Point-of-sale lender Affirm is gradually expanding its credit to focus on repeat customers and certain merchant categories, after initially reeling in its loan appetite at the beginning of the coronavirus pandemic, Chief Strategy and Risk Officer Sandeep Bhandari said during the LendIt Fintech USA 2020 conference today.

Affirm took “very quick, decisive action” in March when the possibility of surging defaults was high, Bhandari said. In its tailored approach, the buy-now, pay-later lender responded by reducing approval rates, requiring higher down payments, asking for additional customer information and experimenting with price increases for merchants, which he noted was a successful tactic. After the initial shock of the pandemic, repayment performance was surprisingly strong, Bhandari said, adding shorter loan terms likely contributed to the resilient repayment performance.

Affirm works with more than 6,000 merchants in the U.S., has provided more than 5.6 million consumers alternative credit across North America, and this month the company raised $500 million in a Series G funding round.

As Affirm’s loans continue to roll off its book — less than 25% of Affirm’s current loans were originated pre-COVID — the lender plans to cautiously expand credit further, looking at shorter term durations and down payments as levers, Bhandari said. Repeat customers and certain merchant categories will play a role in how that credit is expanded, but he noted that with the levers in place, Affirm is already seeing “good application demand and good loan performance, both on the repayment side as well as the types of applications we see.”

Affirm-specific changes aside, Bhandari said the lender is seeing a shift in its applicant profile, with average Fico scores and other measurements of credit improving, and higher incomes on average. “As a result, we feel there is in fact a broader product fit for e-commerce-based, point-of-sale lending across the entire consumer segment than what we used to see pre-COVID,” he said.

But random macroeconomic and COVID-spurred factors will make it challenging for Affirm and other lenders to properly calculate underwriting risk and portfolio forecasting.

“Evolving customer spending, evolving payment behavior, government response, business operations changing based on shutdowns will continue to affect data, and hence the predictive power of models,” said Swati Bhatia, who, up until a few weeks ago, was Chief Payments Risk Officer at Stripe. “That’s the crux of it, everything will keep changing in how we look at data and prediction in matters of days and weeks, not even months.”

Until payment reporting normalizes and consumers who have been truly impacted by the pandemic roll off forbearance, it will be difficult to be proactive in tweaking or rebuilding predictive models, said Liz Pagel, senior vice president and consumer lending business leader at TransUnion.

“We expect — and this is kind of preliminary — 20% to 35% degradation in the models while they still rank-order risk,” Pagel said. “We’ve tried to figure out exactly where that’s coming from,” she said, noting that it doesn’t seem to be from the miscalibration of models, but “the randomness induced by these external factors.

“If you think about COVID-19, it doesn’t discriminate subprime versus prime versus super-prime. Someone could be impacted by illness, someone could be impacted by job loss — I mean, dentists have lost their jobs — these are factors that can’t be predicted by some of the traditional data we use today,” Pagel said. TransUnion has been exploring different ways to incorporate income and employment data into these forecasting models, and the pandemic will accelerate the race to figure out how to use cashflow data in underwriting, she said.

Despite the encouraging loan performance at Affirm, the “trifecta of the stimulus going away, lenders doing fewer deferments and consumer expenses increasing as they venture out of the home more,” is top of mind for Bhandari. “That’s going to have a definite impact on their cashflows and a consequent impact on repayments and that’s something we’re all worried about,” he said.

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