Earnings Call Transcript - AFRM Q1 2024

Operator, Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Affirm Holdings Financial Year 2024 First Quarter Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speakers’ remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded, and a replay of the call will be available on Affirm’s Investor Relations website for a reasonable period of time after the call. I’d now like to turn the call over to Zane Keller, Director, Investor Relations. Thank you. You may begin.

Zane Keller, Director, Investor Relations

Thank you, operator. Before we begin, I’d like to remind everyone listening that today’s call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website. Actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of today, and the Company does not assume any obligation or intent to update them, except as required by law. In addition, today’s call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. For historical non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website. Hosting today’s call with me are Max Levchin, Affirm’s founder and Chief Executive Officer; and Michael Linford, Affirm’s Chief Financial Officer. Before we begin today’s call, we would like to remind investors that we will be holding an investor forum next Tuesday, November 14th, from 2 to 5 pm Eastern Time. Both the livecast of the forum as well as a replay are open to the public. Additional details about the forum, including registration information, are available on our Investor Relations website. In line with our practice in prior quarters, we will begin with brief opening remarks from Max before proceeding immediately into questions and answers. On that note, I will turn the call over to Max to begin.

Max Levchin, CEO

Thank you, Zane. Thanks, everybody, for joining us today. I'll keep it very brief. We had a very strong fiscal Q1, exceeded our outlook across all metrics. GMV growth accelerated sequentially. We significantly exceeded our own outlook for revenue less transaction costs. We continued to gain market share, kept our already strong economics quite good, drove positive credit outcomes, which matter most to us, and added some funding capacity. Our plans now include continuing to invest in risk management, technology, and product development, and to turn our attention to growing Affirm faster. Back to you, Zane.

Zane Keller, Director, Investor Relations

Thank you, Max. With that, we will now take your questions. Operator, please open the line for our first question.

Operator, Operator

Our first question is from Bryan Keane of Deutsche Bank. Please go ahead.

Bryan Keane, Analyst

Good afternoon and congratulations on the solid results. As we approach the second quarter, considering the strong performance in the first quarter, particularly in GMV and volume, what contributed to this outperformance? Additionally, it seems that the growth rate may slow down a bit after the acceleration this quarter. Could you provide some insight on that? Thank you.

Max Levchin, CEO

I think I’ll take the why the growth. I think we’ve just been executing really well. As you saw just the overall operating leverage, we are firing on all cylinders of the Company, which feels very good. We’re able to deliver a couple of really key initiatives on the product side. Our team in Ottawa, in particular, had several really strong ideas that played out very well for us there. And so Shopify volume accelerated again, which speaks to maybe the way we operate the business. It sometimes seems like you sign a great partner and that's the burst of volume. But in reality, it takes us years to fully realize the opportunity for us when partnerships are this rich and with this much potential. So that’s one example. Card grew quite well as well, so we’re happy with those results. There’s not one thing that I can point to and say that this is the core reason for the GMV growth. But the other thing is that the demand for the product remains strong. We are still declining quite a number of applicants because we’re trying to remain thoughtful and productive in our credit outcomes, but the consumer demand for what we have to offer is continuing to drive it forward.

Michael Linford, CFO

The only thing I’d comment on for Q2 is it’s our largest quarter of the year. And so, we just have a lot more math in the comparable period. We do expect that some of our programs, our largest enterprise partner programs are continuing to mature in a way that we just expect a little bit less growth this year than we had in the last quarter.

Bryan Keane, Analyst

And then just as a quick follow-up, Michael, maybe you can talk a little bit about the adjusted operating profit that came in quite a bit ahead of expectations. Is that some timing of expense items that even out throughout the year, or anything to call out there for the margin in the first quarter versus for the quarters for the rest of the year?

Michael Linford, CFO

Yes. The adjusted operating income did come in well ahead of where we thought it was going to be for the quarter. I think it shows the power of us and our technology orientation. When we are able to control expenses and drive a little bit of extra growth, the growth and profitability is very, very strong. To put it in context, we have 28% GMV growth or 37% revenue growth, and our non-transaction operating expenses reduced on an absolute basis by $50 million year-on-year. When that happens, obviously, you can print pretty strong results. Due to our outperformance, we did raise the outlook for the full year. We’re now expecting closer to 5%. We’re driving leverage across all three lines: G&A, sales and marketing, and tech data and analytics. Those lines are all very leverageable in our business. We’ve been saying this for quite some time, and yet that’s also the area we invest in, primarily in human capital. We want to maintain the ability to invest in the back half of the year, which is why we wouldn’t expect to run at this level. There really wasn’t any sort of timing benefit. We expect sales and marketing to creep up a little bit in Q2 as we invest into the holiday season. But other than that, we feel like Q1 was very close to run rate before we again maintain some investments in the back half of the year.

