Affirm Holdings, Inc. (AFRM) Earnings Call Transcript & Summary

Okay. Let's get started here. Thanks, everyone, for joining this fireside chat with Affirm. I'm Dave Chiaverini, disruptive finance analyst at Wedbush. We'll open up the meeting for Q&A towards the end. [Operator Instructions] With that said, I'm pleased to introduce Michael Linford, CFO. Michael, thanks for your time today. Really appreciate it.

Thanks for having me.

So to kick it off, and this is a multipart sort of first question, but I think it's one that investors are really focused on in this environment. But fintechs are coming under pressure. Other financial services companies are coming under pressure. E-commerce growth, while it looks like the holiday shopping season is off to a strong start, but it is slowing from the pandemic peaks, rising interest rates or pressuring funding costs. Now with that as a backdrop, Affirm discussed on the earnings call last month about how higher interest rates is pressuring funding costs and gain on sale revenues. You also mentioned that the negative impact from rising rates on your revenue less transaction cost margin has diminished/improved since the initial guidance you provided back in February of '22. The updated guidance, as a reminder to everybody, is such that an incremental 100 basis point increase in rates is expected to have a 10 to 20 basis point negative impact on the revenue less transaction cost margin for fiscal 2023. That's improved from a 20 basis point impact and a 25 to 40 basis point impact on RLTC margin in fiscal '24, which has improved from a 40 basis point impact. Could you talk about -- the question is could you talk about what's driving this improvement in interest rate sensitivity. And could we see further improvement in interest rate sensitivity over time?

Yes. Great question. And I heard you rattling off all of the macro conditions that are out there, and it sure sounds like it's an easy market to execute in, huh? And a whole lot of the investors out there are similarly navigating these pretty choppy waters. And I think it's fair to say that uncertainty is kind of ruling the roost right now. I think that more so than the actual numbers, it's the uncertainty around what's ahead. Last quarter, our Q1 results were really strong, and they were stronger, especially even in some of the funding dimensions, which I'll get to in a second as to how we're able to mitigate some of those impacts, but that is a backwards-looking view. When you look forward, what you see is there's still an incredible amount of uncertainty, and you saw the jobs report this morning, which caused a pretty big market movement in rates. And I think our view internally is that we're going to continue to have a lot of uncertainty more than anything else. That uncertainty, of course, drives a lot of implications through the debt capital markets. What it doesn't change is the fundamentals of our business. And I think there's probably more noise outside than inside around the performance. If you look at our GMV growth, if you look at our credit performance, when you look at our ability to fund the business, none of those are in doubt and are performing exceptionally well. I think folks are preoccupied with what does all of this macro stuff mean for the future and all the uncertainty around that, for what it's worth. I think thinking about specifically how we're able to do better than we indicated, first, it's only a little bit better. So I don't want to -- no mission accomplished banners or anything of the sort here. We feel like the macro environment continues to be difficult to navigate and execute in. And yet, I think there's a real belief in our team that continued differentiation and performance of our asset versus alternatives in the debt capital markets will result in superior execution. That will show up even lower spreads. That will show up in lower risk premia for forward flow partners around assumed credit performance, and it will show up in continued ability for us to generate high-quality assets. The framework we gave folks last February, which I continue to point to go back to because I think it's a really good starting point for thinking about how rates impact Affirm, the framework we gave back then was pretty explicitly an unmitigated number. And so how do we mitigate? We mitigate in part by taking credit decisions. Those are controlling the other costs in our business. And we mitigate in part by revenue actions, both merchant pricing and consumer pricing, both of which are available to us. And then lastly, product mix drives a big swing here. And so our ability to shift and steer people around products, steering meaning like our merchants to pick and offer the right products, has a huge impact on our ability to manage the impact on rates. And yet the uncertainty is very real, and the environment that we're in continues to be really tough. So I don't want to suggest that we feel like we're going to be able to continue to navigate it, but it's our job. It's our job to be able to deliver the unit economics that we've signed up for in any macroeconomic environment, this one, especially.

