2023-03-21 15:24:04 ET
Affirm Holdings, Inc. (AFRM)
Bank of America's Electronic Payments Symposium
March 21, 2023, 11:15 AM ET
Company Participants
Robert O'Hare - SVP, Finance
Conference Call Participants
Jason Kupferberg - Bank of America
Presentation
Operator
Ladies and gentlemen, the program is about to begin. [Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Jason Kupferberg. You may begin.
Jason Kupferberg
Thank you, everyone, for joining us here at the 11:15 am session at Day 2 of our Virtual Electronic Payment Symposium. I'm Jason Kupferberg, the Payments Processors and IT Services Analyst here. And we are very happy to again have with us management of a firm. And we have Rob O'Hare, here, who is the SVP of Finance and really excited to get into a whole bunch of different lines of conversation. Rob, we appreciate you taking the time.
And we'll start the same place we're starting with pretty much everybody during the conference. Just talk about where you may or may not have any exposures to some of the bank failures out there. I mean you guys actually were on top of this right away. You had a press release out about Silicon Valley Bank right when they failed, saying they were not a partner of yours.
But if you can just talk through some of the pieces. Obviously, there's been some other developments in Silicon Valley, so we can have an understanding there.
Robert O'Hare
Yeah. And thanks, Jason, and really appreciate you and the team having us here today. Yeah, in terms of our exposure, we were pretty proactive in terms of getting a press release out. I think the Friday after the SVB news broke, just sort of making it clear to investors and interested folks that we don't have any exposure to SVB, same is true with First Republic. I mean we tend to hold all of our cash at a very large money center bank, not one that seems to be in the fray in terms of the liquidity issues that are going on.
We do though we do have a wholesale funded business. And so we work with a variety of financing partners, and we also have originating banks that actually originate loans on behalf of the firm. And so, we don't think that there's any liquidity issues for our originating bank partners. We intentionally have more than one bank partner such that, that creates the ability to diversify and risk management approach that we've had in place for several years now.
And then on the funding side, we have committed warehouse facilities from large money center banks. Those have expirations that are laddered out across several years. And we don't see any risk today with any of those facilities either in terms of their there's sort of normal course operating nor do we see any risk of being able to renew those facilities down the road. But obviously, we try to cultivate strong relationships there and make sure that our partners understand the risk management approach that we take to underwriting our loans and making sure that we're putting good assets into those facilities to derisk renewals.
And then on the other sort of area that's probably relative to the conversation is just our forward flow or our wholesale loan sale program. We don't see any risk with any of the partners. I mean, we have two-year -- typically two-year committed relationships with those loan buying partners.
There are some banks that are in that ecosystem for us. But we have good relationships there, and the banks are not the majority of the funding partners. We also work with insurance companies asset managers and then large pension funds like CPPIB.
So right now, we feel good about the funding ecosystem at large and haven't had any sort of liquidity issues across the partner landscape.
Question-and-Answer Session
Q - Jason Kupferberg
Okay. So everything is kind of flowing properly, if you will?
Robert O'Hare
Yeah. I mean, again, it's obviously a volatile time, but yeah, we feel good about the roster of counterparties and partners that we have today.
Jason Kupferberg
Like you said, I mean, you guys have always pursued a strategy of diversification. It seems to be especially pronounced on the funding side, maybe on the loan side, the origination side, it's a little more concentrated? I mean do you rethink any of that just in terms of broadening out the partner set in origination?
Robert O'Hare
Yeah. We have a handful of conversations and really integration work underway with -- to continue to diversify on the originating bank side? And then just to be maybe a bit more specific about our originating partners because those names are all public in our filings.
But historically, Cross River Bank has been our originating partner and Cross River Bank is located in New Jersey. And as a result, they have APR cap. And so one of the big initiatives that we have underway at the company is moving to a 36% APR cap for our interest-bearing loans, and that meant bringing on a new bank partner because Cross River could not originate 36% loans.
And so, we diversified to a bank called Celtic Bank, which is based in Utah and isn't subject to the New Jersey rate cap. And so as we look out ahead, we're looking to bring on some additional partners that can support our 36% interest-bearing program. And so we'll have a diversity of partners we hope, by the end of this calendar year, certainly.
