A young man holds a credit card and uses a laptop to shop online.
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Americans who shop online after midnight often make riskier transactions and are more likely to default on their loans, according to Say Chief Financial Officer Michael Linford.
The fintech company uses the time a consumer attempts to complete a transaction as a key data point to help determine whether to approve loans, Linford told CNBC in a recent interview. Other factors include a user's payment history with Affirm and transaction data from credit agency Experian.
“Local time of day is a signal we use in underwriting, and most times of day have the same credit risk,” Linford said. However, between midnight and four in the morning something changes, she said.
“Human beings don't make the best decisions at two in the morning,” Linford said. “It is as clear as day: credit delinquencies increase around 2 in the morning”
While the data is clear that late-night financial decisions are riskier, the reasons for them are less so. Buyers could be intoxicated or under financial or emotional pressure and desperately searching for credit, Linford said.
Affirm, led by PayPal co-founder Max Levchin, is among a new generation of fintech lenders competing with bank-issued credit cards. The buy now, pay later industry offers installment loans that generally range from short-term interest-free transactions to rates of up to 36% for longer-term credit.
Real-time approvals
Companies like Affirm, Klarna and Sezz They have integrated their services into retailers' online checkout pages.
A key to its business model is the ability to approve or reject customers in real time and at the transaction level, using data to help judge the likelihood of receiving a refund.
“We don't need to know if you'll be employed two years from now,” Linford said. “We need to know if you'll be able to pay back the $700 purchase you're making now. That's very different from credit cards, where they give you a line and say, 'Good luck.'”
The use of buy now, pay later loans has grown along with the overall increase in consumer debt. While the industry touts introductory rates and fewer fees compared to credit cards, critics have said they allow users to overspend.
But Affirm manages payment risk by denying transactions or offering shorter-term loans that require down payments, Linford said. Last week, Affirm reported that 30-day delinquencies on monthly loans remained stable at 2.4% during the last three months of 2023. compared to the previous year, even as total purchasing volumes increased by 32% during that time.
Affirm has little incentive to allow users to accumulate debt, according to the CFO.
“If you can't pay us back, we've lost, unlike with credit cards,” Linford said. “We don't charge late fees. We don't renew, we don't accumulate.”
Affirm's rates contrast with credit card delinquencies at the four largest U.S. banks, which have been rising since 2021 as loan balances grew. Americans owed $1.13 trillion on credit cards in the fourth quarter of last year, an increase of $50 billion from the previous quarter amid higher interest rates and persistent inflation, according to a report from the Federal Reserve Bank of New York.
“The work environment is good, so the question arises: why are credit card delinquencies increasing?” Linford said. “The answer is that they stopped paying attention to underwriting and, from my perspective, became aggressive at a time when consumers were starting to show stress.”
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