Great. Very helpful comments. And okay, shifting over to funding capacity. And Affirm, in the most recent quarter, you increased your funding capacity by almost $500 million to just over $11 billion in the third quarter. You expanded your forward flow agreement with CPPIB. Could you talk about your forward flow program a bit? How many partners do you work with? How has their cost of funding been trending? And this is a multipart question. What is their loan appetite these days? What are typical contract lengths? Are there repricing windows? Are there any new forward flow partners in the pipeline? And you can take those one at a time of having to repeat them as you kind of check them off.

Yes. So let's zoom out all the way and talk about what our forward flow program is, and then I'll characterize the partners and give you some color as to how we see it right now. The partners are -- so forward flow for us are committed capacity arrangements where we negotiate a certain amount of capacity with the partner. We then -- usually on a multiyear basis, typical term lengths might be 24 months. And then when we originate and sell assets to them, it's into an agreed-upon level. And so a partner might say they want to do a $500 million forward flow arrangement. What that means is not that they buy $500 million in loans. It means that they maintain a balance of $500 million of capacity. And as our loans amortize, which, as you know, is very, very quick given the duration of the asset, we continue to increase the amount that we sell to the partner consistent with the level of amortization. And then we hit some sort of a renewal window, and we either renew, extend, upsize or otherwise deal with the implications that might happen. We have never had a partner leave us. That's not a thing we've had to deal with because our partners, I think, truly do value the partnership mentality we bring here. We're focused on ensuring that our partners get the returns that we owe them. And we're focused on doing everything that we can do and the things that we can control to give them those actual returns. And our performance has been good, not perfect but very good. And so the conversations that we have with the partners tends to be around continued growth and expansion of programs. I can't tell you how proud I was to be able to share with the market the CPP upsizing. It's a really strong signal for an institutional investor that strong to want to own our assets. And that tends to be the conversation with most of our forward flow partners who are really not concerned -- nowhere near so, by the way, as the equity capital markets, which is ironic [ as all ] get out. The people who buy and own the risk from us are nowhere near as concerned as those who buy and sell shares of Affirm, I think around the performance of the asset we generate because they know that they've grown up with us. The partner types vary quite a bit. We have forward flow partners who are in pension plans. We have forward flow partners who are insurance funds. We have some who are investment banks or fund managers and even hedge funds and really everything in all permutations therein. We always have a pipeline. There's never a point in time when we're not out there talking to forward flow partners because the forward flow program sits inside of our overall capital program and our primary mandate for capital at Affirm is to enable the scale and growth that we want to deliver in the business. That's job 1A at the capital team. They do a great job of it. We've never been constrained with capital and as you know, we've communicated that we don't believe that we will be, for the balance of this fiscal year, constrained in capital in large part because of the big capital additions that we've been adding over the past 6 months, and we will continue to do that. But the forward flow partners is only 1 of 3 programs that we execute in. We also have a securitization program, and we've built a pretty big level of warehouse line capacity that allows us to navigate around these kind of more acute market dislocations, which we really feel like we're in right now. With respect to the pipeline, though, the way I would characterize it is it's very different based upon the kind of investor you are. The more like insurance money and pension plan money you are, the more you're still in need to be able to put assets to work and find -- put the money to work and find assets. And the more money manager you are, the more you're facing redemptions and pressure around just total capital availability, both of which though are definitely at the table in conversations with us around how they can continue to grow and expand and net new partners coming onboard, but we are mindful of the fact that there's a pretty big difference in how the balance sheet and P&L work. And so our guidance that we put out there for Q2 and beyond reflects the fact that we don't believe we'll be adding a net new capacity this quarter, meaning Q2. And that was to make sure that we were very thoughtful with the market around how choppy the debt capital markets are in general. That is not to say that we expect that permanently. But nonetheless, as a result, we did want to make sure the market understood how the Q2 was going to look.

Now your comment about the equity market being more concerned about the credit market, how would you respond to investors that would say that they might be concerned that the loan economics could be accruing more to the partner than to Affirm? Would you point them to the revenue less transaction cost margin and how you're in that 3% to 4%? But could you comment on that?

