Chapter 1: What is the main topic discussed in this episode?
Welcome back to the Rundown, interview edition. Today, we are talking to the founder and CEO of a firm, Max Levchin. Max Levchin was a former PayPal executive, part of the famous PayPal mafia, and he founded a firm back in 2012 as an alternative payment option to credit cards.
Fast forward to today, and the company has grown to over 26 million users, doing over $13 billion in transactions, according to their most recent quarter. So in today's episode, I asked Max why Affirm has become so popular, the difference between Affirm and credit cards, if Affirm is just yet another debt tool with better marketing, and other topics like the health of the consumer.
This was a really fun conversation. We had some good back and forth. I think you guys are really gonna enjoy it.
Chapter 2: What problem is Affirm solving in the credit landscape?
All right, let's get into it. Max Levchin, thanks so much for hopping on the rundown this morning.
Thank you for having me.
Of course. I'm really excited for today's conversation. You are the CEO of Affirm, which is one of the leaders in the buy now, pay later space. I want to start there. Buy now, pay later has become very, very popular over the last few years. I want to start with what problem do you think that Affirm is solving? Just big picture, and then we can kind of dive into the details.
Sure. I started the company almost 15 years ago, and the There's a little bit of a personal and a little bit of a business observation that went into it. And so 100 years ago, prehistoric times, I started PayPal. And when we took the company public, did really well, went to buy a car, my car loan application was rejected on the spot because my credit score was too low. And that's not an accident.
I started a bunch of other companies before PayPal, screwed my rating up, credit rating very badly by being spotty with my credit card repayment and The thing is, I had no idea it would catch up to me a decade later. And two, I didn't really know at the time that I was doing damage to my credit score because I never really read the fine print.
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Chapter 3: How does Affirm differ from traditional credit cards?
And so this latent memory of credit cards aren't your friends, they feel good in the coming in, but then they can really mess you up going out, sort of stayed with me. And then 15 years later, actually, I was reading a study that showed that the next generation really did not trust banks.
It was I forgot the name, but it was a Viacom sponsored study that showed that millennials hate all sorts of industries, but they really hate banks because they blame banks consumer bank products for the collapse of 2009 and the fact that their parents had to really take it on the chin.
And so the idea that, well, OK, I remember this vividly 15 years prior to this, but I remember what it's like to get get run over by a bank product. What if we started a company that just built a more honest, more transparent mousetrap when it comes to consumer borrowing? And so that's the origin story of a firm.
And initially we just had this idea that what if we built a score that would keep up that when you went from being an irresponsible college student to being a reasonably well-to-do entrepreneur, the credit score would say, Oh yeah, like this guy's cool now and auto loan is okay. And we did that didn't work because everyone in the industry I talked to would say,
yeah, but if you have a cool credit score, why don't you go land your own money? And then we'll see if it's any good. And so the nothing, you know, it's like catnip to entrepreneurs, go land your own money, find out if you're any good, like never tried, definitely going to find out. And so we started a company on this premise that we think we can be better at underwriting.
We think young people do not want to suffer at these indignities of confusing, weird terms of credit cards.
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Chapter 4: What are the risks of revolving debt and compounding interest?
And, uh, It might just work. And so at the beginning it was like, why would anybody use you at the point of sale instead of a Visa or MasterCard? And then we would introduce it and we'd really just marketed it by saying, Hey, we're also available here. You've never heard of us, but we don't do late fees. We don't do compounding interest. Every price is upfront.
Everything you see is what you get, try us. And people would, and they're all very young people. It's all millennial consumers. And then our merchant partners in the very beginning of the beta would come back and say, whoa, like you guys just added 30% to my sales. And so that was like, okay, clearly this hunch that young people want a better alternative to credit cards wasn't made up.
Like it wasn't a fever dream. That's, you know, that was about 12 years ago. And now we'll do, you know, on the order of $50 billion plus or minus of buy now, pay later volume.
Yeah, I want to talk about that. I mean, according to your recent earnings, you guys are growing. I think your revenues personally were up 30% to over $1 billion, crossing the $1 billion mark, so congrats on that. Thank you. And I think in there, you said Affirm grew five times faster than U.S.
Chapter 5: How does Affirm ensure transparency in its lending process?
credit card spend last year, which is also very, very impressive, five times faster than credit card spend. So you're positioning Affirm to be as an alternative to credit cards. Yes. What is it that you think that credit cards fundamentally get wrong that a firm gets right? Is it the high interest rates? Can you kind of walk me through that?
