The upstarts are muscling into consumer finance even as traditional players pull back, citing the specter of rising defaults. Affirm and Afterpay typically approve more than 80 percent of applicants, compared with about 50 percent for store credit. Discover, one of the biggest players in consumer finance, has zeroed in on offers from online lenders and warned that they lack the experience to manage through a downturn.
Afterpay and Affirm brush off such concerns, arguing that their technology analyzes hundreds of variables, even how fast a person is typing, to determine credit-worthiness.
“Their artificial intelligence and machine-learning algorithms is the secret sauce, allowing them to approve instantly a wider spectrum of borrowers not traditionally pursued by the legacy credit-card issuers,” says Richard Crone, who runs payments researcher Crone Consulting LLC.
The nascent industry is tiny and its proponents say there is plenty of room to grow in the U.S., where more than half of American consumers have lousy credit and need alternative ways to finance their purchases. Still hurdles are emerging. Despite building a $1.8 billion business, Levchin acknowledges that most shoppers have no idea they’re using his company when they choose how to pay at checkout.
“We’ve built this enormous audience,” he says. “But a lot of them still don’t really know that much about us.” To become better known, Affirm in November said it was redesigning its logo and will start listing all the retailers it works with on its website. The company will also step up a focus on travel, letting consumers pay for vacations over time.
Afterpay has come under fire in Australia for late fees ($8 if a borrower misses their second installment, for example) that made up about a fifth of its revenue in first half of the year. Critics say the practice could hurt consumers’ credit ratings, and the Australian Senate launched an inquiry into buy-now-pay-later businesses. The nation’s securities regulator, meanwhile, has asked lawmakers to tighten lending standards.
So far no such issues have emerged in the U.S., but consumer watchdogs are already paying attention. “These services were created to facilitate impulse shopping that, for many, jeopardize their ability to afford necessary expenditures and to build needed savings,” says Steve Brobeck, senior fellow at Consumer Federation of America.
Millennials, be forewarned.
This article was provided by Bloomberg News.