Jason Kupferberg
Okay. Okay. Okay. So it kind of worked out that you've got some of this added diversification coming in, you were working on that even before this regional banking crisis. So okay. That's good color.
I guess just on a related note, I mean you're seeing all this daily transactional activity over your platform. I mean, over the past couple of weeks since some of these bank failures started, like any noticeable like change in trajectory of spending, trend lines or anything like that?
Robert O'Hare
No. I mean we do look at daily volumes, of course. But I mean it's been too early to see a real trend line. I mean we've seen you would have seen this in the December results, but we've seen strength in travel and that continued. It's a seasonally strong period for travel for us and for the industry. So that's continued. But no, really nothing really to call out in terms of near-term changes post the SVB news.
Jason Kupferberg
Okay. Okay. That's good to hear. And it's worth -- very consistent with what we've heard from others. So the more companies that are telling us that, I guess, the more reassuring it seems to be, and hopefully, it stays that way.
All right. So let's move off of the crisis and into some other topics here. I think one of the sort of fascinating dynamics at a firm in the past couple of years, is that there's just been these massive shifts in your GMV mix. I mean, Peloton peaked, I think it was roughly a third of your volume. That was, I guess, kind of in the throes of COVID, maybe around the middle of 2020. It's down to like 2% of GMV now and then Amazon, you didn’t name have as a customer until the calendar fourth quarter of '21. I think you had half of that quarter. And now it's a 23% of your GMV. And so that's obviously driven a lot of mix shift in terms of zero percent APR versus interest-bearing.
So just talk about what some of the implications of these big swings have been for your financial profile because I think this is something that the investment community kind of didn't appreciate as it was happening. And it kind of caused some surprises along the way and some of the key financial metrics that folks monitor for you guys.
Robert O'Hare
Yeah. Yeah, that's right. And thanks for the question. Yeah, in terms of the mix from zero percent to interest-bearing, I think one thing that we haven't done a great job of articulating is actually that the fact that interest-bearing loans are our most profitable loan product. And so I'll talk through some of the timing dynamics that happened with an interest-bearing loan and there's also -- you didn't ask this in your question, but I think there's also a dynamic around how we're utilizing our balance sheet and the proportion of loans that we're carrying to maturity versus selling pretty soon after origination.
And so that's a big dynamic as well in terms of the economics. But full stop interest-bearing loans are our most profitable loan product. And so in terms of the profitability of the portfolio, it's actually a positive thing for us, right, to mix into interest-bearing and to mix out of zero percent.
Just to address the Peloton concentration. I mean they are a great partner of us. They've been a long-term partner of ours, and we hope that, that continues into the foreseeable future. When they were third of our volume, we obviously were over-indexing in terms of their share of e-commerce, right? And that probably -- there was concentration there. It was a committed long-term relationship, contractual relationship. But as you look at e-commerce at large, Peloton is not 1/3 of e-commerce. And so yes, they were definitely over-indexing for us. We're proud of what we're able to do to support that program, but probably a little too heavy on Peloton when they were at their peak.
I think the opposite is true actually for Amazon, right? I mean Amazon is roughly third of U.S. e-commerce. And so because we're driving for ubiquity across a variety of merchants. I mean it makes sense for Amazon to be a large percentage of our business because at the end of the day, we want to be everywhere that people are shopping, not only in e-commerce but also off-line as well. And so it makes sense for Amazon to be a large partner, and we're really proud of the work that we've done to scale that program. So yes.
And then in terms of like what that all means for the P&L, I think the differences really are all around timing of sort of revenue and expense recognition. When Peloton was as large as it was with a zero percent interest loan, the only way that a firm is making money is through the merchant side of the transaction. And so we were collecting a pretty healthy merchant discount rate or an MDR at the time of the transaction. We recognize all of that upfront and in the period that the GMV is originated.
And then the large majority of our Peloton volume was actually being sold to third-party loan buyers. And so there wasn't any -- when we sell a loan, we don't book a provision for consumer credit losses. And so there was no -- and that tends to be our largest expense on the transaction cost side for a given loan. And so we didn't have the expense. We were collecting a big merchant fee upfront or a healthy merchant fee upfront at least. And so you were really just sort of booking income almost immediately into the P&L.