Yes, I would. And I would step back. I think if you pulled investor belief, investors I talked to, there's 2 minds. There's a group of investors who think we're out earning and we're earning too much, and there's a group of investors who think that we're under earning. And I really don't know who's right, but the fact that they disagree with one another suggests that maybe they're both wrong, and we might be in a decent spot with respect to our economic take overall. I think that our capital partners are definitely compensated for the risk that they take, but whether that's -- depending upon funding channel, it ebbs and flows. If you look at the level of execution we were getting in the securitization market last year and to late 2020, it was really, really strong. And it'd be pretty difficult to point to that as evidence of us giving too much to the market in terms of the returns. And similarly, I think the price for execution today is a lot higher, which means it does ebb and flow a little bit. But over time, I think it balances the needs of the company and our equity interest and the needs of the debt markets. But again, I think it's a mistake to worry too much about where those levels are set today because the primary job of our capital program is to enable scale. Where Affirm is in 3 and 5 years matters a lot more than where we are today.

Great. Great. And on the gain on sale margin, any thoughts as to where the gain on sale margin could trend in the near term?

Yes, I think there's headwinds and then there's mitigants. The headwinds are the rate headwinds that we talked about and future credit headwinds. I think the credit environment last year was very benign. I think the credit environment saw some stress early this year. We've done a very good job in managing that stress to kind of consistent and stable levels and execution that we're very proud of. And yet, the conversation from a macro standpoint right now feels an awful lot like there needs to be a change in the labor market in order for us to get through the inflationary pressures. And so the rates only they get better the way the market gets worse. And I'm paraphrasing. I'm not a macro economist, but if you believe that, then that means that there is future risk around employment, and we have to be mindful about managing that, and that's a headwind. And so you either have rate headwind or credit headwind, but you're going to have one of the 2, we believe, into the future. And then it's how we mitigate that. And the way you mitigate that is, again, you control the credit outcomes that you're supposed to control for. We believe we can do that, and then you price it appropriately. And I think if we're able to do and execute like we think we can on merchant and consumer pricing, then we're going to be able to deliver the gain on sale yields that we need as Affirm, even if the market is demanding higher yields in the assets we've been purchasing.

Great. And then shifting over to the ABS market. You guys had marketed the securitization 2022-B. And you guys kind of alluded to this on your conference call. But it looks like you pulled the deal due to market conditions and you guys indicated that you're going to be doing more on balance sheet and using the warehouse lines of credit. Can you talk about the ABS market, what you're kind of seeing in terms of the terms that they're kind of offering? And could you talk about where you see ABS fitting into the funding structure as we look out to next year?

Yes. All 3 funding programs for us are important, and we're going to keep executing on all 3 channels in any environment. And yet, I think the important thing and how we think about both giving guidance and building our business plan, we want to be really mindful of what we can't control. And if the market is volatile enough that we don't feel confident in the functioning and capital availability in the market for us to execute there, then we're not going to guide assuming that we're able to execute there, and that's different than in the past. We've been able to provide guidance and build business plans where we had more confidence and certainty around the market being available to us. I think what you saw when we were premarketing a deal and chose to pause on it was a pretty widespread concern around lack of capital availability in the market and also continued uncertainty around the rate environment. What's interesting from our perspective is there was very little, if any, Affirm-specific commentary around our asset or asset performance. It was really about the level needed to clear given the capital availability. And it's not that surprising really if you think about the overall liquidity in the market and what the Fed is doing right now, which we believe they will continue to do. All that being said, 2 months before we gave guidance and had paused that deal, we were able to execute reopening and upsizing of our 22A deal. And that was a very short period of time where the market flipped from being meaningfully oversubscribed, very constructive, felt really positive about where we're at to lots of concerns around capital availability. And my read on that is just that we're going to continue to have a lot of volatility. And so our funding model is not built to be reliant on any one channel. We are able to fund the business with diverse funding sources. And so as this volatility persists, and we do think it will persist, it's our job to navigate around it.