Operator, Operator

The next question is from Michael Ng of Goldman Sachs. Please go ahead.

Michael Ng, Analyst

I just have two. First, as a follow-up to the first question around Shop Pay Installments GMV growth acceleration. I was just wondering if you could talk a little bit about what functionally changes or ramps up over time that allows you to drive this acceleration in GMV over two years since the initial partnership? And what can that tell us about how you approach some of these enterprise partnerships? And then, I have a quick follow-up.

Max Levchin, CEO

I tend to give long answers, so I’ll keep this brief. The short answer is optimization. Both companies focus heavily on numbers. We invest a significant amount of energy in testing and refining how we present our products to consumers, aiming to simplify everything and fine-tune our explanations, for instance, about interest payments. We ensure that consumers understand that there are no interest charges on specific products. Even a small increase of 1% or 2% in conversion rates with a large volume can lead to millions in additional GMV. It's not always about discovering something new; most of the time, it's about optimizing the current consumer experience and presenting offers more clearly so consumers realize their budget capabilities. This continuous effort has cumulative benefits. Essentially, our success lies in the consistent work we do, not in any hidden secrets.

Michael Ng, Analyst

And then maybe just a quick one on Affirm Card, $224 million of GMV, accelerating from the $130 million last quarter. Could you just talk a little bit about how you’re approaching driving growth there? The user growth seemed like it was steady at that $75,000 per month? And anything you could tell us around the mix of Affirm Card GMV and how that may have changed relative to last quarter? Thanks.

Max Levchin, CEO

So I don’t want to steal too much of Libor’s show next week, to quote my favorite movie, I’d love for all of you to come and give me notes when we do the investor forum a week from now. But the shorthand is, the mix remained largely in line with what we said last quarter. It’s still more split pay or split transactions versus paid in full. We’ll talk a lot about things like cohort retention and usage over time and a little bit about lifetime value next week. The growth is quite strong. It is managed to the number that we want. We have internal goals that we are driving card numbers to. We won’t run out of opportunities there for some time. We also want to make sure that we don’t paint ourselves into a corner. The product is a new idea. This is not something that existed before. We have lots of intellectual property protection around some of the stuff that we invented both what meets the eye and what’s under the hood. Every time you launch a new product, even if it has exceptional uptake, which we think this one does, you are educating a consumer. You have to look for long-term effects. A lot of feedback that comes to me directly from the card now comes in a very steady stream. A lot of it is about sort of getting in touch with our PMs and saying there’s this wrinkle on the card that people still don’t fully understand, how do we fix this? In service of that, let’s get 3% more conversion, let’s get 5% more conversion. The card is so new that every time we find some major comprehension unlock, we find ourselves with another 10% gain. We’ll continue growing users quite deliberately, focused on unblocking all the quirks of these interfaces, doing the educating that we have to do before we start sending a card to everybody as they sign up. Overall, I expect we’ll get to a place where we say: hey, welcome to Affirm, the card will be in the mail. That’s not going to happen anytime in the immediate or foreseeable future. The long-term point of the card is, it is the best way of experiencing Affirm, and we will build all of our product roadmaps centered on this idea—you should have this card; it is the best thing ever, and you should just have one of these, even if you’ve transacted with Affirm for the first time yesterday.

Operator, Operator

The next question is from Dan Dolev of Mizuho. Please go ahead.

Dan Dolev, Analyst

Hey, guys. Great results. So proud. Max, the B2B initiatives in the Amazon partnership, I think it was last week, got a lot of excitement and a lot of press. Can you maybe tell us what makes you so excited about this, kind of the opportunity, sizing it, and maybe talking about whether or not there’ll be other B2B partners? And then, I have a very quick follow-up. Thank you.

