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

Good morning, everyone, and thank you for dialing in to our quarterly conversation. I want to thank Craig and Matt from FT Partners for being our host today. For those of you who haven't used the Say Technologies' platform, feel free to submit questions ahead of the calls, and we will do our best to address them here. We appreciate the participation and engagement from all our investors, especially people who submitted the questions in advance. And with that, we'll hand it over to Craig and Matt who will begin the Q&A session.

Yes. Thank you, Michael, so much for the opportunity here to host the quarterly call. Always fun to catch up with you and the team. Craig and I have really enjoyed reengaging now that we're launched here at FT Partners, and I figured we'd just jump right into it and maybe start at a high level, just from your vantage point, what are the key points that you're most focused on? And if anything has changed since the last time the investment audience has heard from you, what's kind of the top of the list right now from a macro perspective? And what are the things that you're watching most acutely, I guess, as you're thinking about FY '24 guidance and the go forward here?

Yes, thanks. We're at a pretty cool moment in our company's history. We are and have been focused on really making sure we manage credit outcomes to where we need them to be over the past 6 months. And I give ourselves a pretty high grade there. The credit outcomes we're delivering are exactly what we said we were going to do and how we're doing it is exactly how we said we were going to do it. And so that has given us some pretty strong footing from which we're thinking about the areas of growth for the business. So we know that we need to continue to drive higher frequency engagement on our platform. We know we need to continue to take share from our existing merchants who are penetrated, and we need to add more merchants to our network. And so we're really focused across all 3 of those dimensions. And as you have probably heard on a number of our conversations, we're really focused and excited for what the future of Debit+ is going to be for us across all those dimensions as it really is a way for consumers to use Affirm in a lot more use cases than they could before, which we believe will have a huge impact on frequency as we scale the card up to a meaningful portion of our business.

Got it.

So thanks, again, Mike, for taking the time today. I wanted to follow up on a more specific macro question, but Max identified a student debt crisis on the most recent -- at a recent conference is something you're keeping a close eye on. Could you discuss how recent developments have helped to change your thoughts or maybe not in terms of what you have coming in terms of credit risk and other potential issues?

Yes, we're focused on controlling what we can right now, which is everything inside of our business. One thing I think that just bears repeating always when we talk about credit at Affirm is just how short the asset is. And by that, I mean the term length of the loans are very, very short. And so like a fun stat that we talk a lot about is by the time we get to our earnings call, this week -- this year was at the beginning part of May, 45% of the originations we had originated in the quarter that we're reporting had already been paid back. So a little under half of the originations were fully paid back by the time we even talked about them to the market. And that velocity of the asset gives us a tool that a lot of others don't when thinking about the macro. We don't need to think 12 and 18 months ahead with respect to macroeconomic predictions, like a credit card issuer might, as they are creating lines right now that will continue to perform and create performance impacts for them all throughout in the cycle. For us, it's a little bit more near term. We're looking at the current situation and the current performance of our portfolio. So that frames how we approach it, which is a huge qualifier for any prognostication that we have on the macro, which is like it's kind of down the road for us. By the time it gets -- plays out, the book will have turned over at least once. And so we have time to be reactive as opposed to trying to be super proactive. Now that being said, I think we're generally very cautious right now. We saw continued rising delinquency rates amongst the credit card issuers, and that's in addition to some indexes that we report in our letter. We track a DV01 Index, which is a bunch of other online lenders and all of them showed significant drips and delinquencies up. And for us, that's just an indication that we need to be very thoughtful and cautious as we approach the market and so we continue to maintain the strictest underwriting standards and really want to dial in at a specific level of delinquency and credit performance in the business as that has a much more short-term impact on our business' results, right? So given the short duration of the asset, the credit performance actually is part of the unit economics for us in a way that I think some people who follow financials may not really appreciate the same way. And so we look at things like unemployment as good macro indicators. In the near term, that remains very robust. We look at overall consumer spending, both categorically and overall. And yes, we look at what we think is a potentially very negative outcome with respect to student loan, whatever student loan issue is resolved with. However, far enough way that we're not, we're not gearing up the business for that yet. That's something that we will tackle when it gets here.

Can I ask a follow-up here? So when Affirm is a relatively young lender versus the credit card lenders that we see and some others, right? And so what's the experience been in terms of flow-through from the large card issuers' experience on credit to what Affirm sees in its own book of business, whether it's lagged 3 months, 6 months, 9 months, 12 months, whatever it might be. And at the same time, what can you tell in terms of the current hierarchy in terms of consumers' repayment obligations when it comes to their different types of debt?

