Affirm, FICO to create BNPL credit-scoring model
- Affirm CEO Max Levchin said Tuesday the buy now, pay later company is partnering with data analytics company FICO “to build a first-of-its-kind credit scoring model that would enable buy now, pay later loans to be consistently, transparently factored into credit and lending decisions and to be reported to the credit reporting agencies.”
- Affirm will share more details when the new scoring model is ready, Levchin told analysts during a Tuesday conference call to discuss the company’s fiscal third-quarter results. A spokesperson declined to comment on that timing.
- Noting the Consumer Financial Protection Bureau’s concerns around the lack of information being furnished in the BNPL space, Affirm intends to “help the industry report buy now, pay later loans and make sense of them in the broader context of borrowing,” Levchin said.
Buy now, pay later loan information still isn’t being widely reported to credit bureaus, more than a year after those firms announced efforts to collect such information. At issue is the short-term, no-interest installment loan that BNPL providers have popularized with consumers. The CFPB flagged that lack of data furnishing in its report last September on the burgeoning payment trend.
Affirm is the only BNPL provider sharing positive and negative loan information with credit reporting agencies, Rob O’Hare, Affirm’s senior vice president of finance, said in March. But the company is not reporting its short-term, interest-free loan data, a company spokesperson said.
Affirm offers consumers both interest-bearing loans paid off over a period of months, as well as interest-free loans paid off over weeks.
At least one credit bureau indicated change to scoring models is needed to factor BNPL loan information into credit scores. BNPL loans reported to Experian will begin to appear on consumer credit reports later this year, an Experian spokesperson said Wednesday.
But because the bureau initially discovered including all BNPL account information on consumers’ reports negatively affected credit scores due to “the way inquiries, new tradelines and utilization rates are reflected in credit score models,” Experian won’t factor BNPL information into credit scores until those scoring models “are enhanced” to accept the information, the spokesperson said.
Spokespeople for credit bureaus Equifax and TransUnion didn’t respond to requests for comment.
Affirm is the largest independent BNPL provider based in the U.S. Rival Afterpay is owned by Block and Klarna is headquartered in Stockholm. Earlier this year, Affirm wound down operations in Australia, but Levchin has said the company plans to expand into the U.K.
In its quarterly filing, Affirm said it completed the purchase of U.K.-based buy now, pay later firm Butter Holdings on Feb. 1, paying about $15 million for the company. That amount included $14.9 million in cash, with some unspecified adjustments, and a $1.5 million settlement of debt notes, the filing said.
Spokesperson Matt Gross said Butter has a small team, but he declined to specify the exact headcount. The company’s LinkedIn profile puts its employee count between 11 and 50. “The transaction advances our long-term international expansion efforts,” Gross said.
For the fiscal third quarter that ended March 31, San Francisco-based Affirm’s loss widened over the year-earlier quarter, to $205.7 million, on a 7% rise in revenue, to $381 million.
Contributing to the loss was a $52 million increase in tech and data analytics spending, and a $35 million charge tied to employee cuts the company made in February, Affirm said in its shareholder letter.
In the fiscal third quarter, Affirm’s short-term, no-interest loans paid off biweekly in four installments made up 16% of the company’s gross merchandise volume, according to the company’s quarterly filing with the Securities and Exchange Commission.
As Affirm has increased its maximum annual percentage rate on interest-bearing loans to 36% from 30% in recent months, more than half of the quarter’s interest-bearing gross merchandise volume came through merchants that adopted that higher limit, the company said in the shareholder letter.
CFO Michael Linford said those pricing increases can act as a counterweight as Affirm’s loan funding has become more expensive amid the volatile bank and higher interest rate environment. “Our ability to get those pricing initiatives over the line and realized will offset a healthy amount of the headwinds that we’re experiencing in the capital markets broadly,” Linford told analysts during the call.
Still, it could take several quarters to see maximum benefits from those pricing adjustments, and the more challenging funding environment is expected to continue through the company’s fiscal fourth quarter, the shareholder letter noted.
The company upped its funding capacity to $11.4 billion at the end of the most recent quarter. In April, it landed a $400 million securitization deal that was increased from an original $250 million, according to the shareholder letter.
Since Affirm is a non-depository lender, those loan funding relationships are crucial to the company, and Affirm aims to maintain those through strong credit performance, Levchin pointed out.
“Credit is always job No. 1, probably through No. 5,” he told analysts. “It is our responsibility to deliver good returns to our capital partners, to make sure that they never have a second thought about partnering with us.”
Gross declined to identify the company’s capital partners, but said they include asset managers, banks, pension funds and insurance companies.
The higher interest rate environment put pressure on Affirm’s revenue less transaction costs, which dropped 9% for the quarter to $167 million.
The company’s active customer count rose 26% to 16 million as of March 31, compared to the end of the quarter last year, the SEC filing said. Gross merchandise volume rose 18% to $4.6 billion for the fiscal third quarter, according to its earnings presentation.