Max Levchin, CEO

Thank you, Dan. We are very proud too, but I really appreciate hearing that. The team works very hard. I know a bunch of Affirm staff are listening. You nailed it this quarter. Thank you for your hard work. The B2B initiative that we started showing is certainly not a one-off. When we started reviewing the opportunity, my ask to the team was to please come back to me with a plan of what this looks like in a market, sort of what’s the true opportunity across many possible platforms, not just one. So yes, you should expect us to do more. The current product as you see it today is for sole proprietorships. It’s this interesting space where the efficiency of the lending market to that user is really poor. The consumer typically borrows money either on their personal financial devices, which is generally not a good idea, or through old-school lending platforms. There’s no reason why it should remain this way, given our expertise in underwriting, particularly underwriting consumers. Expanding our models to very small sole proprietorship-type businesses wasn’t a huge challenge. The actual work began over a year ago when we primarily tested whether our underwriting works as well in the case of very small businesses. We feel confident enough to start rolling it out with the largest e-commerce player. We’re very positive about it. We’ll be very deliberate—it’s a new business for us. We will not do anything that damages our stellar credit performance, that’s certainly job number one, but it’s exciting. There are many merchants with sizable side hustles that sell their goods or resell them; they too need solid financial services, and here we are for that.

Dan Dolev, Analyst

That’s super helpful. And maybe as a quick follow-up for you or for Michael. I mean, I was - what caught my eye in the shareholder letter was the ability to sustain 3% to 4% revenue less transaction costs. We all know that with the key pushback from clients that we talked about. It sounds like you guys have figured out a way for this not to be a problem anymore. So maybe just kind of walk us a little bit through sort of the path to making sure that this 3% to 4% is sustainable even in a higher for longer environment. Thank you again.

Michael Linford, CFO

Yes. We’re really proud that we were towards the high end of our long-term range in a quarter when we were obviously up against a substantially lower rate environment, and we feel like we’re settling into the higher for longer. There are maybe two things to call out. The first is that we’ve done a good job of ensuring our assets have the right economic content in them. In our letter, we plot the yield of our asset and also where our funding costs have gone. Certainly, you’ll see a big inflection towards the end on the Affirm asset yield, and that reflects our pricing initiatives plus the strong credit controls we’ve had in place over the past year. It all starts there; you've got to get the asset yield right. The second piece is really important—we’ve been executing very well in the capital markets. We have added forward flow partners to the mix, which helps the imperative earning power as you can sell loans and earn the gain on sale, which is crucial for us. What’s notable is that the percentage of loans sold in our first quarter was more in line with the historical averages than we had in the prior quarter, which was at a pretty depressed level. What you’re seeing is the benefit of the improvement to the asset yield and the benefit of the capital markets execution, which in turn benefits from the discipline that we’ve had on the asset yield. Those two things are linked. We’re seeing it shine right now where our engagement with capital markets partners is very positive. Max mentioned that we went and saw many folks over the past couple of months, and the discipline we’ve maintained is really benefitting us. That’s what gives us confidence that this rate environment is one we can operate well in. We’ve done the work to get the asset yields where they need to be. We’re getting credit for it in the capital market. Our focus is really on continuing to scale the network—we’ve earned the right to do that.

Operator, Operator

The next question is from Andrew Bauch of Wells Fargo. Please go ahead.

Andrew Bauch, Analyst

Just wanted to ask a general state of the consumer kind of question. I know that the student loan forgiveness or forbearance is coming due. Any kind of updated thoughts on how you think that impacts overall demand? And then, maybe a higher-level question. As the macro has deteriorated, you’ve said there’s a reasonable possibility that BNPL becomes a more preferred payment method in more challenging economic times. Just trying to get a sense of whether things have played out the way that you anticipated in both of those opportunities.

Max Levchin, CEO

A lot to cover there. So, on the student loan topic, that’s easy. We noted for two quarters in a row prior to this one that we were preparing. Nobody had a real sense for what it would look like. I gave Dan props last quarter because he precisely predicted what we thought would happen to student loan repayment and its impact on our ability to approve people. We’ve been looking at it for months and incorporated underwriting changes to ensure we were prepared for the student loan repayment resumption. They’ve been back for a month now, and we believe we’ve handled it very well. We see it in our credit prints; it had no material impact on us. In fact, the slight increase we saw was seasonality, exactly as we predicted. We’ve done a good job preparing for that and largely think it’s behind us. Broadly, that’s been our strength as a company. We take our underwriting as the single most important function; we cannot make a mistake on that. We obsess over it, look at all metrics all the time, çağrı to alarms whenever metrics deviate slightly to know exactly why. That’s what has allowed us to maintain our level of performance in credit. I’m not sure I agree that the economy has deteriorated—it's a broad statement. There are definitely signs of stress going back as far as April of 2022, yet for our consumers, there’s not been a dramatic change in their ability to pay their bills back. Employment remains effectively full. Recent unemployment numbers show modest cracks in the full employment number, but still very strong relative to what we consider serious concerns. We tune our models using internal data of actual repayments and macroeconomic inputs like job prints when forecasting the near term. We don’t need to forecast far into the future because our loans have very short terms. Regarding BNPL popularity, we’re certainly seeing stronger demand now as we did at certain times. It does help that we are the only player of scale willing to write monthly installment loans. Paying for was a cool idea when rates were low; longer loan terms require us to be more detail-oriented in our modeling, which is our strength and source of superiority. We feel positive about our ability to continue performing in those loans as well as the shorter-term ones. It seems that offering the full spectrum of products drives consumer preference. The BNPL remains a favorite among consumers.

