Loading summary
Transcript45 lines
- [00:00]
A
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 a firm 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 going to enjoy it. All right, let's get into it. Max Levchin, thanks so much for hopping on the Rundown this morning.
- [00:53]
B
Thank you for having me.
- [00:54]
A
Of course. I'm really excited for today's conversation. You know, you are the CEO of a firm which is one of the leaders in the Buy Now, Pay later space. I want to start there. You know, 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.
- [01:16]
B
Sure. Yeah. So I started the company almost 15 years ago. And 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, 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. And so this latent memory of credit cards aren't your friends. They feel good 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. 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. The idea, I thought, well, okay, I remember this vividly 15 years prior to this, but I remember what it's like to 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, 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 lend your own money and then we'll see if it's any good. And so nothing. It's like catnip to entrepreneurs. Go lend your own money, find out if you're any good. Like, never try it. 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. To suffer at these indignities of confusing, weird terms of credit cards. And 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 market 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. They're all very young people, 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.
- [04:34]
A
Yeah, I want to talk about that. I mean, according to your recent earnings, you guys are growing. I think real revenues personally were up 30% to over $1 billion, crossing the $1 billion mark. So congrats on that and I think in there you said a firm grew five times faster than US credit card spend last year, which is also very, very impressive. Five times faster than credit card spend. So you're positioning a firm to be as an alternative to credit cards. 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?
- [05:10]
B
The single most important objection I have to credit cards is that it is not designed to guide you as a customer 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 till good, you're in good standing, keep going. 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 pay it 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, 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 interesting 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. $1,000 TV very nice for Super Bowl. It's not going to cost you $1,000. One, you don't know how long it's going to take to pay it off. Two, you have no idea what it'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 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 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 $1,000. TV will tell you you're going to pay us $1,000 back or over 12 months. After that, you're done. Total interest, you'll Pay, let's say, $120. So for every monthly payment, you'll have an extra 10 bucks 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.
- [07:37]
A
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 even use the word interest, but there's the additional fee on top of it.
- [07:51]
B
It's interest. Our core, core value proposition here is transparency. We're entirely transparent in 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. But it is predictable. It is profoundly predictable.
- [08:08]
A
Yeah, okay, I see what you're saying. And then that. 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. One thing that I, 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, how is a firm so good at knowing who's going to pay them back?
- [08:40]
B
So it's actually a funny story or funny causality. We are very good at it. Like, it's a core core competency of the company to be very, very good at it. But I maintain that anyone can be good at it. Like, you can learn math, you can be extraordinary at it. You can build models. You know, 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 the 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. We must like. If you are not paying us on time, bad things happen to us.
- [10:15]
A
Are you worried that though this model hasn't been stress tested in like a major recession? Right. I think we've been blessed enough to where the economy has been booming. We haven't had a major, major recession since 08 09. There was a little blip in 2022, but it was like, for 10 minutes. Right. Are you worried the model breaks if we enter into a major downturn?
- [10:36]
B
Not for a couple of reasons. So one, we've had a couple of mini recessions, as you put them. That's exactly right. So we've had a few moments here and there where things seem dire. So we've been operating for 15 years. We saw the extreme uncertainty of COVID So between the time we went into lockdown and government started printing stimulus checks, we were very much in this. What's going to happen to us? Like, okay, so will people. People obviously get to lose their jobs because restaurants are closing down or, you know, people are being told to stay home. And so we had to plan for that. And then 22 and then a little bit of the extreme hike in the interest rates had its consequences. So we've had a bunch of blips. And every single time we didn't know what to expect. But we have two things to lean on, which has served us really well. One, because we're so obsessed, for good reason, with transparency, every transaction is explicit. You don't just get to swipe the affirm card or click and go. You have to go through full underwriting process. Every transaction we write is full underwritten in the moment, in real time. So we get a chance to say, hey, we're really not sure it's a good idea for you to borrow. And we'll do the best we can to say yes. We'll ask you for additional information. If we don't understand who you are, we wouldn't just say no, thanks. We'll say, could you please log into your bank account so we can see your cash flow? So we'll go very far to say yes, but the answer is no. Right now, we will say no. And so we're able to control, as I say in lending, our front book, whatever difficult things are coming ahead, we can adjust the front book coming in. The thing about the back book, which is always the, you know, you made a bunch of loans and suddenly there's a recession, and then you have a three years to deal with it. The half life or the average half life of our loan is about four and a half months. And so no matter what hits us on the front, there's not a whole lot of time it takes for us to make the back book basically be the front book. And so as a result, because we have such a short duration in our loans, we have the capacity to reshape the back book quite quickly and are not worried about having to react. So it takes monitoring, takes automation, takes good underwriting. So all the things that make this kind of thing challenging are there and we have to be very good at it every day. But structurally, we're well prepared for any kind of economic bumps and so not worried, but both eyes on the dashboards all the time.