Great. And then I want to touch on -- quickly on the convertible notes that you guys issued in November of last year. It was in, I'd say, a brilliantly executed deal, $1.7 billion, 0% coupon convertible notes due in 2026. The question is what impact would that have? Now granted you guys have a number of years before this, but I'm curious on your answer of what impact could refinancing this $1.7 billion at current market rates, what impact could that have on the RLTC margin if it were to be repriced.

Yes. Good question, and thanks. Yes, in hindsight, we look like -- we do look pretty savvy. I assure you we didn't know what was going to happen. But there is a thing for us where we're smart enough to walk through doors when they are open for us. And the market was open before, and obviously, things have changed. I think the really important thing for investors and analysts to follow is just how unconnected corporate level debt, like our convertible debt is from the margins of the business. We don't use the convertible debt to finance loans. That's not the reason why we raised that capital. They're very unconnected. And so today, that cash sits as cash or invested amounts in our treasury program, and it was really there and raised for corporate treasury, corporate purposes. I think that means that first order effect, there really shouldn't be any impact. If we had to refinance this, we probably obviously just actually take it out with the cash we have on hand given the overall capital position of Affirm, but we have a lot of time. And we look at this as we have the benefit of another 4 years left on the convertible notes. That's a lot of time for us to navigate through what could be a choppy couple of quarters or years even, and we're going to operate pretty carefully with that. That being said, Affirm otherwise doesn't have any corporate debt. If you think about our capital structure today, we have our convertible notes and really nothing else at the corporate level. All of the debt that we have today sits in funding vehicles that are -- [ they get too ] remote and otherwise protected from a corporate standpoint. We don't operate the business that way. We certainly think about these obligations as being ours. But nonetheless, the corporate entity itself is pretty unencumbered. And I think that's more opportunity than anything else. If you think about the long-term capital structure of the enterprise, I think there's room for senior debt. I'm talking 4 and 5 years down the road. Right now, given our cash flow and profitability profile, we just kind of like sitting on the capital structure we have.

And you mentioned about the $1.7 billion basically sitting in cash and securities. How much in -- how much is that generating in interest income for Affirm?

I don't have that number off the top of my head. We have been extremely cautious with the rising rate environment. We've maintained a very short position, short in duration, meaning, not short the market but short positioned and by design. I mean if you think about the kind of risk that we take at Affirm, we're taking a lot of risk in so many parts of our business. And sometimes we'll talk to investors and they'll encourage us to take more risk with some of our corporate treasury program. My feedback to them is it gets really important for me as the CFO to know that we have ample liquidity for the business and feel like having a decent amount of safety in that number is very important. And for what it's worth, all of this is below revenue less transaction costs. This sits all the way down in other income. And so my assumption is very few investors are spending much time down on that line item in the income statement. But nonetheless, we actually see this as a source of cash flow upside here as we do get into a spot where we're willing to go a little bit longer in duration. Right now, we've been so short that as -- it's been super material. But as rates do stabilize, we feel like we can leg in a little bit to longer duration.

Great. And sticking with funding, Affirm's equity capital required as a percentage of the total platform portfolio declined to 2.4% in the calendar third quarter, belongs below the long-term target of less than 5%. However, you noted it could rise to slightly above this 5% figure for the remainder of the fiscal year due to the use of more on-balance sheet warehouse funding. Could you talk about your warehouse capacity and how high of a utilization rate you're expecting to get as we move through the interim funding period?

Yes. Our utilization on our warehouse lines as of our first fiscal quarter is very low. I think it's in the 20s percent basis. And so most of that capacity is undrawn as of the end of our Q1. And again, that's actually by design. I think if you think about all of our funding channels, it's the one that we have the most control over, and we're plenty willing to have it sit underutilized. Securitization and forward flow programs are by design near or completely utilized based upon how those funding arrangements work. So much of our idle capacity does sit at any point in time inside of the warehouse lines. Now with one caveat, of course, the forward flow program has this neat feature where the capacity you have expands as amortization happens on the loan. And so future GMV generation has a home in our forward flow programs and our revolving securitizations as well. But we have today very, very low utilization, and we talk about adequate funding runway. It does imply that we're going to take the utilization up there and that does drive the higher equity capital required. We think the biggest driver is going to actually happen in Q2 because you have a confluence of factors going on right now. You have the big spike in demand from holiday season as you alluded to at the very top. That's going to put more asset generation through the machinery and show up as additional total platform portfolio and, therefore, higher utilization. The subsequent quarters are not going to be as big, of course. And so we're not going to need to be able to grow marginal capacity, for example, in Q3, just given the shape of the seasonality of the business. And so I don't feel like we have to double or triple our capacity in warehouse lines in order to fund the business.