Operator, Operator

The next question is from Jason Kupferberg of Bank of America. Please go ahead.

Jason Kupferberg, Analyst

I know the shareholder letter mentioned that you’ve seen some disparate GMV trends among some of the various categories that you serve. I’m wondering as you look at the updated guidance for fiscal ‘24, are you assuming any material changes in the more discretionary categories?

Michael Linford, CFO

No, we’re really not. As per the usual, we try to hold what we’re seeing right now when we provide our guidance. We don’t assume things will get materially better or worse because we really don’t prognosticate too much about the economy's direction. We see some positive trends right now; categories that were declining over recent quarters are returning to something resembling flat, certainly less decline. We think that’s a good sign, especially since we still have exposure to the largest platforms in e-commerce. That breadth of exposure allows us to achieve pretty wide category coverage. The more operative question for us is: are consumers going to spend? We definitely feel like the evidence right now indicates that they are.

Jason Kupferberg, Analyst

Max, you touched briefly on decline rates. I’m wondering if you’ve seen notable changes in those decline rates, not just this year, but how they might vary across different slices of your demographic, or have you seen certain consumers come back with more loan requests more frequently?

Max Levchin, CEO

I want to remind you that a decline is our last resort. For many underwriting decisions, we strive to approve loans, and we require the borrower to make a down payment. Ideally, we believe they should borrow $600 instead of $800. If they can put down $200, that would be great. It's an important factor to consider. Our approval rates have stayed largely consistent across different consumer groups, and the credit mix hasn't seen significant changes. We've expanded our EPR range from 0% to 36%, which helps us approve more borrowers. This is a valuable tool for us, as we aim to provide access to credit transparently and at a fair price. With a broader range, we can approve more applicants, and you may notice us being slightly more willing to approve due to this change. The key is to accurately assess the risk, which enables us to say yes more frequently.

Operator, Operator

The next question is from Rob Wildhack of Autonomous Research. Please go ahead.

Rob Wildhack, Analyst

I wanted to ask about the higher allowance quarter-over-quarter. Can you speak to the drivers there? Given the short duration you're emphasizing, how do you view changes in the allowance as proactive, i.e., received credit vs. reactive, i.e., things started looking worse than we expected?

Michael Linford, CFO

It’s definitely not reactive; meaning things do not look worse. It’s mathematic for us. We estimate losses for all loans on the balance sheet at any point in time and ensure an allowance appropriate to support that. The increase in sold loans this period drives the math for a higher allowance given we’re selling more early-stage loans. However, we don’t see this as a bad thing—it’s not a reflection of underlying credit performance; it remains exactly where we want it. With the unit economics we’ve achieved this quarter, which is strong at the high end of our 3% to 4% range, we’re very comfortable with the provision needed to support the growth in allowance.

Rob Wildhack, Analyst

And then, maybe one on the regulatory front. The CFPB has been pretty active with respect to buy now, pay later and even fintech more broadly. What are your latest thoughts on their role, and how do you see that evolving going forward? Thanks.

Max Levchin, CEO

Yes. We’ve always viewed them as one of our key regulators. I’ve spent a fair amount of time on their advisory board in the past. Being subject to supervision from our point of view formalizes the relationship between Affirm and the bureau. It’s a positive step for the industry, as it normalizes engagement with regulatory bodies. It’s good for consumers for obvious reasons and beneficial for us as we think it levels the playing field. We’ve engaged with the bureau for a long time and certainly expect to maintain that contact. Our priorities remain unchanged; we are extremely transparent and clear with end borrowers, which aligns with the mission of the bureau. Overall, I feel quite good about our regulatory engagement.

Operator, Operator

The next question is from Ramsey El-Assal of Barclays. Please go ahead.