So firstly, I'm going to quibble a little bit. The difference between our credit outcomes and our credit card issuers isn't just the timing that it flows through, we take a very different approach. And there's really 2 things to stress here. One is that because we are a transaction-level underwriter, we think about transaction risk, not just consumer risk. And so as a result, we're not making the same sort of -- we don't experience the same sort of credit outcomes that are kind of, if you will, a predefined outcome. So it's consumers see stress, credit card companies stress, and they go up and they kind of all go as a pack. We don't think that's going to be the case for us because of the transactional lend rate. We're also really good underwriters. And so because we can actually assort risk better than what we think the other providers of unsecured consumer credit can do, we're not of the opinion that the same sort of credit rises that you see elsewhere, you're going to see here at Affirm. And that's a statement that we've made for a long time. The past 6 months have really borne that out. If you look at the trend in delinquencies and credit losses in our business and compare them to the other unsecured consumer lenders, there is a stark difference between what we're driving and what they're seeing. However -- I will get to your question because underneath it's still really about a question. I just want to make sure that we separate that point out, which is it's not that there's this much more stress and then we're going to experience it like everybody else. It is the case though that when the consumer gets stressed, we observe it and see it differently. And there's 2 things that I think about they're both mathematical. First, the rise in consumer stress. So it shows up more quickly in our portfolio because the denominator in our business goes away very quickly. Let me explain that for a second. You are a credit card business and you have 2 years of duration, a little bit of stress gets spread over a lot of volume and that volume's principal balances don't go down nearly as quickly. Because our book turns over so much more quickly, that any sort of change in delinquency performance we see in a really quick way, and much more quickly than anybody else. But equally, it goes away quicker too, right? So if we make the decisions that we're supposed to make to control underwriting outcomes, it can go away from our portfolio more quickly. And so as a result, what you saw for us last year, which was a rise in delinquencies, some of which was normalization, some of which was actually stress in the consumer. We took actions to remediate that and it disappears from our portfolio very quickly. And we would expect that to be the trend that continues to play out as further economic stresses may get seen amongst any number of consumer cohorts.

So Mike, I know we can talk about credit normalization forever, and it's always a fun subject. But I do think it is always important when investors are discussing Affirm, they understand that velocity factor, right, because that really is a unique facet that's quite different from what many of us are traditionally used to in sort of longer-duration revolving-type products. But with that said, maybe we'll turn it over to partnerships. And I know we have a handful of questions from the community on the line. So I'll kick it off with one of those. [ Brad H. ] asks, I've been a long-term shareholder with strong faith in the future of Affirm. Are there any new potential clients accepting Affirm in the near future? And a similar question from [ Thomas L. ] also asks, who are the next major partners Affirm's going to go for? I realize this might be a bit leading the audience. So I'll turn them to you.

Thanks [ Brad and Thomas ], both for the questions and for your engagement as a shareholder. We can't talk about new partners before they go live, of course, but we do have a team that's focused on furthering our network growth, and for us, that's acceptance with merchants. We talk about being accepted at over 60% of U.S. e-commerce today, and it's a stack that we're really proud of because it shows progress, but it's well short of the 100% expectation we have. We want to be accepted across all of U.S. e-commerce and, of course, offline as well. And so we still have a lot of work to do with a lot of large merchants. And we really think that we're still in the early innings of the adoption of this category for a lot of merchants. We saw a really big push between 2020 and this year, the large surge in merchant acceptance with some of the largest merchants signing up and onboarding with Affirm. And I do think that there's a lot of work left to do. And I think as the industry matures, you're going to see a different rate of the biggest players entering it. One of the things we like to say is that you can't add the world's largest e-commerce player every quarter, and so you get to do that once, and then you get to work with them. So we're not going to have those sort of big chunks in front of us. It's going to be a lot more singles that home runs. But that's okay because we're not going to do it all ourselves. We've been talking a lot about some partnerships that we've announced recently, and these are all ways for us to further acceptance without actually having to go with every new merchant. However, there are still some big merchants out there that we're really excited to try to partner with and certainly would encourage everyone to stay tuned into our partners there.

So maybe to follow up on partners you have announced. Maybe talk about what your expectations are in the Amazon and Shopify relationships considering, I mean, you are talking about the 2 biggest e-comm platforms in North America. And obviously, they are 2 very different opportunity sets. But I know on the Amazon side, you have both the Amazon Proper opportunity and the Amazon Pay opportunity as that matriculates beyond Amazon's core. And obviously, with Shopify of everything from enterprise scale all the way down to the smallest e-comm merchants. So any color on those 2 partners would be fantastic.

Yes. I think the most important thing with both of them is that we're still really early. And I know that statement can sometimes be brought with a little bit of skepticism because we've been live with both of them now for what feels like a very long time. But the amount of work that's ahead of us is quite large. In the case of Amazon, we just have a lot of work to do to continue to find the right moments to offer our product. We have the further and some additional products to offer. And that business itself is still growing really quickly for us. Shopify, we reported last quarter was actually accelerating in Q3 versus Q2. So this growth rate was faster. And it's not because of some sort of major unlock like the launch was, it's the sum total of all of the work that we're doing with them in order to create the best possible consumer experience and drive the best outcomes for the merchants. And both are obviously very big players. But again, I think that we're excited to partner with the rest of the e-comm landscape as well. And we think that these -- the benefit to our network is that we are accepted at the biggest e-comm merchants that have the most presence, but also you can find us on a large list of non-Shopify and non-Amazon affiliated merchants. And the more consumers can see our mark, there more consumers can see the Affirm proposition in more environments, the more it reinforces the frequency that I was talking about above. It's so important to building our network.

Can you maybe dig a little deeper into how these big platforms act as gatekeeper to where your product is presented to consumers and how you have input into that opportunity set so to speak?