And what is the advance rate on your warehouse facilities?

Yes, they range between 80% and 90%, I believe. So a good number for investors to think about is low to mid-80s.

Okay. And as we think about how you chose to use the warehouse facilities as opposed to going forward with that ABS deal, what is the average rate on the warehouse facilities versus what the market was offering you on the ABS side?

Yes. I mean we were getting well north of 100 basis points wider in the ABS market than we had in our next best execution. And I think that had we not had adequate warehouse capacity and this kind of thoughtful 3-legged stool of funding, I think we probably would have executed in the ABS market. So -- but we did and I think that gives us the ability to be thoughtful about where we execute.

And the warehouse facilities, those are floating rate?

Yes. So those are usually struck with either SOFR plus some to nominal spread. What's interesting to me is that the spreads have come in a lot as we continue to scale as an enterprise. I think one of the things that sometimes this funding conversation ignores, and I'm not suggesting that you are, but sometimes, we ignore just how far we've come as an enterprise. A few years ago, we were still fielding the question about what is Affirm and what does this thing even mean. And in the last quarter, we were 1.8% of U.S. e-commerce, and we're becoming very material now. And that's really exciting. And so it's a very different world today. And as we've done that, executing on that and delivered really good credit outcomes, I think the banks who extend those warehouse lines have understood that and spreads have actually gotten -- and I'm talking about longer-term perspective here -- gotten better for Affirm over the years. And I think that's actually helped quite a bit in the whole ecosystem, right? There's network. There's flywheel, if you will, on capital and better execution in the ABS market, better execution forward flow and the warehouse lines as well.

And as we were talking about with the equity capital required is very low, even with it increasing from 2.4% to perhaps slightly above 5%, still very low relative to your overall equity capital available on the balance sheet. Has Affirm considered using some of that excess capital to, for instance, that 0% coupon debt that's trading, of course, at a discount to par, have you considered repurchasing some of that or even stock repurchases?

Yes, we, of course, consider everything. I think like any company who's been dealing with this rerate in the market over the past year, our Board has been very thoughtful around asking the right questions. I think invariably, we conclude that it's smart for us to be thoughtful and careful right now. We're not -- we take some -- again, we take so much risk in the core of what we do. And we take so much risk in how we built the enterprise and in the level of team that we built, the human capital investment that we've built. I think we want to be very careful and make sure that the well-timed IPO and the well-timed convertible get us as far as it possibly can. And so what that means is we're not going to be silly and go up and do something really aggressive right now. We know that the share price is lower than we think it should be. We know that the convertible is trading at a level that we think isn't entirely rational. And yet, it doesn't make sense for us today to try to fix those problems. More importantly, we're focused on where the enterprise will be again in 3 and 5 years, and we're making sure that we're making the right investments and ensuring that the enterprise is healthy and safe, and that we don't risk diluting our shareholders in a material way between now and the end of the cycle.

Great. Great. Okay. Shifting gears to the share of e-commerce. So Affirm's share of e-commerce, it's approaching 2%. So lots of upside here. But where do you see this figure getting to over the long term? What do you expect will be the major driver of growth in GMV going forward? Should we expect to see continued growth in general merchandise, travel and ticketing? What are some of the factors that could push GMV towards the higher or lower end of that guidance range of $20.5 billion to $21.5 billion?