Ramsey El-Assal, Analyst

Hi. Thanks for taking my question this evening. I wanted to ask about the competitive landscape in general. The stability and the merchant fee rates in your presentation indicates a pretty rational environment, but you mentioned taking some market share. How are conversations with merchant partners progressing in this context?

Max Levchin, CEO

It’s been more rational now than it was before, but I wouldn’t categorize it as fully rational yet. It’s harder still with every passing moment, especially as the overall economic reality becomes less positive. We have not seen a dramatic decline in the economy, yet we’re very active in managing credit. It’s a competitive advantage for us, and honestly, it’s a soft spot for some of the competition. Conversations with merchants have been rational. Our competitors struggle to separate risk as well as we can, and they have to decline more applications. Our strength lies in our ability to differentiate between good and bad risk, allowing us to keep high approval rates. This has served us well over the years. Merchants often reconsider when their chosen partner offers better pricing but poor approvals. If you’re adept at managing risk, you can price accordingly, allowing both the consumer and merchant to benefit. Conversations will likely become more straightforward. Each merchant company has varying focuses—some prioritize top-line revenue while others focus on bottom line margins. We’re very adept at tailoring financial offers to meet merchants’ financial targets.

Michael Linford, CFO

To add to that, the market will continue to be competitive. This is a growing category for a reason. Consumers seek alternatives, and we expect it to remain competitive. While we expect to navigate competition with rationality, we anticipate it will persist. Regarding the sales pipeline, we don’t disclose specifics, but we feel good about current commercial activity. Many great discussions are happening, particularly ones we couldn’t have had a few years ago due to some past irrationality.

Ramsey El-Assal, Analyst

Fantastic. A quick follow-up for me. In the shareholder letter, you mentioned improvements at checkout with Affirm at brick-and-mortar big-box partners as well as expanding the partnership with Verifone. How should we perceive that physical opportunity? Does that change with Affirm Card, or is there still another leg to develop regarding perfecting that physical Affirm checkout experience?

Max Levchin, CEO

You must have been listening in on our conversation yesterday. Joking aside, yes, the short answer is absolutely. We’ve been confined to e-commerce for a long time and feel very good about breaking into the broader commerce space. Affirm works well in-store if merchants cooperate. You can find us on kiosks or your phone, speaking to a store associate. There are multiple modalities we’ve developed—each works fairly well for existing users. The card will significantly enhance these abilities. I’ll bite my tongue on some impressive statistics we expect to share next week during the forum, but offline success with the card is notable. We believe there are still numerous opportunities in the offline space, even before consumers get the card—this is exciting. As Michael mentioned, issues like Wi-Fi coverage can be addressed, and we have an 80%+ app download rate among existing users. Our app reviews have been consistently strong, so we feel positive about our offline prospects. Brick-and-mortar endeavors may progress slower, but the payoff will be worth the effort.

Operator, Operator

The next question is from James Faucette of Morgan Stanley. Please go ahead.

James Faucette, Analyst

A couple of follow-up questions on things you’ve already talked about, Max and Michael. First, concerning merchant engagement, how active are your discussions beyond just enabling them to provide promotions on interest rates, etc.?

Max Levchin, CEO

That’s certainly a key part of the conversation. The situation varies with the merchant margin structure. If your overall view prioritizes margin and inventory turnover, you may not have the margin capacity for these promotional 0% deals, unless the manufacturer contributes. We’ve presented this idea for quite some time, which demands significant sales and engineering efforts to connect consumer, seller, and potentially manufacturers or brands that want to support promotions. However, progress is steady. There's a point in my letter about mixed carts, the capability to combine various financing programs. If a manufacturer is sponsoring a 0% deal—a TV manufacturer, for example—you need to ensure both sides of the transaction are appropriately accounted. Before we fully roll out brand-sponsored promotions, we need robust mixed cart accounting and transaction reliability. That has taken time and effort, showing how complex the situation can be. Now that we’re live, we can have rich conversations about 0% promotions that don’t require the merchant to directly fund discounts.

Michael Linford, CFO

I’d add that we’ve been focused on introducing fixed APR offers—low rates of 5% and 10%—into the merchant base. Those promote the same clarity 0% deals did in a low-rate environment. They’ve been well received. Moreover, the merchant mix matters significantly. The platforms with more interest-bearing transactions tend to skew our trends. Those trends may disguise specific market dynamics.

