The Potential Risks of Shopping Online at 2 a.m. with Affirm, a Buy Now, Pay Later Lender
Late-night online shopping has become increasingly popular, with consumers being able to purchase items with just a few clicks. However, recent data suggests that shopping online between midnight and 4 a.m. may come with potential risks, particularly when using Affirm, a buy now, pay later lender. Affirm Chief Financial Officer Michael Linford shared insights on this issue in a recent interview with CNBC.
According to Linford, customers who shop online during these late hours tend to make riskier transactions and are more likely to default on their loans. Affirm uses the time of day as a key data point when determining loan approvals. Factors such as a user’s repayment history with Affirm and transaction data from credit bureau Experian are also taken into account. While most times of the day have the same credit risk, something changes between midnight and 4 a.m.
Linford believes that human beings don’t make the best decisions at two o’clock in the morning. There could be various reasons for this, such as shoppers being inebriated or under financial or emotional duress and desperately seeking credit. The data is clear that credit delinquencies spike around 2 a.m., highlighting the potential risks associated with late-night financial decisions.
Affirm, founded by PayPal co-founder Max Levchin, is part of the fast-growing buy now, pay later industry that competes with traditional credit cards issued by banks. These fintech lenders offer installment loans ranging from short-term no-interest transactions to longer-term credit with rates as high as 36%. Their business model focuses on real-time approvals and using data to assess the likelihood of repayment at the transaction level.
Unlike credit cards that provide users with a line of credit without specific purchase requirements, buy now, pay later lenders like Affirm focus on whether customers can pay back the specific purchase they are making in real time. This approach helps manage repayment risk and prevents users from accumulating excessive debts. Affirm either denies transactions or offers shorter-term loans with down payments to mitigate risk.
Despite the rise in consumer debt, buy now, pay later lenders like Affirm have reported steady delinquency rates. Affirm’s 30-day delinquencies on monthly loans remained at 2.4% during the last three months of 2023, even as total purchase volumes increased by 32%. Unlike credit cards, Affirm does not charge late fees, revolve, or compound interest, giving them little incentive to allow users to accumulate debts.
In contrast, credit card delinquencies at major U.S. banks have been steadily climbing since 2021. As loan balances have grown, Americans now owe $1.13 trillion on credit cards as of the fourth quarter of last year, according to a Federal Reserve Bank of New York report. Linford believes that credit card delinquencies are increasing because banks have taken their eye off underwriting and have become more aggressive while consumers show signs of financial stress.
While buy now, pay later lenders offer upfront rates and fewer fees compared to credit cards, critics argue that they enable users to overspend. However, Affirm’s approach to managing repayment risk and their focus on specific purchases rather than lines of credit sets them apart from credit card issuers.
In conclusion, shopping online at 2 a.m. with Affirm and other buy now, pay later lenders may come with potential risks. Late-night shoppers are more likely to make riskier transactions and default on their loans. However, Affirm’s real-time approval process and data-driven underwriting help mitigate these risks. By focusing on specific purchases and offering shorter-term loans, Affirm manages repayment risk effectively. As the buy now, pay later industry continues to grow, consumers should be aware of the potential risks associated with late-night online shopping.