Yes, I think Affirm has a really diverse set of vertical industry exposure. Some players in the space are more nichey and focused on like fashion, beauty as one category or lifestyle brands or maybe travel or maybe general merchandise. And we stand a bit unique in just how broad based our merchant network is. And I think what that means is a little bit of this will be -- at scale, it will be as the economy is, right? And so what you saw over the past several quarters was really strong performance on a year-on-year basis in travel and ticketing as everybody came back to travel and entertainment, and we benefited from that. We also benefited during the pandemic in the growth in home, lifestyle and sporting goods brands. And I think the conclusion is we're well positioned to benefit from whatever secular trends do exist. And underneath that, we're having pretty meaningful adoption of the category that's driving better than market growth. We talk a lot about our growth rate in comparison to e-commerce growth rates, and obviously, we're in significantly higher levels of growth in e-com overall. And that's in part because of the merchant relationships we've developed but also in part due to the adoption of the category as a preferred payment method amongst younger consumers in particular. And that tailwind, we think, will continue. Estimates vary widely as to where the category gets to. We definitely believe that 10% to 20% -- I know it's a pretty wide range. We don't think those numbers are crazy for the category overall, and we think we should be market leading in that category.

Great. [Operator Instructions] Okay. Let's shift over to -- so Affirm is seeing a mix shift away from 0% APR products where revenue is typically recognized in the same period as GMV towards interest-bearing products where revenue is spread out over the life of the loan, which is driving lower revenue as a percent of GMV. Interest-bearing loans were 64% of GMV in the most recent quarter. How high do you think this percentage can get to? And does that change how you operate the business from an expense perspective?

Last question first. No, I mean we really don't focus on, internally, the vertical period as much as I think external folks do. We're focused on making sure we generate assets that have value, those assets that the value of those assets is either monetized on the balance sheet when we put them in warehouse lines or through gain on sale. And obviously, the map and logic you just laid out is exactly right, except when we're selling these loans forward flow. And there, the P&L looks much different on a vertical basis. And so we try to separate the decisions out a little bit, generate good assets that have good value and then fund them the way that we need to based upon where the market's at. And on the front side, that means we're measuring things like what is the overall economic content in the asset that we're generating, taking into account all the revenue and all of the costs associated with that asset. And interest-bearing loans have obviously more revenue content but also more cost content. They tend to be longer in duration than our Split Pay or Pay in 4, excuse me, program and therefore, have more funding costs either implied in forward flow or explicitly in the balance sheet than our Split Pay program. I think the bigger driver though of the, I don't know, the shift that you're seeing right now is really just a decline in penetration of our -- what you said, our largest partner. We have a very large partner who was experiencing explosive growth during COVID and has definitely -- going through their own set of issues, trying to find some stable footing from which to grow. And I think that drives most of the, I'll call it, the first derivative, if you will, the change in mix right now, much more so than anything else. And I think the longer-term profile of this business should be a healthy mix across all 3 products, which is -- are paying for our longer-term 0s and our interest-bearing loans.

Got it. Okay. So we've got a question come in here. Are you starting to see any increases in delinquencies or credit losses? How do you expect that to shape up in 2023?

If -- I think we have not seen anything -- we saw -- let me back up. We saw stress in the portfolio early summer, very late spring last year. We talked about that. We talked about the actions that we took to mitigate it. We have not seen any further stress on the consumer since then. And that's not that surprising. The consumer continues to enjoy full employment. The consumer continues to enjoy real consistent access to wages. The stress that we saw, we believe, is driven mostly by inflationary pressures on household cash flow much more so than the primary thing most folks are used to seeing, which is a rise in unemployment. So into '23, I think it really depends upon how the macro goes. And if we see an environment with substantially higher unemployment, we're going to see more stress, and we're going to manage that. The commitment we've always made is that we're in control of credit. And what that means for us is that I think folks really underestimate how much the back book goes away so fast, right? So our business has such a short duration. Even our long-duration assets just amortize so quickly. And so it's less about where the future goes and more around how Affirm manages the decisions every day and every week, and we're hyper focused on this right now. So into '23, we don't know. I mean there's a scenario out there that we have a longer and more sustained level of inflationary pressure, and that would mean more what it looks like today [ through having ] for some period of time. You could also see scenarios where we have harder landing and an increase in unemployment, which we would have to appropriately manage. But no, we're not seeing any additional stress today. We're seeing the same stress that we've seen earlier. And again, I think we're really, frankly, pretty proud of the credit results that we're delivering right now.

