The debt serviced by Affirm is at a stable, manageable level. What is her secret? It would seem so trivial that everyone should come across it. Well, sometimes when the analysis shows that the client will not be able to bear the new debt, he or she refuses to grant him a loan. Matt Egan writes about this peculiar practice, at least by American standards, for CNN Business.
Buy now, pay sometime
Years of high inflation are taking their toll in the US. Americans are increasingly behind in repaying car loan installments, and their credit card debt is growing. Surprisingly, such economic conditions make all types of loan-like services, such as “buy now, pay later” (BNPL), more attractive. According to a recently published Fed report, the trend to use such services will increase, especially among clients delicately referred to as “financially vulnerable.”
However, there is one company operating in the BNLP segment that is sleeping soundly. Even when industry peers experience financial stress, Affirm's arrears remain stable. There is a hard logic behind this state of affairs – a client who does not repay the loan will not make any money, but will lose money. However, Affirm's CEO, Max Levchin, who co-founded PayPal years ago, talks about how the company sometimes says “no” to people applying for a loan, as if it wasn't common practice in the business. And I guess, well, it really isn't.
Hell has frozen over
According to Levchin, the word “no” is extremely rare in the lending industry. “We don't have any miraculous, secret knowledge about our customers. We simply reject a loan application if we see that the client will not be able to repay it. It's an unpleasant situation, customers don't like it, but in this case, honesty is our advantage,” Affirm's CEO told CNN.
What may be even more surprising is that the company has not always gone against the grain of industry customs so strongly. She decided in the spring of 2022 that she needed to be a bit more assertive. Levchin then “sensed” the tensions of soaring inflation and rising gas prices, so he decided that Affirm would act in a sensible, thoughtful and assertive manner, above all else. Hell has frozen over – the lending company has decided not to grant loans to everyone who asks for it.
Don't say “no”, say “yes, but”
But how to retain customers by sometimes refusing to grant them loans? After all, they will flee to places where submitting an application is a pure formality between a person and cash. And the clever Levchin has an equally clever solution to this. Why say “no” when you can say “yes, but”? For example, a customer wants to borrow $800 for a new television. The company tells him it will lend him $600 if he gives $200 in advance.
It seems that after hearing such a counter-proposal, customers actually either give up on the whole TV thing or save up for the down payment, because Affirm's customer volume is not decreasing, and is even increasing. The number of loan applications approved by it is not decreasing, although Levchin emphasizes that their structure has changed. The required own contribution is higher.
It's a matter of rumination
Levchin stressed that his company does not lend to customers who try to “bite more than they can chew.” As data from the previously mentioned Fed report show, there are more and more people who take out a loan and do not bother with the issue of “chewing” it. The BNPL model has become the “default form of payment” for many of them.
And they have something to use, especially when shopping online. BNLP is possible not only in such popular chains as Walmart, Target or Amazon, but also in the case of concert tickets from the SeatGeek network, cruises offered by Royal Carribbean or American Airlines flights. However, according to Levchin, credit cards pose a greater threat to Americans' financial stability. “You swipe your card and you don't have to wonder whether you can afford these purchases. This is a very convenient and very irresponsible way to incur debts,” he argued.
Don't trust the bank, trust BNPL
Affirm's CEO is partly right – data presented by the Fed shows that Americans' credit card debt has increased to $1.1 trillion, reaching its highest level since 2011. Young, low-income households are at the forefront of this type of debt. Despite this, it is young people that Levchin points out as being responsible for the growth of the BNLP segment.
In his opinion, young US citizens, mindful of the economic crisis of 2008, do not trust banks and credit cards. Levchin argues that they think more responsibly than the older generation, which is why taking out loans in the BNLP model is so popular among them. The CEO predicts further strong growth in this industry and emphasizes that new trends are emerging in the wake of the coronavirus pandemic – in addition to travel and concerts, home theater sets, computers, TVs and other types of electronics are purchased this way.