Yes. It varies by partner a lot. We work with merchants, large and small, to try to create the best conversion and consumer experience. And so for some platforms, it's really important that our product is shown in as many instances as possible. And some, they want to be really focused on where and how it's seen. And some is a lot more earned, meaning as we show results and can show incremental conversion, we'll earn more space. And that's maybe the most important point is across all of our partnerships, the most important thing is our performance. This -- we always talk about kind of what's in the contract as being, of course, important for the contract. And there's lawyers who are plenty happy towards, met every single contract. But at the end of the day, if we're not driving the results that improved conversion and drive the merchants business along like the consumer and take care of the consumer as well, and it's not really sustainable. And so we focus less on getting sort of contractual rights, although those are important. We focus much more on making sure that we're driving the right kind of impact so that merchants want to put us on the product display page, call it, PDP, the product display pages, the details of the product, where we know the conversion is highest, and we drive the best outcomes for everybody involved when we're able to show our messaging as up funnel as possible. But it really does vary quite a bit across all the merchant landscape.

Just a follow -- yes, I just wanted to dig in one more time on these platforms. Aside from the economics toward -- to the lawyers, for writing those contracts, maybe you can talk about how we should think about the economic agreements with large platforms that are marketplaces effectively for lots of other merchant goods, versus, say, you sign a deal with either a large e-comm enterprise, but it's a single merchant or even a small merchant.

Yes. It is the case that we enjoy the greatest pricing power with the smaller merchants, not because we actually have any real power in that, it's because they're less price sensitive. And so the smallest merchants do have -- we have -- we enjoy higher MDRs with the smallest merchants. And one of the things I'd like to share when I talk about that, it's just to stress how the smallest merchants are just not focused on things like payment cost efficiency. They have real bigger problems to solve. The thing I'd like to say is the small merchants don't have payments teams. They're heavily reliant on their acquirer or the platform in order to solve these problems for them. And it's important that we deliver real economic value to them. But it means that you're not going to get RFP then you're not getting heckled to debt from the smallest merchants. My joke I'd like to share is I'm a part owner in a brewery here in Colorado, and we pay an absolutely absurd rate for credit card acceptance at my brewery. And it offends me as a payment CFO, the rate that I'm paying, and yet, we just -- we cannot be bothered to go change that because we're much more focused on keeping the operation running. And I think there's -- the real insight there is that it's not about whether or not there could be value in that being more competitive, it's about how practical it is in the lift associated with the smallest merchant partners. Now, I think for the biggest partners, which we have a couple of really important things. One, we try to be as transparent as we can with the merchant partners because we think it's important to them that we can do this profitably. And we spent a lot of time talking to them saying you don't want to partner with people who can't do this profitably. There are certainly players in our space who are willing to do some version of this business unprofitably. And it's not entirely unrational, the rationality of being willing to go do make a loss on one product, BNPL, is only rational if you can make it up somewhere else. And I think a lot of these merchants or a lot of these other competitors do think they can make it up either in a core business that they have away from the pay-over-time products or in an advertising business. And so we spend a lot of time with merchants to actually get them comfortable with the idea that they actually want us to be making money doing the thing, that is the core of our business, because that means that we're going to be there in the long run to keep doing that thing that's so important to the consumer outcomes as holders and you put a program in place in the first instance. And so we spend a lot of time with merchants on that, and we're as transparent as we can be on there. But it also means that, for us, it's important that we are driving profitable transactions on the platform. And as I think we said, even when things got really competitive with respect to the offers some competitors were willing to make, we always insisted on it's important for us to be profitable in the core of our business, and that's not going to change. It is the case, of course, that the largest merchants in the large platforms do either participate in the economics or attempt to drive the lowest possible MDRs. But what sets us apart from some of our competitors is our product breadth allows us to still create profitable transactions. We can combine paying for. We have long-term and short-term 0% loans and also our interest-bearing portfolio. And that product diversity allows us to attempt to solve the merchants' or platforms' aspirations around economics and conversion, while still delivering an honest product to the consumer.

As you think about the sort of relatively short amount of time since we were having conversations like this leading up to the IPO, there were certain concentration risks that existed then that are certainly evolved and changed. Some -- and so quickly with respect to Amazon and Shopify, given their size and the potential there, how is the team internally thinking about ultimately the concentration risks that could come from these programs becoming very successful over time? And what does that look like? Is there some offsetting factors of unbridled success with them?

