Loser Afirm struggles to convince investors of the authenticity of FinTech

Max Levchin founded Affirm Holdings in the belief that young people are more open to borrowing from Silicon Valley beginners than from established lenders.
“Consumers, especially millennials and the 1970s, have lost confidence in financial institutions” and “increasingly prefer flexible and innovative digital payment solutions over traditional credit payment options,” Lifchin told investors last year.
His vision has made San Francisco-based Affirm one of the largest “buy now, pay later” companies that allow buyers to get unsecured loans in installments when buying clothes, electronics and other goods online. Investors gave the losing company a market value of $ 47 billion when it was announced last year, making it more of a boring lender than a flashy technology company.
Now, with technology stocks falling and interest rates rising, investors are feeling reluctant.
The company’s market value fell to five billion dollars after its share fell 89 percent from its highest level last November. Some say Affirm is more like a traditional financial institution, as its digital brilliance might suggest.
According to Chris Brendler, an analyst at DA Davidson, “This type of hybrid fintech trades kind of technology stocks when they are growing very fast and the financial side of their business is not causing any problems but if they are starting to have bigger losses. funding issues, then you start performing like financial institutions. “
Affirm’s offering to retailers was simple: by allowing customers to make installment payments for goods, sometimes without interest, they would sell more products.
Retailers pay a “dealer discount fee” to Affirm, which is actually a commission of a few percentage points of the purchase price. In 2020, about 60 percent of the company’s revenue came from these fees.
Affirm’s largest dealer during the pandemic was the manufacturer of stationary bicycles Peloton, whose sales are now declining.
But Affirm’s business mix began to change after it entered into partnerships with major retailers such as Amazon and Walmart – companies with enough weight to avoid having to pay retailer discount fees.
Instead, the majority of Affirm’s income now comes from its business as a lender: by selling loans, either through loan securitization processes, or to third-party buyers such as insurance companies, or by earning interest income from the assets it holds in its balance sheet. . . In the most recent quarter reported, more than half of the revenue came from interest income and loan sales gains.
Affirm said it remains committed to growing its fee-generating business as part of a strategy to “build a menu of different products to meet the needs of consumers and retailers across shopping cart sizes, categories and payment terms.”
She added: “This is a key point of differentiation, which allows Affirm to firmly build on our momentum as a leader in a large and fast-growing industry, where consumers continue to seek flexible payment options, according to their ability.”
Unlike traditional banks, Afirm does not hold consumer deposits, and instead relies on “warehouse” lines of credit. Cross River Bank, a New Jersey-based company backed by large venture capital firms, creates Affirm loans while the group operates a “buy now, pay later” relationship with the client.
Affirm has also grown by securing loans, or amalgamating loans to sell as bonds, and keeping some of them on its own books. Selling debt generates liquidity to make future loans, and investors’ appetite for this type of paper remains high.
Two years ago, none of Affirm’s loans were financed by securitization, according to data compiled by the company. By the last quarter, a third of Avirm’s $ 6 billion portfolio of bonds had been amalgamated.
The shift from fees to lending and interest income has brought a new focus to the Affirm loan underwriting process. Potential credit losses not only reduce the book value of the loans the company holds, but also reduce its profits in secondary markets.
In the fourth quarter of 2020, only 1.44 percent of Affirm’s loans were identified as four to 29 days in arrears, according to company data. After four quarters, that number rose to more than 3 percent. In the last quarter, the amount of provisions the group set aside for potential loan losses reached 6.5 percent of its book loans, up from 5.2 percent in mid-2021. Interest rates charged to consumers can be as high as 30 percent .
Finally, Vincent Kintik, an analyst at Stevens, wrote: “While we agree that Affirm serves an important payment function, we argue that Affirm is actually more of a lender than a payment company.”
Affirm recently reached its target gross profit margin of 4 percent, including credit costs, even though operating costs and indirect costs of net income were depleted.
Skeptics note, however, that the company’s explosive growth over the past two years has come at a time of declining unemployment, when U.S. consumers had plenty of government stimulus money.
Jim Chanos, a short seller and founder of hedge fund Kinicos Associates, was a critic of Affirm and other fintech start-ups.
“Every time, a group of online lenders try to convince the market that they have a better model to assess creditworthiness,” Chanos said. “They simply give credit to people who should not be. We will not see it until you go. By a downturn in the credit cycle.”
Wall Street also focuses on the details of its business model. In March, at a time of turmoil in the bond market, Affirm withdrew a $ 500 million financing deal it plans to use to finance future loans to clients.
At a recent investment event, Affirm’s chief financial officer Michael Linford downplayed the move, saying the agreement reached was’ a sign of strength, not weakness. “We felt very good about the business and thought we did not have to try to reach an agreement,” he said.
Finally, the company was able to close the deal last week in an over-signing process, with returns slightly lower than originally planned, according to a person familiar with the matter.
In a securities filing in March, Affirm said it has about $ 10 billion in dedicated capital, more than enough to support short-term loans. If the economy starts to deteriorate, the company, she said, could quickly adjust its lending policy, especially since its loans are not rolled over for long periods, such as car or home loans.
“But at the head of a recession, when things start to go wrong, and if there’s a significant increase in unemployment, we’ll face bigger losses,” Linford told an investor conference in March. “But given the short term of our assets, we think we will be able to change little track.”

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