With our interest-bearing program with Amazon, for example, but it's indicative of our other merchant relationships, too, the MDR may be will be significantly less than the MDR that you would see on a long-term zero percent APR program like Peloton, right? And so the amount of income that comes into the period of origination is significantly less. And the majority of the income that we make from an interest-bearing loan is if we're holding that loan to maturity, which we are due -- which we are doing a bit more in today's environment, the income is going to come over the lifetime of the loan, right? We're going to recognize the interest income ratably as the loan is paid off.
And so while, as I said, while interest-bearing is a very profitable program for us, it will just take longer for that income to come into the P&L and show up as revenue and transaction profit.
Jason Kupferberg
Okay. Right. And hopefully, at this point, there's been a little bit more normalization now, right? I mean, Peloton is not going to go back to being a third of your volume and Amazon will probably go up from here, but it's not like it's going to fluctuate dramatically. So that's helpful.
If we reflect on this past quarter financial results, I mean, I guess like IR overarching takeaway was there were some signs of, for lack of a better term, some trade-off between growth and risk at a firm. Credit metrics clearly remained impressive and under control, but the top line was below expectations. And so, maybe you can just touch on how a firm strategy has kind of evolved in this regard. Again, these trade-offs of growth and risk just as the U.S. economy has gone into a more volatile period with spikes in interest rates and inflation.
Robert O'Hare
Yeah. I mean I think the -- we are in a volatile environment, and that volatility has meant a lot of different things. We've seen pockets of stress with consumers towards the lower end of the credit spectrum, right? That's something that started to show up in our data roughly a year ago and something that we've been able to to manage through, through optimizing our approach to underwriting. That doesn't always mean saying no to a consumer. It may just mean that we put a different type of offer in front of them. It may mean that we ask them for a down payment at the point of sale rather than allowing them to finance the entirety of the purchase.
And so there's lots of things that we can do to sort of optimize and take risk and take other costs out of the stack for us. And then the volatility has also meant that it was a pretty unprecedented year for interest rates in '22. And so, that meant that the yields that are loan buyers -- our third-party loan buyers within our forward flow program, the yields that they were solving for were increasing throughout the calendar year. And so in order to make sure that they were making their returns, we also had to take, like I said, other costs out of the system.
And so tightening credit, making sure that we were optimizing credit as tightly as we could that really was sort of job one for us because being able to fund the business at scale, being able to sort of continue to grow programs like Shopify and Amazon in the ways that we have. I mean that that's really where we're focused. And we have to -- our loan buyers have to know that we're going to do the right things to protect their yields.
So yeah, all of that resulted in slightly less GMV growth than we had guided to. I think we missed the low end by 1% and the high end by 3%. So we're hopefully building a generational business here and blips like that won't matter in the long run. But yeah, when forced with the decision point, we're going to do what we can to protect the unit level economics in our loans, and that should give us a durable way to fund the business throughout the cycle and at scale.
Jason Kupferberg
I think you guys have been very consistent with that messaging. And I know that Max and Michael and yourself have said for a while that you can control the credit outcomes, right? And I think recent results, we kind of bear that out. So maybe you can just talk a bit about what really differentiates your credit models versus not just other NPL providers from more traditional credit card issuers and then talk about how loan approval rates have trended as we've going through this more volatile part of the economic cycle.
Robert O'Hare
Yeah. I mean, so I think it's important just to set the backdrop that firm really started in what we call the higher average order value or AOV. So that the higher AOV end of the spectrum, more of the sort of multi-thousand dollar Peloton type loans than the pain for side of the world that is probably clustered under $250. And I think by starting with higher ticket items, typically, those goods get financed over longer terms. And so there's obviously risk the longer that you're extending credit.
And so because I think we started in what I would consider the hardest part of consumer unsecured lending within buy now, pay later at least, I think risk management and underwriting has always been integral to sort of the company's DNA. I mean, in fact, one of the original ideas for a firm was actually just to build a credit score that they would then sell to other lenders, right?
So it really, I think, speaks to sort of the DNA of the company and it's a huge point of emphasis for us internally, and we pay a lot of attention to it. We care a lot about it, and we think it's one of the ways that we build a moat to make sure that we have durable funding, right, because we think that we can do a really good job of sorting risk and driving visibility and predictability into our results.
