definitely see the competition have been quite a bit in that segment of the market. And I think for some of our enterprise partners, Walmart included, frankly, I think it’s really important to them that we can offer financing across a really broad range of consumer purchases because the last thing that they want is for a consumer to rely on financing and then, “Oh, they put an expensive good into their basket” and suddenly, that financing falls away. And so having that broad aperture, I think, is really important and has been a real differentiator for us, especially the enterprise part.

Eugene Simuni

Yes. Got it. Makes sense. Okay. A question came in from the audience, so I have to be true to my iPad here and ask it. So it’s related — it’s a kind of follow-up to my competition question, and I think the premise of the question is, look, some of your competitors are humongous enterprises, Apple, PayPal, et cetera. You can argue some of the banks are indirectly competing with you.

Frankly, direct question is how confident that — what gives you confidence that you can survive as a kind of stand-alone company in this environment? And could there be an interesting possibility for you to, let’s say, merge with somebody or become part of a larger entity that would preserve the enterprise that you built, but make you stronger through that?

Rob O’Hare

Yes. I mean I think what gives us confidence that we’re on the right path is that we’ve had a tremendous amount of traction with sort of a who’s who list of enterprise partners, Apple included, Walmart included. And we’ve got really deep relationships across those programs.

And then on the consumer side, we’ve been able to grow our consumer base at pretty incredible rates while also increasing frequency at the same time. And so I think the latter point really speaks to a demographic shift in the U.S. around how consumers want to engage with financial products. And I think buy now, pay later is a category that isn’t a fad. I mean, it’s a real way that consumers want to transact at the point of sale.

And what we’ve seen in other geographies outside of the U.S. is that this sort of tender type can be a quarter of sort of e-commerce at large, and there’s no reason to believe that we won’t sort of get to those sort of levels in the U.S. as well. So I think that gives us confidence that we’re on the right track, both with merchants and consumers, to build a real business. And I think we’re reaching a scale point where profitability is starting to come into focus for us.

And I think, with that, we control our own destiny. And obviously, we’re a public company. And to some degree, every public company is for sale every day. But we want to do the right things for our shareholders, but we’re really heads down on sort of a stand-alone path, and I think we’re on the right path.

Eugene Simuni

Yes. Got it. Okay. And now the key strategic topic I wanted to hit is direct-to-consumer that was highlighted in a big way last quarter. Max talked about it a lot. Obviously, you’ve been working on the Debit+ offering for a while. That’s a big topic that we’re not going to hit over the next two minutes. But two kind of highlight questions I wanted to ask. One is, yes, give us a little bit of like what should we expect on that in terms of the timeline? What should we look for, the kind of milestones as investors as this product develops? And two, how important it is to the — to your strategy and to Affirm? Like how important is the success of direct-to-consumer strategy to your overall strategy over the next, call it, couple of years?

Rob O’Hare

Yes. I mean, I think, internally, I think we’ve been pretty vocal about focusing on profitability, profitability, both at a transaction level, but also profitability from an overall enterprise perspective as well. And so with that focus, I think we’ve set a higher bar for what needs to occur for us to launch a new product.

And so we’ve really focused, first and foremost, on getting the profitability of Debit+ to a point where it’s not meaningfully dilutive to our overall portfolio. And I think with the current cohort that we have in the pilot, we’re making really good progress there. And that gives us confidence that we’re going to be able to take the next step of accelerating the penetration into our existing base. I think it’s really important to remember that we view Debit+ as sort of a second or third transaction product. It’s not going to be necessarily a new on-ramp, at least in the short run, for consumers to find Affirm, but it’s a way to deepen the engagement with our current base.

And in some ways, it will be the second iteration of the direct-to-consumer strategy we already have, which is a product we call Affirm Anywhere, which allows users to transact with a virtual card anywhere that Visa is accepted.

So we have a really strong and engaged core base that uses Affirm Anywhere with great frequency. And we think that Debit+ can sort of replicate that but also unlock a lot of brick-and-mortar spend, where buy now, pay later as a category in the U.S. isn’t really participating in any meaningful way. So that’s what gives us the excitement, is that it’s a way to deepen engagement with our base but also to unlock a really big TAM with brick-and-mortar spend. So in terms of milestones, I think we haven’t given any guide beyond sort of the June quarter that we’re currently in. And all we can ask for is a little bit more patience in on that front.

Eugene Simuni

Got it. Okay. Okay. Okay. Great. Well, we’re within five minutes. I wanted to just ask both you kind of the same lightning-round question, which is as you think about the next 12 months, let’s say, in your role, both Brooke and Rob, what are the couple of critical priorities for you personally in the areas that you’re working to kind of further Affirm’s mission and to make sure that the company is successful.

Brooke Major-Reid

Top priority for me is working with our team to ensure that we’re kind of managing risk in the business. And so when it comes to capital, it’s being thoughtful about scaling our capital program such that it can continue to be flexible, continue to serve our consumers and our merchants. The other big priority for me is making sure that we are managing the ecosystem well in a complementary fashion. There’s still so much uncertainty, volatility, who knows what’s going to drive what. So we need to be able to see around corners and respond thoughtfully.

So when you think about the next iteration of what we are experiencing today, I don’t think anybody thinks that it’s going to get any easier to execute in the market. So all we can do is continue to double down on the business we’re building, the fundamentals of that business, which are pretty strong, and start the attractiveness of what we’re producing and providing for the entire ecosystem.

We’re helping consumers manage their daily lives well. We are providing value to our capital partners in a way that’s kind of multifaceted. And we’re also ensuring that from a merchant perspective, we are delivering value in a very — in a tough time. So my priority will be around how do I press the advantage that we have thoughtfully with empathy around what the broader market is experiencing.

Investors are having to make decisions about different risks that they are perceiving or expecting, how do we still grow and leg into that in a way that’s partner-like so that folks can kind of get the confidence that we have in what we are doing so that we’re scaling efficiently and fine-tuning the model in a way that’s both thoughtful and well managed.

Rob O’Hare

Yes. And I think on my side, I mean, we’re coming to the tail end of our fiscal ’24 budgeting exercise internally. So we’ve been spending a lot of time talking about the next 12 months. I think what I’m most excited about is getting as much of the portfolio as possible the 36. I think that, that unlocks a lot of good news on multiple fronts for us from a profitability perspective, from a capital markets perspective.

And then also really being able to show our work a bit more on Debit+. I mean, I think that’s a big strategic initiative for us internally. And I think the milestones, I think we’ve got some important ones that hopefully we can share as we get into FY ’24.

Eugene Simuni

Great. Well, we’ll look forward to that. Awesome. Well, thank you very much. Brooke and Rob, really appreciate it.

Brooke Major-Reid

Thank you.