A young man holds a credit card and uses a laptop to make online purchases.
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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 a study. Confirm Chief Financial Officer Michael Linford.
The fintech company uses the amount of time a consumer attempts to complete a transaction as a key data point to help determine whether loans should be approved, Linford told CNBC in a recent interview. Other factors include the user’s payment history with Affirm and transaction data from the credit bureau. Experian.
“Local time of day is a signal we use in underwriting, and in most cases the credit risk is the same,” Linford said. However, between midnight and 4 a.m., something changes, he said.
“People don’t make the best decisions at two in the morning,” Linford said. “It’s clear as day: loan arrears increase sharply at about 2 a.m.”
Although the data is clear that Late night financial decisions are riskier, the reasons for them are less risky. Buyers may be drunk or under financial or emotional pressure and desperate for credit, Linford said.
Affirm, run by PayPal co-founder Max Levchin, is among the new fintech lenders competing with bank-issued credit cards. The buy now, pay later industry offers installment loans that typically range from interest-free short-term deals to rates of up to 36% for long-term loans.
Real-time approvals
Firms including Affirm, Klarna and Sezzle introduced their services to the online checkout pages of retailers.
Key to their business model is the ability to approve or reject customers in real time and at the transaction level, using data to help assess the likelihood of debt repayment.
“We don’t need to know if you’ll be employed in two years,” Linford said. “We need to know if you can pay for the $700 purchase you are making right now. This is very different from credit cards, where they give you a line and say, “Thank you!”
The use of buy now, pay later loans has increased along with the overall rise in consumer debt. While the industry touts prepayments and lower fees compared to credit cards, critics argue they allow users to overspend.
But Affirm manages repayment risk by either declining transactions or offering short-term loans that require a down payment, Linford said. Last week, confirm reported that the 30-day delinquency rate on monthly loans remained stable at 2.4% during the last three months of 2023. compared to a year earlier, despite the fact that the total volume of purchases during this time increased by 32%.
Affirm has little incentive to allow users to accumulate debt, the CFO said.
“If you can’t pay us back, we’ve lost, unlike credit cards,” Linford said. “We do not charge late fees. We don’t spin or accumulate interest.”
Affirm rates are different from credit card rates. offenses at the four largest U.S. banks, rising from 2021 as loan balances increase. Americans’ credit card debt stood at $1.13 trillion as of the fourth quarter of last year, up $50 billion from the previous quarter amid higher interest rates and persistent inflation, according to Federal Reserve Bank of New York report.
“Working conditions are good, so the question is: why are credit card delinquencies on the rise?” – said Linford. “The answer is that they stopped paying attention to underwriting, and in my opinion, they became aggressive at a time when consumers began to show stress.”
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