Max Levchin, CEO

Definitely. The question of Debits+ and alike is clear. You are observing GMV and usage frequency upticks. Usage is tracking our expectations for both debit and credit transactions. That’s certainly a major topic to discuss next week. I’ll give a light preview rather than a comprehensive overview. Generally speaking, it's tracking our expectations. We’re clearly guiding consumers through learning about a new product. Those who sign up for the cards are existing repeat consumers; we've not employed extensive marketing for the card. When consumers get it, their initial hurdle to comprehend is that this is just like Affirm—request loans and get approved. But now, they can consummate the transaction with a card. Their first thought is that it’s just Affirm in a plastic form. Over time, they gradually see it as cool, realizing it provides buyer protection unlike debit cards. It offers neat features like allowing them to adjust transactions if they wish. As consumers recognize various card functions—this isn't something they grasp overnight—they can explore the features that make it valuable. Our role is to help them transition from seeing the card as simply an Affirm tool to appreciating its utility as a debit card. That process is going well, although we still have a lot to accomplish.

Operator, Operator

The next question is from Andrew Jeffrey of Truist Securities. Please go ahead.

Andrew Jeffrey, Analyst

I appreciate you guys taking the question. Max, could you talk a little about trends in Affirm’s tender with your enterprise customers versus across the entire business? I’m curious whether you’re closing the gap, and how you think about growth beyond that. We’ve seen that on big sales days like Amazon Prime Day, where BNPL oversamples relative to total tender. Can you provide an update on your runway to grow beyond total company GMV?

Max Levchin, CEO

I think it’s inappropriate for me to comment on any one particular partner, but we’ve done well there. If you look at share of cart in our largest partners, we’re far from done. One of my bragging points is our partnership with Shopify, which has been around for three years. Despite some analysts writing it off as a slow grower, we’ve observed accelerating volume due to continuous collaboration to deliver new value for both merchants and consumers. We have substantial room to grow in large and small partnerships alike, with significant payoffs in unlocking even 1% depending on volume. Therefore, we think we're well positioned for future growth. The big companies have numerous competing priorities, so it will take longer than average efforts to maximize our agreements. The reality is that the companies selected us for our technological capabilities. Complex integrations take time, but once they’re completed, deploying optimizations is less daunting. We are very optimistic about our long-term growth potential, given that we believe our product is superior to credit cards—the dominant payment method. The metric you're referring to—91% of transactions from existing customers—is something I monitor closely. It indicates our growth trajectory and engagement levels. We’re competing for our consumers' total spend. We're not pushing new debts into their lives; rather, we aim to shift spending onto our platforms. As this evolves, the percentage may decrease as we gain more users. While I'm not obsessed with finding the ideal number, I view it as an indicator of our progress. New users will always present higher risk. We've been carefully monitoring our credit stance for some time, allowing us to maintain strong approval rates. But, ultimately, I’m more focused on GMV growth and credit metrics.

Operator, Operator

Our last question is from Reggie Smith of JP Morgan. Please go ahead.

Reggie Smith, Analyst

The biggest variance this quarter to my estimate was the interest income line. I’ve seen over the past few quarters that your mix of interest-bearing transactions has been growing. How common are prepayments in your business? I ask because I’m trying to understand the durability of that interest income.

Michael Linford, CFO

Yes, prepayments in our business are common. They’re factored into all our capital deals. We believe that’s positive; Max has noted before that consumer exposure limits our risk. If a consumer prepays, it creates an opportunity for us to transact with them again; that’s beneficial. Prepayments don’t pose a credit risk for us; rather, it’s a healthy sign. Given the short loan durations, prepayment risks are minimal. The economic erosion of interest income isn’t typically a substantial concern for us, as the originations drive our ability to generate revenue.

Max Levchin, CEO

It’s worth noting that the past year saw a rate shock, causing loan yields to dip. However, we've since recovered. Our business model isn't entirely shielded from these short-term shocks. We expect to recover on medium-term yields due to our asset execution and capital market dynamics.

Reggie Smith, Analyst

We’ve taken up enough of your time. I’ll let you wrap up the rest of the call. Thank you.

Michael Linford, CFO

Thanks, Reggie.

Operator, Operator

Thank you very much. There are no further questions in the queue. I would like to turn the call back to Zane Keller for some closing remarks.

Zane Keller, Director, Investor Relations

Well, thank you, everybody, for joining the call today. We look forward to speaking with you again next week at our investor forum. See you there. Thank you.

Operator, Operator

Thank you very much. Ladies and gentlemen, that concludes today’s event, and you may now disconnect your lines.