A young man is holding a credit card and using a laptop for online shopping.
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Americans who shop online after midnight often make riskier transactions and are more likely to default on their loans, according to We confirm Head of financial services Michael Linford.
The fintech company uses the time a consumer attempts a transaction as a key data point to 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 the credit bureau Empirical.
“Local time of day is a signal we use in underwriting, and most times of day have the same credit risk,” Linford said. Between midnight and 4 a.m., however, something changes, he said.
“Human beings don’t make the best decisions at two in the morning,” Linford said. “It’s clear as day – credit arrears go up around 2am”
While the evidence is clear that late at night Financial decisions are more risky, the reasons for it are less. Buyers may be intoxicated or under financial or emotional stress and desperate for credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among a new breed of fintech lenders competing against bank-issued credit cards. The buy now, pay later industry offers loans with installments that typically range from interest-free short-term transactions to interest rates as high as 36% for long-term credit.
Real-time approvals
Companies including Affirm, Klarna and Sezzle have integrated their services into retailers’ online checkout pages.
Key to their business model is the ability to approve or reject customers in real-time and at the transaction level, using data to judge repayment probabilities.
“We don’t need to know if you’ll be working in two years,” Linford said. “We need to know if you’re going to be able to pay back the $700 purchase you’re making right now. That’s a lot different than credit cards, where they give you a line and say, ‘Godspeed.'”
The use of Buy Now Pay Later loans has increased along with the overall increase in consumer debt. While the industry touts upfront interest rates and fewer fees compared to credit cards, critics have said they allow users to overspend.
But Affirm manages repayment risk by either declining transactions or offering short-term loans that require down payments, Linford said. Last week, Confirmation mentionted that 30-day delinquencies for monthly loans remained flat at 2.4% in the last three months of 2023 compared to a year earlier, even as total purchase volumes increased by 32% during this period.
Affirm has little incentive to allow users to pile up debt, according to the CFO.
“If you can’t pay us back, we’ve lost, unlike credit cards,” Linford said. “We don’t charge late fees. We don’t rotate, we don’t compound.”
The rates on Affirm are unlike a credit card delinquency at the four largest US banks, rising from 2021 as loan balances grow. Americans owed $1.13 trillion on credit cards as of the fourth quarter of last year, a $50 billion increase from the previous quarter amid higher interest rates and persistent inflation, according to Report of the Federal Reserve Bank of New York.
“The business environment is good, so it begs the question, why are credit card delinquencies increasing?” Linford said. “The answer is that they took their eye off the underwriting and from my perspective they got aggressive at a time when consumers were starting to show anxiety.”
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