And so I think that sort of culture of risk management is hard to overstate. And then from there, I think relative to like a credit card provider, as you mentioned, I think we have a structural advantage in that we're underwriting every single transaction every single time, right? These aren't -- we're not issuing a multiyear line of credit to a consumer and then hoping that, that consumer maintains their job and can pay us back at any point in time over the next three to five years.
We're sort of -- we're looking at a transaction. Our average loan is roughly a year long, but it pays back really quickly. So the weighted average life is closer to five months. And so we just don't have capital at risk for as long as a credit card line of credit would be outstanding. And we're reunderwriting the consumer every single time.
So we get lots of attachs and as things change with consumers, we're able to sort of course correct and make sure that we're issuing the right amount to the consumer at the right time. So those -- I think those points are really, really important.
And then the other point that's important is that an increasing percentage of our transactions are coming from consumers that we've already worked with, right? And so the amount of sort of risk and the amount of credit losses that are in a consumer's second, third, fourth loan, it falls off really quickly. And so that naturally helps take risk out of the system for us, too, just by partnering with consumers that we already know.
We're still doing the underwriting, right? It's sort of a trust but verify approach. But just working with consumers that we've already touched one, two, three times in the past, that's a structural advantage too. And that one, there's a bit of a flywheel there as we broaden our distribution across an increasing proportion of e-commerce.
Jason Kupferberg
And just any directional commentary on the trend in loan approval rates, let's say, over the last few quarters?
Robert O'Hare
Yeah, I think we get that question a lot. I mean I think the approval, as I referred to earlier, a little less binary than I think folks think. Again, it may be that we can't finance the entire $1,000 purchase for a consumer, but maybe we can finance $800. And so it's really not necessarily just around saying yes or no or is this a good credit or bad credit. It's about -- are we being compensated properly for the risk.
And at the end of the day, we're selling conversion to our merchants. And so we want to find ways to say yes. And I think part of the elegance in the affirmed model is that -- we have a range of interest rates we can put from the consumer. And so if we need to increase rates, being able to go to a 36% cap, can help us say, yes, more, it can help us underwrite more deeply than we would have been able to do six months ago and increasing down payments, things like that can help us say yes as well.
So approval rates have actually been on a program-by-program basis, actually pretty constant despite the fact that we have tightened, and we have found ways to take some of the risk out of the ecosystem.
Jason Kupferberg
Okay. And I also wanted to come back to -- you alluded earlier to some of the initiatives around moving from 30% APR to 36%. And I think as part of that, maybe you guys have talked about adjusting some of the terms -- the duration of those loans, so just wondering like if there is -- how is that going so far, I guess, how is that being received in the market? Is it having any appreciable impact on demand or have these strategies essentially passed through to the consumer with kind of minimal friction at this point?
Robert O'Hare
Yeah. I mean firm has a couple of different product offerings, as you know. And so one of the product offerings is a product called Affirm Anywhere, which is really our direct-to-consumer lending. And typically, those loans are issued to consumers that have already worked with a firm once or twice.
And so we were able to test the elasticity of increasing APRs over the course of last summer. And what we saw was that really, it didn't have any impact on what we call take up, right? The consumers were just as likely to accept a 36% APR loan as they were a 30% APR loan. I mean if you sort of run the math on our average order value is about $300 and you look at a 12-month loan.
I think you're talking about like $0.75 a month in terms of increased payment as you go from 30 to 36. So while it is -- there is some additional cost there. It's not enough to see a headwind on the take-up side. So we feel good that the product can work at 36% work for us and work for consumers and for merchants. We said, I think in the most recent shareholder letter, that we were at about 23% of our interest-bearing program, had a 36% rate cap.
Obviously, there's some large merchants in our ecosystem that are running primarily interest-bearing programs. And so, discussions with that group has continued into this quarter. Nothing to announce here, but we feel like those conversations have been really, really constructive. I think in some cases, you may be able to go to some of our marquee merchant sites and see a 36% offer today.
So that's a positive. And again, we don't think this is going to impact take up or the trajectory of growth. What we think it will do is just it will put more economics into the loans, and that will allow us to sort of keep some for ourselves or underwrite more deeply or make sure that we're sort of keeping healthy relationships with our loan buyers as well. So I think all good things from our perspective.