And along those lines of credit quality, because this is one of the topics I wanted to hit on as well, how severe of a recession are you currently building into your underwriting models today, moderate, severe? And could you talk about your expectations for where the allowance ratio could trend over time?

Our hope is to not let it drift a lot. So I think this is a thing that really distinguishes us from traditional financial institutions. We have a short duration asset. It still has scale and mass due to lots and lots of volume, but it's a short duration asset, which means that the allowance is less a statement about macro and more a statement about where the loans that we currently own are actually performing today. I made the same math a couple of days ago. It's just the math. It's truly just the math. And so what happened as you see a spike in delinquencies or an increase in credit losses like we did earlier this year, you see that stress begin to materialize, and then you change your underwriting approach. And then as a result, the allowance actually doesn't move very much. In fact, our allowance has gone down since we started making those changes to our credit posture. And I don't think that would be the case in all macroeconomic environments and in all stress, but it is not the case that a higher level of stress results in substantially higher levels of credit losses because we were able to actually control that and substantially reduce the amount of credit exposure we have made possible by this enormous amount of application volume that we have as we sit at the point of sale and do have millions of underwriting decisions we make every quarter.

Great. And we've got a couple more questions come in. The first one is, you guys talk a lot about how delinquencies are an input that you manage. And when it goes up, it's because you allowed it to go up. But that makes the question how will investors know if delinquencies do surprise you to the upside.

You'll see a substantial increase in the provision in the income statement in the event that you had too high of a level of delinquencies and I should note, as a percentage of some level of balance sheet build as well. The allowance rate is the reflection of the current expected losses. If delinquencies start creeping up, you're going to see that rate creep up as well and our ability to control that keeps that down on a rate basis. I think the -- and the way that ultimately shakes out for the P&L is are we delivering the unit economics that we want to deliver. And so credit losses for us are real. They are a big part of our cost structure, and it's the unit economics, that revenue less transaction costs that we're trying to deliver. If the business that we're approving has higher revenue, we can afford higher levels of credit losses. And if there's lower revenue, we need to have less -- revenue less transaction costs and -- or less credit losses in order to deliver the same level of revenue less transaction costs. So I think it's -- that's the governor for you, is really looking at both the allowance and then the unit economics that we're printing.

Great. And the next question in the Q&A, has there been a change in the consumer acceptance rate due to the changes you've previously mentioned about requiring higher down payments, et cetera, to control delinquency rates?

No. I mean I think we're pretty proud of the growth that we're delivering right now. I think there's pretty robust demand for the product. Like we saw during COVID, I do think that these moments of stress, if you will, on consumers actually makes our product more valuable. And I think that puts us in a pretty good position to do things like what we're doing right now. So we don't feel like that's constraining us. And when we talk about -- just to clarify, we talk about requiring down payments and like it's not the case that's a broad-based thing. If you think about our credit stack, you've got the largest majority of the transactions that we approve that are really strong and have the lowest level of loss -- and those don't need any -- those really aren't out for debate internally around whether or not they're going to be profitable. We feel really good about those transactions. We're always talking about what happens on the margin. And on the margin, the last loan that you're approving or not is where we can bring other levers to play as opposed to just the declination. And so if you're talking about what you do with the last 5% of the applications, it's very different than what you might be talking about or seeing if you were taking that posture for the 95%.

And this is a similar question, but has Affirm sacrificed growth for better credit quality?

The very technical answer is, almost certainly, we have grown slower due to our credit posture. But I think that we would say we're pretty happy with the level of growth that we're delivering despite that. And that's always a balance act, and I don't think the relationship is as direct as many investors may think.

And the last one related to this, has the tighter credit box driven a lower loan loss provision for you guys?

