Fintech lender says it’s relying on investors to finance rapid growth

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Fintech lender Affirm Holdings Inc.

relies more on investor funding rather than lenders to fund its growth as its “buy now, pay later” payment plans become increasingly popular.

Buy now, pay later loans often appeal to customers who do not qualify for credit cards or prefer fixed payment plans. Consumers spent between $ 15 billion and $ 20 billion using these loans for online purchases in 2020, up from $ 6 billion to $ 9 billion in 2019, according to estimates from rating firm DBRS Morningstar.

“Buy now, pay later” has also been at the center of recent transactions. Payments company PayPal Holdings Inc.

This month announced that it will acquire Japanese startup Paidy Inc. for $ 2.7 billion, following a deal made last month by Square Inc. to acquire Afterpay in Australia. Ltd.

for $ 29 billion.

San Francisco-based Affirm offers short-term loans to customers at the point of sale, such as when checking online, with payment terms ranging from three months to five years. The company, which went public in January, is offering its “buy now, pay later” loans through partnerships with companies such as Walmart. Inc.,

Amazon.com Inc. and Peloton Interactive Inc.

Gross merchandise volume, which measures all retail transactions on the Affirm platform, net of refunds, was $ 2.5 billion in the quarter ended June 30, about double the amount of the previous year.

One of the ways Affirm finances its business is through securitizations, which is similar to what other fintech lenders such as SoFi Technologies Inc.

and the assets reached Inc.

done. The company entered the securitization market in July 2020 and has completed six transactions since then. In the quarter ended June 30, Affirm funded about a third of its $ 4.7 billion buy now and pay later loan portfolio with cash from securitization transactions, in which the company consolidates its securities loans and sells them to investors.

Michael Linford, Affirm’s chief financial officer.


Photo:

To affirm

The company previously relied on financing from lender warehouses, where the company borrows against its consumer loan balances, and direct sales of loans to other companies. Securitization deals require less equity than financing warehouses, from which the company is moving away, said chief financial officer Michael Linford. These financings represented 19% of the company’s financing mix as of June 30, compared to 42% a year earlier.

Affirm generates most of its financing by selling loans that it does not divide into securities. Direct sales of loans to other companies accounted for 49% of the company’s funding mix during the period ended June 30, bringing in $ 2.3 billion, almost double the amount of the previous year. .

“We aspire to a significantly higher level of scale in our business,” said Linford, adding that the company needs a diverse set of funding sources as it grows so as not to lose money. depend too much.

Affirm’s business model is more complex than that of many Main Street banks, which use deposits on their balance sheets to fund loans. Affirm relies on two banks — Cross River Bank in Fort Lee, NJ, and Celtic Bank in Salt Lake City — to make most of its loans. It then purchases the loans from its banking partners and maintains them for the duration of the loan.

The company, like other fintech lenders, includes some of its securitization trusts on its books and removes others from its balance sheet. During the last quarter, Affirm sold the riskier part of one of its transactions to third party investors. This allowed the company to remove the loans from its balance sheet and record a gain of $ 16.7 million on the sale.

In its most recent quarter, the company generated $ 42.6 million in gains on loan sales (whole loan sales and off-balance sheet securitizations), up from $ 11.6 million a year earlier. It reported a net loss of $ 128.2 million for the quarter, compared to a profit of $ 34.8 million in the prior year period.

The expansion in securitizations has diversified Affirm’s funding mix, analysts said. Still, those capital flows can dry up if investors get nervous or economic conditions deteriorate, said Vincent Caintic, managing director of financial services firm Stephens Inc. “It’s not sustainable in the long run.” did he declare.

Affirm sees its warehouse credit lines as a safety net if it cannot access the securitization market, according to Linford. The company has no plans to take on additional debt to fund the business, he said.

So far, investor demand for Affirm securitizations has been strong, said Imran Ansari, senior vice president of DBRS Morningstar, adding that the firm’s funding model gave him other options in the event of a change. “If a funnel closes, it has another outlet,” Mr. Ansari said.

Write to Kristin Broughton at [email protected]

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