A young man holds a credit card and uses a laptop for online shopping.
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Americans who shop online after midnight often make riskier transactions and are more likely to default on their payments Confirm Chief Financial Officer Michael Linford.
The fintech company uses the hour a consumer attempts a transaction as a key data point to decide whether to approve loans, Linford said in a recent interview with CNBC. Other factors include a user's repayment history with Affirm and transaction data from credit bureau Experian.
“The local time of day is a signal we use in underwriting, and most times of day carry the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
“People don’t make the best decisions at two in the morning,” Linford said. “It’s clear as day – loan defaults are already rising around 2 a.m.”
While the data clearly shows that financial decisions are riskier late at night, the reasons behind them are less risky. Buyers may be drunk or under financial or emotional pressure and desperate for credit, Linford said.
Affirm, led by PayPal co-founder Max Levchin, is one of a new generation of fintech lenders competing with bank-issued credit cards. The buy now, pay later industry offers installment loans, which typically range from interest-free short-term transactions to interest rates of up to 36% for longer-term loans.
Real-time approvals
Companies like Affirm, Klarna and Seize have embedded their services into retailers' online checkout pages.
A key element of their business model is the ability to approve or reject customers in real time and at a transaction level, using data to assess the likelihood of repayment.
“We don’t need to know if you’re going to get a job in two years,” Linford said. “We need to know whether you will be able to pay back the $700 purchase you are making now. This is very different from credit cards, where they give you a note and say 'Thank you very much.'
The use of buy now, pay later loans has increased with the overall rise in consumer debt. While the industry touts upfront fees and lower fees compared to credit cards, critics say they allow users to overspend.
But Affirm manages repayment risk by either declining transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans remained steady at 2.4% in the final three months of 2023 compared to the previous year, although total purchasing volume increased by 32% during this period.
According to the CFO, Affirm has little incentive to allow users to accumulate debt.
“If you can’t pay us back, we lose, unlike with credit cards,” Linford said. “We do not charge any late payment fees. We don’t revolve, we don’t add.”
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Affirm interest rates contrast with credit card delinquencies at the four largest U.S. banks, which have been rising since 2021 due to rising loan balances. According to a report from the Federal Reserve Bank of New York, Americans had $1.13 trillion in credit card debt in the fourth quarter of last year, up $50 billion from the previous quarter due to higher interest rates and persistent inflation .
“The work environment is good, so the question is: Why are credit card defaults becoming more common?” said Linford. “The answer is that they lost sight of underwriting and, in my view, became aggressive when consumers started to show stress.”
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