Yes. I do think this topic is -- some perspective always helps in answering this question. Because when we were going public, we had a huge concentration risk with one partner. And there, we represented an outside portion of that partner's business and they represented an outside portion of our business. And so the concentration of risk for that particular partner went in both directions. And so it's something were to happen to that partner's business as it did, you would see that have a disproportionate impact on us and similarly us and them. That kind of concentration risk has to be managed, in my opinion. That's the kind of concentration risk that investors can and should be concerned with. And we certainly work, we spend a lot of time talking about what we were doing to diversify away. And I'm really proud of the progress that we made in that dimension. That aforementioned partner is less than 1% of our business today, and we've really deconcentrated at them. We still very much value everything we do with and for them, but they're no longer the huge anchor tenant in the business as we've moved on to the world's largest e-commerce platforms. And when you partner with the world's largest e-commerce platforms, they're going to have a very large share of your business. But I think it's important to think about it in the other direction, too, is what percentage of our partners' business are we. And there, we're very, very small. We have a lot of runway to go. I talked a lot about that 60% of U.S. e-commerce number that we talk about, if you look at our 3 largest partners, they represent well north of 40%, 45% of that. And so you would expect them to be 75%, taken together, of our business and they're not there. And so I'd argue that while they're very material in terms of the percent of our business, and therefore, we have to continue to drive outsized results for these partners and manage them very well, the truth is we have a lot of growth left in them. And so the concentration risk that we talked about 2.5, 3 years ago, it's a very different story. And if we end up being well penetrated on those sites, then we're going to be happy to have that level of concentration. The last point I'd maybe make there is, I think the credit networks also have that concentration risk. They just don't talk about it, because they're not bilateral relationships. They are acquired through some other means. And so I think we're plenty happy to take the concentration on our business that mirrors the concentration in the industry we're at large, which is what we're working towards and we're not there yet.

Okay. Just more recent announcement, maybe you can tell us the opportunity that Worldpay represents for Affirm. Clearly, a global presence as an acquirer, probably the furthest reach of any acquirer in the world. So perhaps you can try to give us some idea of how you're going to penetrate that vast network of e-comm?

Yes. So like with any of our recently announced partnerships, they're all focused on scaling our network, and Worldpay is a great example of finding a partner so that we're not having to go out and acquire every merchant individually. Our sales team is mighty but small. Worldpay is a massive organization with a massive network of merchants that we are really thrilled to be able to partner with them on and bringing and making available Affirm's product. And we think about that as we're early enough in the network scaling of Affirm or early enough for the distribution of our product where we're going to keep seeking out every opportunity we can to get our product available to merchants. We want to make it easy for merchants, especially the smallest ones that I talked about, they don't have payments teams, we've got to make it easy for them. And oftentimes, that means partnering with existing acquirers to create a product for them that doesn't require a lot of custom or over-the-top work in order to get integrated, but also just to know about it. Partners like Worldpay get to have conversations with merchants that we just can't have the scale to do. And so whether it's them or any of our other partnerships here, it's all focused on gaining acceptance for Affirm and continuing to walk towards ubiquity. We've been talking about that for a few years, and we're making great progress, but we have a lot of work left to do.

I wanted to follow up on something you had talked about earlier in terms of those who might be offering the same product at a loss. And that obviously points to PayPal, where they're talking about offering -- where they offer playing for as a way to get the broad -- the transaction itself even if it's at a lower ultimate margin for them. So I suppose the question is, is there an opportunity for Affirm to go with that from the opposite direction, where you might try to, over time, earn payments that go beyond your core lending product so that perhaps you can be competitive on a total economic basis versus a player like PayPal?

I think it is though -- yes. So the short to answer to your question is, is absolutely, we think that there's a really long list of other payment methods, payment modalities that we need to address. So I think about our history as we kind of grew up in the largest most considered purchases, both interest-bearing and 0%, and that was a diverse and novel set of credit products, but they were still targeted at larger and therefore infrequent purchase moments. And we've done a lot of work over the past couple of years in getting our Pay in 4 business to continue to scale that has naturally a higher frequency to it. And therefore, we've touched more modalities there. But even still, Pay in 4 AOVs, average order values, are substantially larger than industry average order values. And we have a lot of work to do to continue to build products to mean something to more and more frequent transaction types and more different transaction types. That can come in any number of flavors. The core thing is can you underwrite risk well and how much risk do you think you can take and can you get compensated for the risk. And we're really good at all those 3 pieces. My -- I think it's a bit of an accident of history that the product that we all think about as BNPL is Pay in 4. There's nothing magical about that, except for the fact that it works out to about the same flow of credit card transactive debts in terms of their financial product. Besides that, there's no real reason for it. And the real underlying problem it solves for an otherwise would be debit consumer to give them some smoothing out of transactions. And there's a lot of different ways you can do that besides dividing by 4. Part of the reason we're so excited about Debit+ is we do think it opens up a wider set of a consumer spend where we're going to pick up more transaction types. That's one way to do it, not the only way to do it, but we are excited for what that will mean because as consumers begin to think about Affirm as the right financial product in general and in the specific part of Affirm that they're using match to the right transaction type, it's a really powerful model at real scale. And it would allow us to be probably more aggressive than we can today with respect to how we think about merchant discount rates and the ultimate fees we need to get in order to deliver a profitable set of transactions.

So, Michael, I'll bookend the partnership questions for a moment here with one more from an investor. So [ Nicolas P. ] asks, and I should emphasize with great enthusiasm by the end of this quote, what will it take to get Affirm accepted at Costco? Affirm-Costco partnership will be huge. All caps and many exclamation points.