The single most important objection I have to credit cards is that it is not designed to guide you as a customer directly. towards good financial outcomes. It's actually designed to guide you to not so good financial outcomes. The most important feature of credit cards is this idea of revolving where you swipe now and you just kind of pay forever.
And the user interface is built around this idea that, hey, just pay the minimum payment. It's like 3% of your total outstanding balance. It's all good. You're in good standing. Keep going. And so most people either are transactors, which is probably like you and me, where we use credit card same way via debit card, where you paid off at the end of the month, you never pay a penny of interest.
You, you know, that is true for like a relatively small number of people. Most people carry a balance when they carry a balance.
Chapter 6: What is the significance of the consumer's financial health?
Typically when you start, you basically don't stop. Most Americans revolve at about $10,000 and that's roughly dangerously close to their total spending power that the credit cards can actually give them. And so they're constantly just paying interest. Credit cards are also what's called compounding interest. So it's interest on interest.
So every time, every month you get a little bit more interest that adds to your total debt. And next month, if you haven't paid it off, it's just going to keep compounding and compounding. And so your true cost of ownership, whenever you buy a thing, swipe your card, a thousand dollar TV, very nice for Superbowl. It's not going to cost you a thousand dollars.
one you don't know how long it's going to take to pay it off two you have no idea what's going to cost you because it's profoundly dependent on the shape of your repayment if you're making minimum payments you'll basically never get out of debt if you're making slightly more than minimum payment it has some amortization period that goes on for a long time if you're penny late or dollar short you're going to pay late fees you have no idea how to predict those so the unpredictability of credit card is the cost of having this unbelievably nice user interface where you just swipe and move on so affirm is the antidote where
Chapter 7: How does Affirm handle creditworthiness differently?
Everything's upfront. We don't compound. We don't charge late fees. Most importantly, we tell you true cost of ownership. You're buying a $1,000 TV, we'll tell you you're going to pay us $1,000 back. Over 12 months after that, you're done. Total interest you'll pay, let's say, is $120. So for every monthly payment, you'll have an extra $10 of interest that you're going to put in.
There's no opportunity to revolve. There's no opportunity to delay. It's a little bit more rigid. And it turned out that most people actually love that. They feel extreme sense of control because they know precisely when they're done paying things off. So that's the brief version of why we're better.
So instead of it just being like you have a balance and it feels like you're never going to eat into that balance, what a firm does is like, hey, this is what you owe us every month. This is the I don't know if you don't use the word interest, but there's an additional fee on top of it.
It's interest. We don't our core core value proposition here is transparency. We're entirely transparent who we are. And yes, you're paying interest. Time value of money is a basic calculation. You're borrowing money from us. That means you have to pay a little bit for the cost of using our money.
Chapter 8: What concerns exist regarding Buy Now, Pay Later services?
But it is predictable. It is profoundly predictable.
Yeah. Okay. I see what you're saying. And that is a better product for people that they feel like they can actually like they know what they owe. And it's not just this black box of just debt that they owe. And that's the value prop that you have over credit cards. Yep. One thing that I did notice was that your delinquency rate, and correct me if I'm wrong here, is 2.7%.
Credit cards are way higher, right? And so how is a firm so good at knowing who's going to pay them back?
So it's actually a funny story or funny causality. We are very good at it. It's a core competency of the company to be very, very good at it. But I maintain that anyone can be good at it. You can learn math. You can be extraordinary at it. You can build models. Math is not secret. You can't patent it. Most lenders actually don't care to be very good at it.
When we designed the company from the very beginning, we said no compounding, no late fees, fixed period. We've eliminated the crutches. The reason the industry is not very good at underwriting is it has no need to. Like imagine, like you're literally saying, oh, I'm going to be a little bit late. Bummer. It's a late fee.
On the other side, there's a bank that gave you the credit card that says, hooray. that's 100% gross margin product, a late fee from you just goes right to the bottom line. So on one hand, it's important to underwrite just good enough. So you don't like default or run away with the money, you know, don't defraud us.
But if you're not planning to pay us back fully or not in any particular predictable timeline, you'll just pay us more money. And so the incentives in the industry are messed up where you're literally allowing people to underwrite you less than perfectly because then they'll make more money.
On the other hand, we have no reason to underwrite less than the best we possibly can because if you don't pay us on time, we just make less money. If you don't pay us at all, we just make less money. And so the incentives are fundamentally aligned.
The alignment between a firm and its borrower is kind of the cornerstone of why we do what we do and things that we get very good at is exactly because we must. Like if you are not paying us on time, bad things happen to us.
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