Jason Kupferberg
Okay. So it sounds like there's a path to that 23% probably just go up naturally as you roll it out to a broader swath of consumers and merchants.
Robert O'Hare
Yeah. I mean we gave it a lot of airtime in the Q2 node, and it's been a big point of focus for us. There were some there's just some sort of normal operational friction to get that rolled out in mass, but we're definitely heads down on the project and have a good trajectory there.
Jason Kupferberg
What about the parallel effort to kind of get MDRs higher at certain merchants? Maybe you can tell us a little bit about how far along you are in that process? And which types of merchants are those initiatives mostly concentrated with?
Robert O'Hare
Yeah. I mean if you look at -- we have a slide deck in our earnings supplement that sort of shows the merchant rates by loan product. And what you'll see, and I think it makes intuitive sense is that APRs tend to have the highest merchant fees because that's the only way that a firm is making money in that transaction.
And the longer you go out from a time perspective, right, there's increased fees for those loans as well. And so I mean, one of the bigger things that we've been doing actually is moving some of our entirely zero percent programs to be what we call fixed APR programs. And so an example would be maybe a year or two ago, we had all zero percent offerings to the consumer at a given merchant it may make sense in this environment to have a consumer interest rate that's 4.99 or 6.99.
And so still very much a subsidized rate from the merchant but not subsidized all the way down to zero because in this rate environment, that's increasingly expensive for us and for our merchants as well. So we've had good success there, and it's a way for us to get more economics into the loans, right? We're being compensated by the merchant and being compensated by the consumer as well. And in some cases, that may mean a small MDR reduction for the merchant. In some cases, it may mean that stay flat and we get the consumer interest on top.
We have had instances where the merchant discount rate just sort of didn't work and the merchant didn't want to go to a fixed APR. And so we were able to pass on price increases. I can think of a couple of examples of that situation as well. So it really comes down to what the merchant is solving for. Some merchants will want to test a fixed APR before they roll it out in mass some sort of don't want to do the test.
And so it's really -- I think because we have a lot of flexibility within our platform, it's something that we've been sort of taking on a case-by-case basis with merchants.
Jason Kupferberg
Okay. Right. So really just trying to expect that balance between kind of merchant revenue, consumer revenue at the individual merchant level and what makes sense for a firm, what makes sense for the individual merchant. Okay. That makes sense.
The engagement metrics at a firm have really been quite strong. And I wanted to just hear some of the ways that you guys are really driving engagement, repeat usage with customers and to what extent just strategically, are you prioritizing those engagement efforts over efforts to add new users onto the platform?
Robert O'Hare
Yeah. I mean it's something that we're really proud of. I mean, I think when you look at how our customer base has grown from a consumer perspective, we nearly doubled in calendar '22, right? And at the same time, we drove increasing engagement as measured by transactions per user per year.
And so I think one of the things that we do is that we do have really, really strong coverage across e-commerce. And so once a consumer sees us and uses us once that ability for them to use us again in places that they know and love from a merchant perspective. I think that's really, really powerful. And that -- that's been incredibly important to driving frequency, being present across Shopify being present across Amazon and Walmart. I mean those are incredibly important -- it's an incredibly important real estate for us, and that drives a lot of the frequency.
But we also have direct-to-consumer products like Affirm Anywhere, which I mentioned previously, that allow consumers to start their shopping journey with a firm. They can get a virtual card offering that they can use anywhere that Visa is accepted. And really, I think we've done a really good job of getting distribution across the point of sale but Affirm Anywhere makes that distribution basically 100% in terms of e-commerce coverage.
So really important there. And I think, ultimately, what we're building and what we're looking to do is to complement all of that with Debit+. I mean Debit+ will be the next iteration of Affirm Anywhere, really, when you think about it, the idea that you can have a physical piece of plastic that works not only online but also at brick-and-mortar and gives you the flexibility to sort of finance purchases where some cash flow smoothing makes sense for the consumer.
And then the other thing, obviously, we Debit+ is that it should bring us into everyday spend, both online and in brick and mortar, right? I mean, being able to sort of have -- to participate in sort of the traditional debit purchases, right, the dry cleaning the cups of coffee that should increase frequency and engagement with the base as well.
