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A young man has a credit card and uses a laptop for online shopping.
Diy13 | iStock | getty images
Americans who shop online after midnight often make riskier transactions and are more likely to default on their loans Voice Chief Financial Officer Michael Linford.
Linford told CNBC in a recent interview that the fintech firm uses the time a consumer attempts a transaction as a key data point to help determine whether a loan should be approved or rejected. No. Other factors include the user’s repayment history with Affirm and transaction data from credit bureau Experian.
“Local time of day is a signal we use in underwriting, and most times of the day have similar credit risk,” Linford said. However, some variation occurs between midnight and 4 a.m., he said.
“Humans don’t make the best decisions at two in the morning,” Linford said. “It’s as clear as day – credit defaults spike around 2 a.m.”
While the data is clear that late-night financial decisions are riskier, the reasons why are less so. Linford said buyers may be intoxicated or under financial or emotional duress and are desperately trying to get credit.
Affirm, run by PayPal co-founder Max Levchin, is one of a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for long-term loans.
real time approval
Firms including Affirm, Klarna and sizzle have embedded their services into retailers’ online checkout pages.
Key to their business model is the ability to approve or reject customers in real-time and at the transaction level, using data to help assess the chances of getting paid.
“We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay off that $700 purchase you’re making right now. It’s very different from a credit card, where they give you a line and say, ‘Godspeed.’ “
The use of buy now, pay later loans has increased along with the overall increase in consumer credit. While the industry touts advance rates and lower fees than credit cards, critics have said they enable users to overspend.
But Affirm manages repayment risk by refusing transactions or offering shorter-term loans that require upfront payment, Linford said. Last week, Affirm reported that 30-day defaults on monthly loans remained steady at 2.4% through the last three months of 2023. from a year earlier, while total purchase volume increased 32% in that time.
According to the CFO, Affirm has little incentive to allow users to submit loans.
“If you can’t pay us back, we’re lost, unlike a credit card,” Linford said. “We don’t charge late fees. We don’t go around, we don’t compromise.”
Affirm’s rates contrast with credit card defaults at the four largest U.S. banks, which have been rising since 2021 as loan balances have soared. Americans owed $1.13 trillion on credit cards in the fourth quarter of last year, up $50 billion from the previous quarter amid high interest rates and persistent inflation, the Federal Reserve Bank of New York reports.
“The job environment is good, so the question arises why are credit card delinquencies increasing?” Linford said. “The answer is that they took their eye off the underwriting and from my perspective, they became aggressive at a time when consumers were starting to show stress.”
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