Yes. Costco -- first of all, on a personal level, I'm a huge fan of what Costco is. They're on my personal list of merchants along with our existing partners who value their customers in a way that gets them out of bed everyday to do something good for them. And that's very aligned to who we are. And so I would love nothing more than that, I can assure you. But today, we don't have an integrated relationship with them. However, I would point out that our Debit+ user base, as small as it is, is very active in Costco as it's a Visa card can be accepted there, as well as our Affirm Anywhere product, which you can use online, the onetime use virtual card. And so we do see our consumers using Affirm at Costco quite a bit, and definitely in a material number of users doing it and I would encourage that [ Nicholas P. ] and any other investors and users of the product out there to do the same if they'd like to bring the power of Affirm to Costco.

Great. So maybe I'll move over to another fun facet of the business, which is, of course, how do we pay for all these loans on the funding side. So with the interest rate environment changing probably faster than it has changed, I think, ever, at least recently. How have your strategic priorities with respect to funding channels, how they evolved, where are they now? Yes, start there and dig in some more.

It definitely has been a volatile year. The rate of change really is unprecedented. And that has caused us to have to remain very nimble with respect to how we think about funding the business. And that's maybe the overriding strategic objective that hasn't changed, which is we need to maintain a diverse set of funding channels. And diversity for us is diverse partners, diverse funding methods. So we talk about our program as being a mixture of on balance sheet where house lines credit, our forward flow program where partners by whole loans, as well as multiple flavors of execution in the ABS markets. And that diversity has allowed us to continue to be able to scale this business despite what I think is a very volatile and tough funding market. And it is objectively very volatile and tough. That does not mean we can't continue to scale the business, though, as we've demonstrated over the past year. However, we aren't the kind to kind of rest on our laurels here. We're happy that we have 3 channels and 3 ways to fund the business. But we really feel like there's more opportunity. Our asset does something very special. It's very short in duration, which means we can more guarantee and control credit outcomes. That's a very attractive thing to investors right now. If you think about some of the issues that some smaller banks had with managing their asset side of their balance sheet, they bought too much duration. Our asset's shorten duration, and I think that provides a number of really attractive features. And so we do think that our asset continues to be very valuable to the capital markets and more so now. And so that opens up other ways for us to think about continuing to scale the funding of our business. But the priorities for my team remain the same as they did when we went public 3 years ago. We -- first thing we're going to do is going to fund the business, and we're going to enable growth in the business. And we're not going to apologize for whatever we need to do in terms of the mixture and type of channel in order to do that. And the second thing we're going to do is we're going to deliver on the unit economics that we signed up to do. And that's it. Obviously a very -- there's a feedback loop between credit, the capital markets and the merchants in terms of our ability to do that. And then lastly, we're going to make sure we're really efficient with the investors' equity capital. And as we think about planning the business, we do it with really efficient use of capital at scale. But we work in that priority. And this past year has caused us to spend more time on priority 1 and 2 than 3. And yet, I'm proud of our ability to operate in what I consider to be some really, really choppy markets out there.

So along these lines, another investor [ Pratimesh C. ] asks, with rising interest rates resulting in turmoil in the banking sector, has this affected Affirm's ability to sell the underwritten loans? And then also, how does the current condition affects Affirm's ability to underwrite the loans themselves. Obviously, a complex 2-part question there.

Yes. So I think in terms of our ability to underwrite, as we talked about at the beginning of the call, so much of that is predicated on the fact that we're really good at sorting risk and we're really well situated in this transaction level approval process that allows us to be reactive to trends that we see in the data and with the consumer, and we can also tune our models appropriately. We don't think we have some sort of magic signal that figures things out. We don't think that we've invented some sort of artificial intelligence that's cracked the nut of underwriting. We just -- that's not who we are. What we are is about using really good machine learning, data science, engineering applied to the problem of credit risk ranking, and then situate ourselves in the transaction flow that allows us to be very reactive. And that has served us very, very well. Our credit results stand out against pretty much anybody. And with respect to the rates impact on funding the business. Rates impact our business in 2 first order ways. The first is it raises the cost of our funding debt, whether that's in the ABS markets, where we usually pay a spread on top of the then rate; or in the warehouse lines, where we pay a floating rate with a spread over SOFR, for example. In both those instances, it's a pretty direct impact. Rising rates flow through to our funding costs in the form of the rate of funding debt that we pay. In the forward flow context, which is where this question was coming up, it's slightly -- it's a little bit more indirect. Rising rates increase the expectation of return that an investor wants to get out of a forward flow program. And so the investor will think about a risk-free return they can get away from us where they'll say, okay, I'm going to take the risk within an Affirm loan, I need to get compensated for it and are agreeing to that. As rates go up, the expectation of rate -- expectation of premium that they get goes up with it. And so it is the case that we have to hit a higher level of yield for our forward flow partners. There's plenty of appetite and demand for the asset. That is, that's really not a thing -- the work of my team is making sure we find investors who are willing to buy at yields that are good for us and good for the investor, and that requires the investor really getting comfortable with the credit outcomes of the business, understanding that how and why we can control that. Because obviously, rate movements obviously impact the return of -- on their asset. But so does credit, and very small levels of additional stress can really change the credit outcomes. So I think that portion of the conversation is just -- it dominates the conversation right now. I think a lot of investors are looking at what they think is at or near the peak of the rate cycle, maybe have a little bit more room to go, but certainly not a lot. And more likely, we're going to be seeing some declining rates in the next couple of years. In that environment, those who can control credit outcomes will deliver the highest returns, and those who were buying assets for those who control the best credit outcomes are going to be the ones awarded the most. And so we're spending more time right now with these investors on credit than we are, frankly, on rates. In a way, it's really positive and constructive because we stand out to the good year.