Jason Kupferberg
Yeah. So why don't we jump over to Debit+. I know it's been talked about for a while now, and you guys have been in sort of this test and learn phase. I guess I would call it. So we'd love to hear a bit about what you have learned. When do you think we go to more of a full-scale launch and more of a volume ramp up there? And maybe just for those who are less familiar, just go a little bit more into the mechanics of the product and what kind of user experience is going to be.
Robert O'Hare
Yeah. Maybe I'll just start there and give a quick primer. I mean Debit+, really, for us, we think it's sort of three payment modalities in one. And so Debit+ it's a physical card. It's a physical piece of plastic and that card is then linked to a consumer's bank account. It doesn't -- it would -- today, it won't be in Affirm bank account because we're not a bank. So you can link into any sort of bank in the U.S. And it's a layer -- it's a payment layer that sits on top of your existing bank account. You can use it for, like I said earlier, everyday spend, right?
So the example there would be if you buy a cup of coffee with your Debit+ card, Affirm will pull the $4 or $5 for the cup of coffee from your bank account 48 hours later. So we're taking a little bit of float on the transaction, and then we're collecting the interchange from the swipe. And so, we think that that modality, it won't be the highest margin our highest revenue take rate in our stack, but we can make that a profitable transaction. And again, that's unlocking a portion of consumer spend that we're not touching today.
And then for larger ticket items for items that you don't want to pay off immediately, it's got some credit extension features. And so the lending side of Debit+ will really come in two forms. One will be a pay and for option. And so that's a six or an eight-week loan to the consumer, 0 interest there. That works like our Pay in 4 business does at the point of sale. We -- you go into the -- you make a transaction, you go into the app, the complementary app to the Debit+. You sort of hit the toggle.
Yeah, I want to finance this. Yeah, I'd like to Pay in four option and then we'll collect funds from you via ACH in normal course like we would in three or four payments at a two-week interval until the loans paid off.
And then the other option is for probably for higher ticket items, the sort of traditional interest-bearing lending approach. And so like I said earlier, that's our most profitable loan product. We feel good about sort of the economics on that side of the house. And that really will be the biggest driver of margin for us within Debit+ and it gives sort of consumers of the loan options that they've come to know with Affirm, but with a physical card to complement.
Jason Kupferberg
Okay. Okay. And you guys foresee a meaningful ramp in your fiscal '24 there or--
Robert O'Hare
Yeah. So I think in terms of the rollout, the rollout frankly, has taken longer than we expected. I think sort of the change in the macro environment has forced us to make sure that we're fully ready to go and have a well-optimized product before we sort of open up the spigot, so to speak. And so we've taken probably an extra quarter or two to optimize the economics. And we feel really good about how each of the three modalities are working from an economic perspective and also just from a consumer understanding and engagement perspective.
And so nothing to commit to in terms of rollout today, but I would say we feel really good about the economic profile that we're seeing from the pilot that's currently running, and that gives us confidence that the offering ultimately will be successful.
Jason Kupferberg
Okay. Understood. I wanted to touch on the competitive environment a bit. I mean we've felt like for a while that Affirm has been a real share taker. And obviously, winning customers like Amazon helps that even further. But we'd just like to get your perspective how the competitive landscape in buy now pay later has evolved over the past two-plus years since you guys went public and what you're seeing from other providers in terms of how they've navigated some of the moving parts in the macro backdrop?
Robert O'Hare
Yeah. I mean I think it's important to remember that a firm does a lot of things, right? I mean we can go from a six-week loan as low as $50, all the way to a 60-month loan as high as $25,000, right? And so that aperture, I think, is really unique within the competitive set that we play in. And most of the competition that we see is either principally or in some cases, exclusively focused on really this pan for model that is splitting a payment into four chunks. Typically, it's a six or eight-week loan. And really, the utility for the consumer starts to sort of tap out around $300 to $500 is what we see.
And so there's a huge space that we play in that allows us to really differentiate ourselves. And when we're talking to merchants that are selling a variety of goods, the Walmarts and the Amazons of the world, being able to have a single financing provider that can finance a range of transactions for their consumer base. I think that's it's hard to overstate how important that is on the merchant side.
