Late Night Online Shopping and Credit Risk: A Study by Affirm’s Michael Linford

Late night online shopping has become a common trend in today’s digital age. With the convenience of e-commerce platforms and the availability of various payment options, consumers can make purchases at any hour of the day. However, a study by Affirm’s Chief Financial Officer, Michael Linford, reveals that Americans shopping online after midnight are often making riskier transactions and are more likely to default on their loans.

Affirm, a fintech firm that offers buy now, pay later loans, uses various data points to help determine whether to approve loans. One of these data points is the hour a consumer attempts a transaction. According to Linford, the local time of day is a signal that they use in underwriting, and most times of day have the same credit risk. However, between midnight and 4 a.m., something changes.

“Human beings don’t make the best decisions at two o’clock in the morning,” Linford said. “It’s clear as day — credit delinquencies spike right around 2 a.m.”

The reasons for this trend are less clear. Shoppers could be inebriated or under financial or emotional duress and desperately seeking credit. Affirm is among a new breed of fintech lenders competing with credit cards issued by banks. The buy now, pay later industry offers installment loans that typically range from no-interest short-term transactions to rates as high as 36% for longer-term credit.

Real-time approvals are a key to their business model. Firms including Affirm, Klarna, and Sezzle have embedded their services in the online checkout pages of retailers. The ability to approve or reject customers in real time and at the transaction level using data to help judge the odds of being repaid is a significant advantage over traditional credit cards.

“We don’t need to know if you’re going to be employed in two years,” Linford said. “We need to know whether you’re going to be able to pay back the $700 purchase you’re making right now. That is very different from credit cards, where they give you a line and say, ‘Godspeed.’”

The use of buy now, pay later loans has grown along with the overall rise in consumer debt. While the industry touts up-front rates and fewer fees compared to credit cards, critics have said they enable users to overspend. However, Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments.

Last week, Affirm reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023 from a year earlier, even as total purchase volumes surged 32% during that time. Affirm has little incentive to allow users to pile up debts, 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 revolve, we don’t compound.”

The rates at Affirm are in contrast to credit card delinquencies at the four biggest U.S. banks, which have been climbing since 2021 as loan balances have grown. 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 a Federal Reserve Bank of New York report.

“The job environment is good, so it begs the question, why are credit card delinquencies creeping up?” Linford said. “The answer is, they took their eye off of underwriting and from my perspective, they got aggressive in a time when consumers were beginning to show stress.”

The study by Affirm’s CFO highlights the importance of responsible underwriting practices in the financial industry. Late-night financial decisions are riskier, and it is crucial to consider various data points to help determine the creditworthiness of a borrower. The use of real-time data and machine learning algorithms can help fintech firms make informed decisions and manage repayment risk effectively.

In conclusion, late-night online shopping can lead to riskier transactions and higher credit risk. Fintech firms like Affirm use various data points, including the hour of the transaction, to help determine creditworthiness. The ability to approve or reject transactions in real-time using data is a significant advantage over traditional credit cards. The study by Affirm’s CFO emphasizes the importance of responsible underwriting practices and the need to consider various data points to help determine the creditworthiness of a borrower.