Buy Now, Pay Later Is Surfing the Private Credit Wave | Mint
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Business News/ News / Buy Now, Pay Later Is Surfing the Private Credit Wave
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Buy Now, Pay Later Is Surfing the Private Credit Wave

wsj

Affirm appears to be finding demand for its loans from investors looking to tap in to the higher yields it can offer them.

Pay-later provider Affirm, whose shares are up over 170% year to date, said it has added more buyers of loans to its funding platform. Premium
Pay-later provider Affirm, whose shares are up over 170% year to date, said it has added more buyers of loans to its funding platform.

Higher interest rates were supposed to put an end to the fast growth of buy now, pay later lenders. But right now they might actually be helping out.

Unlike banks that fund their loans through their deposits, BNPL players that offer small loans and installments to shoppers need to get that money from the market, as do other nonbank financial-technology companies. So they are, in theory, more exposed to the cost of rising interest rates. That was a big reason that many investors expected banks to regain the upper hand versus their disrupters, leading to a sharp drop in valuations for many “fintech" highfliers, including Affirm, over the past couple of years.

Yet things haven’t been quite so straightforward this year. Many banks’ deposits aren’t proving nearly as steady or cheap as they had hoped. Plus, they are being forced to offload or curtail some of their consumer lending as capital requirements rise.

Meanwhile, Affirm appears to be finding demand for its loans from investors looking to tap in to the higher yields it can offer them. Pension funds have been enticed by returns on credit that can now rival what they were expecting from stocks. Similar demand is boosting alternative asset managers, like Apollo Global Management and Ares Management, which have seen strong flows from investors and insurers that want alternatives to traditional credit.

Affirm said Wednesday, when it reported earnings, that it has added more buyers of loans to its funding platform. This follows comments in September by Chief Financial Officer Michael Linford, who told analysts that many of the largest asset managers were “really interested in credit. Credit right now is an asset class that I think is getting a lot of attention, and we’re the beneficiaries of that."

Gross merchandise volume, or the total dollar amount of transactions, was $5.6 billion in Affirm’s most recent quarter. That was ahead of the $5.4 billion analysts were expecting, according to Visible Alpha. On top of that, Affirm also managed to monetize a larger percentage of that volume, with its revenue net of transaction costs as a percentage of volume rising to 3.8%, from 3.4% the prior quarter. That meant that as much as its funding costs were higher, the revenue it was generating from interest and merchant fees rose more.

Overall, Affirm’s total net revenue grew 37% year over year to $497 million, about $50 million above the consensus estimate, according to Visible Alpha. Affirm shares were up over 20% on Thursday, bringing its year-to-date gain to over 170%.

BNPL credits have a few potential appeals to investors. For one, they can be relatively short-term. Affirm has also been able to boost its yields through higher lending rates. In October, more than 90% of Affirm’s interest-bearing volume was offered with annual percentage rates up to 36%. And it has managed to keep its credit performance steady. Its 30-plus-day delinquency rate, excluding for its pay-in-four installments, was 2.4% in the quarter, down from 2.7% a year prior.

Of course, BNPL hasn’t yet justified the huge expectations of disruption that pushed Affirm’s shares to over $175 back in 2021. It currently trades below $30. Affirm is also still working toward profitability, with a net loss over $170 million in the quarter.

But it is now on a track that might make investors give it a fresh look.

Write to Telis Demos at Telis.Demos@wsj.com

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