Late-night Online Shopping: Risky Business?
Are you a night owl who enjoys making online purchases in the early hours of the morning? If so, you might want to think twice about your shopping habits. According to Michael Linford, Chief Financial Officer of Affirm, shopping online after midnight can lead to riskier financial transactions and an increased likelihood of loan default.
At Affirm, the hour at which a consumer attempts a transaction is used as a key data point to determine whether to approve loans. Factors such as repayment history with Affirm and transaction data from credit bureau Experian are also taken into account. It’s clear that there is a spike in credit delinquencies around 2 a.m., indicating that late-night financial decisions are indeed riskier.
But what are the reasons behind these risky decisions? According to Linford, shoppers making late-night purchases may be under the influence, facing financial or emotional duress, or desperately seeking credit. It’s a behavior pattern that retailers, financial institutions, and lenders are starting to take note of.
Affirm, led by PayPal co-founder Max Levchin, is part of a new wave of fintech lenders that are challenging traditional credit card offerings. Their approach involves providing real-time approvals, embedded services in online checkout pages, and using data to assess repayment risk at the transaction level.
Unlike credit cards, buy now, pay later loans require a different approach to underwriting. Instead of focusing on long-term employment prospects, lenders like Affirm need to assess whether a customer can repay a specific purchase at that moment. This approach minimizes the risk of customers piling up debts and defaulting on loans.
While the buy now, pay later industry has seen significant growth, critics argue that it can lead to overspending. But according to Linford, Affirm manages repayment risk by either denying transactions or offering shorter-term loans that require down payments.
The company reported that 30-day delinquencies on monthly loans held steady at 2.4% during the last three months of 2023, despite a surge in total purchase volumes. Affirm has little incentive to allow users to pile up debts, as they do not charge late fees or compound interest.
In contrast, credit card delinquencies at major U.S. banks have been climbing, reflecting an increase in loan balances and persistent inflation. While the job environment may be stable, traditional credit card issuers have faced challenges in underwriting, leading to an increase in delinquencies.
The bottom line? Late-night online shopping can indeed be risky, and it’s important to consider the implications of your financial decisions, especially during the early hours of the morning. As the fintech industry continues to evolve, it’s clear that a more nuanced approach to underwriting and assessing repayment risk is needed, not only to protect consumers but also to ensure the financial stability of lenders and financial institutions. So next time you’re tempted to make a late-night purchase, it might be worth taking a moment to reconsider before clicking that “buy” button.
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