Yes. I mean it's very mechanical about how it works, right? So if your last loan that you're approving has a loss content of 4% -- I'm making up numbers here. Do not take these literally. But if your last loan has a 4% loss rate and you say no to that one, the next loan up had a 2% loss rate, then your blended average is going to come down, and that is how it shakes out in the allowance, right? So as you [ defund ] book allowance, is a big part in how the provision is -- shows up in the P&L. And as you reduce the level of approvals on the margin, you take out loss and that shows up as less allowance for loan losses.

And I want to hit on 2 more questions. We're just about up on our time. But could you talk about how much pricing power Affirm has? Merchant discount rates across the varying products have been stable. Have you considered increasing merchant fees? How receptive would merchants be to higher fees in this challenging environment? Could you frame the upside pricing opportunity?

Yes, pricing is merchant and consumer pricing. So we feel like we have room to move on APRs as well as on MDRs, and definitely, we will work on both of those. A very wise leader once told me it's important not to take all the pricing power you have, and I think that's definitely the case for us today. We are not interested in pushing all of the rate environment to our merchants today. And part of that is because we don't actually know yet where -- what level of rate we need to reprice to, and there's a lot of work that goes into any repricing we do with the merchant. We want to find a stable base to have a conversation with. Secondly, do not read flat MDRs as we haven't taken pricing. One of the things that we work with our merchants on is more complicated financing programs. And so we're looking at mix of products that are offered, mix of durations that are offered, and that may show up as no change to the MDR but a very different product being offered with lower cost to us, and that accomplishes the same goal. So for example, if you're a long-term 0% partner and you're offering 24- and 36-month duration, 0% loans, we might shorten the duration on that in order to reduce our costs associated with the program for the same MDR. And there, it is a pricing conversation. It just doesn't show up as merchant fees divided by GMV.

And we got one more come in the Q&A. Can you also discuss the competitive landscape opportunities and pressures, Apple Pay Later? And along those lines, what gives Affirm an edge over other pure-play BNPL players as well as some of the traditional financial institutions offering pay over time products?

Yes, very different competitive landscape when you think about traditional FIs and the basket of buy now, pay later companies. I think on the latter, our product breadth, meaning we do short-term Pay in 4, we do longer-term 0s and interest bearing. That mix of products really sets us apart from most of the competitive set but also our approach to risk management. We talked today for the better part of an hour and I feel like a better part of an hour been talking about risk management topics. And that stands out and stands well apart from how one of the pure-play buy now, pay later companies run their business. And that's just who we are as Affirm. And a year ago that mattered less. And right now, it matters a whole lot. And that's why you see differentiated growth rates for Affirm versus those other players. We believe it's because of our ability to do a better job on the risk side. I think on the traditional FIs, they have a hard time keeping up with the technology challenge. And they come in multiple flavors, but a lot of folks who are credit card-oriented, we believe, don't really attend to the core issue here. They're trying to do installment loans inside of a credit card, and we think that's not actually the way what consumers are looking for when they're voting today with their wallet. And then you have entrants like Apple. And I don't actually know when that product is going to launch. I do know that I think the takeaway we have internally is launches like that or as much as anything else, an endorsement of the category. I think it's really important to remember the thing that we're talking about. The problem that we're addressing here is a really important problem. Consumers do not want to use traditional credit vehicles in order to buy stuff. And our product is differentiated. And it's not just our product. A lot of players are looking at this and saying we also need to be able to deliver a product in the space. It is not a fad. It's not a blip. It is a permanent dislocation in how consumers want to consume credit. And we think we're best positioned to capture this benefit, to capture the benefit of this changing market. We don't have legacy products that have put the consumer last with shady and deceptive products like deferred interest. We don't have products that monetize the consumer through late fees and hidden and junk fees. We have a product that offers an honest trade with the consumer, and the consumers value that. Other people are going to seek to replicate our approach with transparency and honesty, and that's great. We welcome it and want it very much in the market. We just happened to have the benefit of quite a bit of a lead on them, both in terms of our merchant network, our consumer network and the overall technology and data asset that we've built over the past decade.

That's great. Well, let's leave it there. Michael, really appreciate you taking the time today. Very helpful and insightful.

Thanks, everybody.

All right. Thanks, everyone.