When we think about your different funding channels, right, how does -- how do you expect Affirm's utilization of the ABS channel to change as more dollar volume shifts towards the 36% APR cap?

I think those things are only linked in so far as the -- anything we can do to add economic content to the asset. There isn't actually a good example of controlling credits and other. Anything we can do to get the asset to be more valuable increases the value of it to the capital markets, which either reduces our borrowing costs in the form of lower spreads or lower yields that we can sell at therefore higher being on sale to us. And that's true regardless of the way in which we get more yield into the asset. With respect to ABS, we are committed to being a regular issuer in the ABS market. You saw us do a deal earlier this year and then reopen it and add more to it a few months later to a feature we built it to our transactions to be able to do that. It just helps expedite our execution. And so we want to and will continue to be very active in the ABS market. And yes, it is the case that things have been volatile. And so I think we think about the market and making sure that the conditions are appropriate for us to be able to execute at the levels that we like. And that means that we're going to be thoughtful about when and how we do it. In particular, for our other programs with 3 different programs, core interest-bearing program, which will benefit from the yields in higher APRs, we also have a 0% program that is a term non-revolving securitization program and we have a program for longer-term interest-bearing loans. And all -- the other 2 programs are probably ones where we look at and think that there's a need for us to be really thoughtful about how we engage. But the volume, the core of what we do, you're going to see us be regular issuers.

So I want to dig in a little bit more on the 36% cap. I think Brooke mentioned at a recent investor conference that you guys have line of sight to the addition of a third originating bank, and that, that one would be able to execute it up to the 36% cap, which I believe Cross River has not. So how do you guys think about that? Is that -- is there any update there? When you think about the decision tree, if that happens, if it doesn't, if it does, does that accelerate the long-term sort of stabilization of certain percentage of merchants and volume that can be at the higher cap?

No. The need to add another originating bank partner is a risk management decision, not an economics or a business decision, if that makes sense. Today, we have a very large portion of our volume flowing through one partner bank from the originating bank partner standpoint, and that's just a risky thing to do. I think that's a piece of risk that we think should be managed, and so you're -- we're -- or busy at work adding another partner. None of that additional partner changes what we think is the right business decision here, which is to continue to negotiate higher caps with as many merchants as possible to give us the room to price loans, where we need to slightly above 30% today. And so that work is ongoing and really originating bank partner isn't a governor or enabler of that at this point. It certainly was a constraint before we had started moving off of Cross River earlier this year. But we have set the large portion of our business throwing through [indiscernible] today that's not a constraint, and yet, we think the risk needs to be managed by adding another partner. And I think we've said that we plan on having at least one by the end of the calendar year. I think we're going to be -- we're pretty certain that will happen.

Okay. Great. I guess just to sort of wrap up the 36% discussion. On the fiscal -- or as of fiscal third quarter, there's about 55% of the merchants, I believe, quoted as being on that 35% cap. Have you guys thought through sort of a terminal value for either the percentage of merchants or volumes that may be bucketed under that cap or not sort of going forward? Is it hard to see that stabilization point yet?

Yes, it's hard. I mean what we said is we don't expect it to be 100% because there's going be either a set of merchants who -- look, if you only are offering 0% loans, you're not going to amend your contract to let me charge 36%. So like that's not going to happen. And so there's going to be some set of merchants who aren't interested and/or for whatever reason have their own issues that suggest they want to keep it to different levels. The ultimate price of that for them is usually less volume. We know we can approve more consumers and drive more volume to the merchant if they do. But there's going to be some. And so we said that we don't expect it to be 100%, but we've -- that's all we said. We think we have a lot of work left to do. We show continued progress on it, but we don't expect it to get to 100%.

Got it.

Okay. Look, I want to perhaps move to the competitive landscape. I'm going to start with an elephant in the room because we had a question about it. [ Christopher ] asks, how will Affirm compete with Apple? And I'm not sure if that's necessarily the right question, but at the same time, I'll let you run with it.

Yes. So I think the most honest and direct answer is it's probably too early for us to speculate too much about where that product ultimately goes, as their adoption and rollout of the product is in its early days as well. However, we truly do think that having a player like Apple enter our space is a net positive for the industry. They share some of the views on topics like late fees that we share. And we think that's a really strong thing when a large tech enterprise like that enters a market and is willing to play by the rules that we think are the most pro consumer. And the benefit for us is, of course, if and when that becomes the standard, which we think it already is and certainly becoming more so, that accretes to us, right? That accretes to players who have never relied on things like late fees or other -- things like deferred interest in order to make their products work. And so we welcome it. We're glad that they're in it because it is a statement around the permanence of what this BNPL thing even is, and it stretches the market opportunity for us that's still very, very large that a player like Apple would get into the game. Right now, though Apple PayLater is only a Pay in 4 product, and it's really targeted at the $50 to $1,000 AOE range. And if you think about where the Pay in 4 product makes the most sense for consumers and merchants, it's typically in that $50 to, call it, $200 range. If you think about the monthly payment on a monthly loan or the biweekly payment on a Pay in 4 loan, anything over $50 starts to really have a huge impact on conversion. And so you kind of are constrained with what the average order values you can drive in terms of driving outsized conversion impact on the Pay in 4. So we think it's going to be an important use case. It's going to obviously -- they're Apple, they're going to have a huge impact on the sector in general. But we wouldn't think that today, we'll see it directly competing with us just given its narrow product that it is today. But again, like I said, I think it's too early. We should be pretty humble and say we don't know how this is going to really play out, but we're not seeing a huge impact on us today. We think that underscores our need to continue to get our product distributed. We know that our consumers love us and love our product, and that means that we need to make it available to them in as many possible modalities as we can. And we know that the industry's scale and margin potential is so large that large competitors are going to be doing the same. And I think that just tells us we got to stay focused on up growing the network at the same time that we're focused on credit outcomes and making sure we continue to address operating leverage in the business. And so this is one of these moments where we really do have to do all the things.