And so yeah, I think we've seen -- it's always been a competitive space within Pay in four. I think we've seen some of the froth come out of the competitive set. I mean some of the deals that we're getting done in late 2020, calendar '21, those deals just aren't happening anymore in terms of the merchant incentives, in terms of where the merchant discount rates were being bid down to. I think we've said this in the past have been on record.
But like one of the reasons that we chose to really build our Pay in four program with Shopify is that Shopify was an aggregation of smaller merchants and that allowed us to have a bit more pricing power with that product than I think what our competitors chose to do, which was aggregating scale in enterprise.
And just the enterprise portion of paying for has always been sort of hand-to-hand combat and really, really stand, if not negative, economics, I think, for the providers that have chosen to play there. So I think with the cost of capital going up for everyone, we have seen our competitors tighten their underwriting. I think because the underwriting maybe isn't as fine grained in their platforms as we think it is in ours. It seems like approval rates have fallen off pretty precipitously for some of our competitors.
And we're seeing an increase in the amount of inbounds that we're getting from merchants looking to bring on a second BNPL provider because they've lost some volume as underwriting has tightened with their incumbent provider and they know that Affirm's network is complementary to sort of what they've already been doing.
And so I think it's an opportunity for us. And like I said, I mean, underwriting is is so core to what we do that we think that so far, we've done a really good job of managing in this environment.
Jason Kupferberg
Where do you guys see BNPL's penetration of total U.S. e-com right now? I mean I think we've seen numbers maybe around mid-single digits. I don't know if that's consistent with your view or anything you've articulated about where you think that mid-single-digit number goes in the next, I don't know, three, five, 10 years, whatever it may be?
Robert O'Hare
Yeah. I mean we've looked at sort of the Australian market, or some of the markets where BNPL has been in market longer. And I think so far, the U.S. adoption curve has actually tracked. I mean, when you adjust for sort of years or tenure of the market. It's tracked actually pretty well with those more mature markets.
And so, obviously, we're bullish on the space. We think that double-digit penetration of e-commerce is very achievable. And I think for Australia, it's approaching a quarter of e-commerce, if not 20%. So we think that there's definitely a ton of headroom still in the U.S. market and doing things like not charging late fees, putting fair and honest in clear terms in front of consumers. We think that gives us the right to continue to sort of build a long-term relationship with consumers. And I think consumers are voting with their feet still.
Jason Kupferberg
Yeah. Okay. I appreciate that perspective. I wanted to touch on Amazon a little bit, just get an update in terms of adding a zero percent APR product there. I know you talked a little bit about that. Maybe discuss how the relationship could evolve further over time. I know that the exclusivity component did expire at the end of January, but the overall contract runs through January of 2025. So you still got some time here, I guess, to drive some avenues of expansion. So I would appreciate any color there.
Robert O'Hare
Yeah, I mean I think we're really proud of where the partnership is today. I mean, you cited that it's approaching a quarter of our GMV from basically a standing start, what, 14-15 months ago. So a lot of work has gone in to make sure that the program is optimized and able to scale to support just the massive volume within Amazon, right? I mean our CFO, Michael refers to Amazon as a country, right, not as just a merchant. So really proud of all the infrastructure that we've built, and we've proven that our underwriting model can scale and scale with the largest of e-commerce partners.
The relationship, as I said, is really, really healthy. The exclusivity did lapse in, I believe, February 1 of this year. That said, there's a myriad of financing options within Amazon. And so we think that we're -- we have been competing for volume from day one even when we did have exclusivity. And so we've got our head down and we're trying to make sure that we maximize the opportunity and do it in a way that we show up as really good partners for Amazon.
So the exclusivity internally was a bit of a nonevent, the lapse and nothing changed on February 2 from our perspective.
I think in terms of the zero percent uptake, I was actually pleasantly surprised with the amount of zero percent volume that we did across Amazon in calendar '22. I was maybe a bit bearish on the uptake and how much Amazon would lean in because Amazon does have to pay an MDR for zero percent loans. And so we did see a lot of interest on their side in terms of doing pilots in different verticals, pilots in different average order values, pilots around promotional period seasonally.