So to round out the competitive discussion, maybe I'm going to give you a chance to answer from 2 different directions, okay? One, we have the threat of embedded finance solutions and how you think about merchants taking something like what a Stripe can offer or others and embed it directly without using a brand, Buy Now Pay Later solution like Affirm? Versus -- and then also at the same time how you think about Visa and MasterCard and their ability to take a Buy Now Pay Later solution and deliver it to 100 million-plus merchants through their network?

So -- and kind of implicit in this question is this idea that the product is really easy, and what's your mote, why can't the merchants do on their own, why can't the networks do it, why can't acquirers do it. And I'll share my belief and then I think a pretty compelling set of facts that point you to why. Our belief is that it's really hard. And that the challenge isn't can you do it for the most perfect, happiest paths. The challenge is not can you take the highest credit quality user, and let them pay for something over time. That's a thing that's very easy to do. And I think that's where a lot of merchants start their thought process on doing it on their own. Inevitably, though, they're confronted with needing to both say no to a consumer who's not credit eligible or say no to a consumer who is not current. And both of those unhappy paths become very difficult for merchants to think about. And those who can underwrite really well can minimize those numbers of unhappy paths, as I call them. And that's really the focus for why the largest enterprises ultimately choose to partner versus doing on their own. I think Pay in 4, in particular, is a bit different because the credit challenge there is a little different. But we do think that at scale, it still is part of the challenge. And a lot of merchants are going to want to have partners who can better manage the economics of the credit side of the equation and pay a healthy and fair MDR in order to compensate for those who could do that.

Maybe -- by the way I think you mentioned it once or twice, but I feel like we should probably double click into Debit+ a little bit more. Early days, understood. But would just love to hear, even anecdotally, kind of how consumer engagement is pulling up, how you're thinking about modeling it internally, how the investment community should start to think about it as presumably it will get folded into our modeling thought process over time. So I'll let you run with Debit+ there.

Yes, as Max likes to say, put down your spreadsheets. Don't model it yet. I promise you we're going to give you the tools that you need to model it when it starts to get bigger. Because we actually have a pretty big volume business nit is going to take a minute for it to scale to a point where it's all that measurable on our results. And so in Q3, it wasn't there. And we would anticipate giving you the tools that the investment community needs to model correctly later this year. We're really, really [ thinking ] and excited about this product. I think the -- despite the fact that it's still small in the scheme of Affirm, its growth rates are talked about internally is week-on-week and month-on-month growth rates, and that's the kind of talk that really early stage startups use, and that's really the fuel for this product. It's very early stage, but shows a lot of really compelling traction. When we talk to consumers who are using it, we get a huge level of insight to just how valuable this product, we think, is going to be to our consumers overall. I think it's transforming to our business over the long run. And I think it really does -- there's 2 things that are so important for us and they're related. But first is we open up an easy way for Affirm consumers to use Affirm off-line. Affirm grew up online, we think about the in-store challenge a lot. We've tried a number of ways, and we have some success but it's limited. And in particular, kind of these more complicated, multiline checkout environments, your typical grocery store, and your typical big box store slowing down the checkout in order to use an app to generate a credit application. It's just something that's unpalatable to the merchant, to the consumer, frankly, to the customers behind the consumer in line holding things up. And so it has never -- we've never gotten the traction that we would want to get. And that possibly delivers a seamless checkout experience for those consumers bringing the power of Affirm to the store. And unless it starts to touch a lot more frequency with the consumer. And so we're proud with the progress that we've made in purchase frequency, but we're well short of where we want to be. And so driving frequency through a product that can be used for a more regular spend, and is less constrained to larger considered spend for us is important as it drives further engagement in the platform overall, which is a key ingredient to the total picture here. We've got to have a large network with lots of frequency and frankly really strong unit economics, if we're going to be successful in the long run. And so the network is scaling, and we're happy with that. We have more work to do as we talked about. But frequency is something that we'd want to continue to focus on, and I think that Debit+ is really going to give us a shot in the arm there.

Got it. I know we have about 5 or 6 minutes left. A couple of sort of CFO-related questions, if you will, from the investment community, which we will absolutely address. One last one, though, as fun as it is to lend money, it seems like you can never talk about doing that without the regulatory environment coming up at some point or another. So did you just want to touch base on Australia's crack down on Buy Now Pay Later credit reporting. High level, what regulatory kind of concerns are sort of front burner at Affirm? And then if you could sort of discuss the new FICO partnership and if and how that addresses some of these concerns?

So I would encourage everybody to read our risk factors in our Ks and Qs, because we do spend a lot of time thinking about the regulatory environment that we operate in and communicate there. And I think you said it well, you can't do what we do without touching a whole long list of regulators. The good news for us is that's not a new thing. So there -- we have not ever attempted to operate away from or hiding from regulators. We try our best to engage with them directly and have -- over the time I've been here, spent a lot of time with them. So it's not a new thing to us. We think that, in general, thoughtful regulation is a positive for consumers, the industry and Affirm. We think that there are a number of practices that are less good for consumers that if they weren't happening it would benefit us because we're not relying on them. We don't need things like late fees and deferred interest to have a profitable business. And as a result, we think that the more the industry can come to those sort of pro consumer stands, it's better for us. We've always thought about our products as being a loan. There's a competitor of ours who thinks that that's anathema to their brand, and we just think that these are loans because they are loans. And I think that stance has served us well in talking with a number of regulators. And the more those conversations can become playing field leveling events, the happier we are. We think that credit reporting is one aspect that the regulators are focused on. Both with respect to ensuring that consumers don't get overextended, it's important that the lenders understand the obligations of the consumer and that we don't find ourselves extending credit to consumer who's going through a credit crunch that's not good for the industry. It's not good for the consumer, it's not good for anybody. And that's part of the credit reporting challenge. And the other part is it making sure that you're doing in a way that's consistent so that no one is being disadvantaged in the system for their payment or not. We shared that we're working with FICO to build the first of its kind credit-scoring model that would enable the NPL loans to be consistently and transparently factored in credit scores, without treating them like an installment loan of olden days, where they were not really thoughtfully incorporated into the FICO model and we're excited to work with FICO to bring them into the best possible way. And we hope that provides a pathway for standardized credit reporting, which we think is an area that, again, would benefit us in the hands of the best underwriters, a consistent approach to credit reporting accretes -- the benefit of that accretes to those who underwrite the best and that's us.

Sorry, I just wanted to move on to a question we have from the community, which is -- and I'll paraphrase a little bit, but your best thoughts on the time frame for Affirm to show a profit. And at the same time, I'll add my own color to that, which is we've certainly seen, at least in the fintech space, a lot more pressure on companies that are backing out large portions of, say, SPC costs or other costs. So -- and there's obviously a big gap between your adjusted and your GAAP numbers. So maybe some thoughts around stock-based compensation and maybe more particularly around partnership compensation, and can you back up those numbers as well.

So it's a great and fair question. With respect to timing of profitability, our focus is to get to profitability on an adjusted operating income basis and to do so sustainably as we exit this year. That has been our focus and remains our focus. And I'm proud of the progress that we're making in showing operating leverage in the business and we still have a lot of work to do. And I would anticipate the next year to be a year of us making great progress and still plenty of work to be done. Now the discussion of stock-based compensation, which jamming it into 1 minute may be tough, but what I would encourage folks to do is to not stop at the 1-inch deep. Unfortunately, I'm going to encourage folks to spend a few more minutes with our adjustments and walk through each of them. There's really 4 buckets of adjustments that warrant discussion. The first 2 relate to warrants associated with the partnerships with Shopify and Amazon. In those cases, we granted warrants at the time we signed these contracts. They were valued at that time and they invest over the life of the contract. There's nothing that drives them up or down besides the vesting conditions, which are usually related to either time or some pretty predictable performance measures of those 2 platforms, which means that we can and should debate whether or not the level of dilution that we took in order to do those deals was positive for shareholders. I think it's a fair discussion to be had. We think, obviously, compellingly, yes, it was a good deal for the shareholder. But to then look at the share count and the numbers as well as the warrant expense to me is a bit silly when you're thinking about valuation measures. And importantly, they're not addressable. There's no way to make them lower, except exiting those relationships, which I assure you would be very bad for the shareholder and we wouldn't want to do that. Then the other piece, stock-based compensation, there's just 2 components to it. There's the employee, the broad employee stock-based compensation, which we will need to grow into creating that profitability to offset that. And then we have the value creation award for our CEO, the only compensation -- material compensation this company has ever given him, where we gave him an award at time of the IPO. Those are options that best that -- strike at $49 and invest that share price is a significant excess as to where we're at today. And yet, despite that, because we value at the time of the grant, that will continue to flow through the P&L. And so again, it's not addressable. We think that investors should set the warrants for Shopify and Amazon on value creation award aside and look at the balance. Because there, the numbers are a lot more narrow than the not. And those are the pieces that are addressable. The stock-based compensation program for us, largely addressable. We believe very strongly that our partners are the largest e-comm platforms and our CEO are good things for the shareholder, and I don't take the shareholders we want those to go away.

Michael, I think we'll leave it there. I realize we're just over the hour mark here. But very much appreciate joining you today. It's always been a pleasure to discuss the business and look forward to talking again soon. Thank you so much.

Thank you.