And so I'm not sure that it's ever going to be 100% on Evergreen part of the program. But I think that they've done enough work to start to build a case internally to have it as a tool that's it's used at their disposal to drive incrementality. And if you're able to drive incrementality, even for Amazon, I think that's really saying something.
So again, I think so far so good on the zero percent uptake. We never thought it was going to be a huge part of the program on day one. But I think we've done the work, and we've laid the foundation to make that a structural part of the program long term.
Jason Kupferberg
Okay. So is that still kind of -- would you consider that sort of be kind of a pilot phase? Or how would you characterize it?
Robert O'Hare
Again, I think we have lots of different types of zero percent right? I mean we can go out for really long terms you're paying for. Both of those are APR. And I think what we've learned about the way that Amazon works is we need to build the case with the payments team and then the payments team needs to work with sort of various category managers to make sure that the product works in the various industry verticals across Amazon, too.
So it's definitely a test in a tote culture. And I would say that we're still in sort of testing mode for zero percent
Jason Kupferberg
Yeah. Okay. And I did want to also just touch on OpEx. You guys have been acting pretty decisively in that regard and becoming even more prudent with spending. And I wanted to just get a perspective on how you balance that with some of the ongoing need to invest in an adequate amount of marketing R&D because you do have that commitment to the investment community to be a sustained positive adjusted operating income as we exit June of this year.
Robert O'Hare
Yeah. Again, I think we're -- we did take the decision to reduce the size of our team. And that was a really, really difficult decision and it meant saying goodbye to some really great people, unfortunately. But I think what we've seen and what others, frankly, across the world have seen is that the growth that we were underwriting to when we set the operating plan for this year, I mean, it hasn't shown up in the same ways. And with the rising rate environment, right, we have seen things like our gain on sale yields compress as well, right? And so it's put -- it's not just the shortfall in volume, but it's also some headwinds on the yield side for us. And those two things just meant that we needed to have a smaller team, unfortunately.
And so I don't think while there were some sort of smaller ancillary projects that we've decided to sort of off ball for the time being, nothing that is sort of core to our growth this year or even really our growth next year. I mean, nothing was put on ICE that would have been a significant driver for us from that perspective.
So we feel good about our ability to execute. We feel good about our ability to launch new products and launch important ones. And so I don't think that we needed to sort of cut into bone to sort of get the P&L where it needed to be from a cost perspective.
Jason Kupferberg
Okay. Last but not least, regulation, we can hit it quickly. It's been six months since that CFPB report came out, which actually thought was pretty balanced. They didn't come out and say, hey, we need to definitively regulate the space or it's nothing but bad for consumers. It was actually fairly balanced. I guess where do you guys stand now? I mean do you feel a little bit more comfortable now that we're six months out, and there's really been no kind of direct or explicit follow-up in terms of planned regulatory actions?
Robert O'Hare
I don't know if I'd use the word comfortable, right? I mean we -- I think generally, we think that regulation is positive for the industry. And we are -- I think we still stand alone in not charging late fees and late fees seems to be a particular hot button for the CFPB, at least on the credit card side of the world. And so we think that we're doing the right things, whether someone's watching or not, right?
And so at the end of the day, that's all that we can control. We take our relationship with the consumer really, really seriously. We want to create honest financial products. And for us, that means no late fees for us. That means truth in lending disclosures. We've also been, I think, at the forefront of furnishing information back to the credit bureaus, so that the consumer, whether it's a positive outcome or a negative outcome that the consumer's record reflects their engagement with the firm. And I think we're sort of the only provider doing that as well.
So I think those were some of the things that sort of came out of the CFPB report and have come out subsequently is really around late fees and furnishing back to the bureaus. And I think we're leading the charge on both of those fronts. And I mean we built this company to be very transparent and very, very honest with consumers. And hopefully, that shows well with the regulators.
Jason Kupferberg
All right. Well, we've got to leave it there. Rob, thank you much for your time. Thanks to everyone who participated in the session here. And our next session will be at 12:30. We'll have an account-to-account and faster payments panel. So appreciate it. Have a great day, everybody. Thank you.
Robert O'Hare
Thank you.
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Affirm Holdings, Inc. (AFRM) Presents at Bank of America's Electronic Payments Symposium (Transcript)