- [12:58]
A
Gotcha. To play a little bit of devil. Devil's advocate. Devil's advocate here, what would you say to, like, critics that say that affirm and other just other. Buy now, play later, buy now, pay later products are just like, you know, better branding. It's, it's debt with better branding. And it's just another instrument that people use to, to buy things they can't afford. And it just enables over consumption, enables people to go into further debt. They, they max out their credit cards, right? Then they go into the next thing that'll give them a loan to buy the thing they shouldn't buy. How do you respond to that?
- [13:33]
B
Look, I think there are definitely people who max out their credit card and go to the next thing, they'll give them a loan. Reality is a firm will not. We monitor credit usage across all instruments because these are all reportable to various credit reporting agencies, the big three and a handful of others. And if you are maxed out, if you're overextended, not even maxed out, but we feel that your debt to income is too high, the answer is going to be no. And unlike credit cards, we wouldn't just say sorry or worse yet, keep spending, we'll deal with later because all you have to do is minimum payments. We'll actually tell you, look, the reality is this is too much, you're overextended, please reconsider this transaction and we'll make it constructive by saying, hey, you make a larger down payment, we're happy to extend you a $500 loan if you need a thousand dollar thing, but you'll have to save up the first 500. So I would argue our approach to it inherently motivates us to do a good job telling people hey, you're going too far, don't borrow. That said, in general, I think there's a real tension. This gets philosophical quickly, so I'll try to get in and get out. There's credit and there's debt and this country is built on credit. And anybody who says otherwise is fooling themselves or trying to be un American. We borrow money to go to college, we borrow money to buy a home, we borrow to get a car. Like borrowing with responsibility, borrowing in a way that allows you to set yourself up for a successful future is a perfectly great thing. Like I wouldn't have had a fancy computer science degree if I couldn't borrow a boatload of money which I've since paid back, you know, 30 odd years ago. Same is true for vast majority of people. And so you can. And by the way, if you look at companies, obviously they use debt in very sophisticated ways to finance their expansion, et cetera. So to use credit is no fault, not an indictable offense in my opinion. I think it's very, very easy to agree with that. Abusing credit, getting Yourself into debt. Staying in debt permanently is a bad idea. We've seen lots and lots of problems with all sorts of people I'm sure we all know, who are just too deep into debt and struggling to get out. What I contend is using something like a firm, and certainly using a firm, given the no late fees, no compounding, et cetera, is probably the best way to borrow, if you will, and I'm confident everyone will at some point or another. If you're trying to stack all sorts of debt instruments together just to see how far you'll go, you're abusing the system and we will stop you. We will not participate in your abuse. And so in that sense, I think we are probably the best alternative to not just credit cards, but the overall kind of faults of the American credit system.
- [16:09]
A
Yeah, I think, I think it's. It just kind of goes back to that meme that was proliferating last year where it's like people are now financing their burrito, their burritos with, with all these instruments now and it's like, have we gone too far? And I know it's not you guys, but it's just, that's just kind of what the criticism is in general for the industry.
- [16:26]
B
So if you cast your mind back to 1985 or 6, there was a famous TV commercial, there's a someone rolling their eyes about credit cards being accepted at Wendy's, if I remember correctly. So, oh my God, you're financing a burrito. Which is a good reminder because every time you swipe your card at Wendy's or your fast food of choice, you are financing a burrito or a burger or a $2 espresso shot. And so sure, I mean, you can trash the latest innovation as like, ah, that's just so silly. I thought the burrito game was funny and entirely disingenuous and may have been planted by the credit card industry zealots for all I know. But we generally see a firm used for transactions that really matter to the person. So our average size of a transaction is about $300. That's actually been going down some over the years. We started in the really high hundreds, like almost $1,000 per transaction. So affirm means more like things consciously purchased versus sure, I'll just put it on my card and move on. But we do have a card product which we built with exactly the same set of product design and sort of set of moral standards. And it's done really, really well. And I'm sure some people use a firm card to buy Burritos. And I don't think anyone is splitting them into, into four. When you, when you buy a low ticket item, as they call it, with a firm card, generally speaking, you just pay it off outright pretty much immediately. So you can build products that don't have this burrito gate silliness to them.
- [17:59]
A
Can you talk more about the affirm card? I know, I know it's been successful for you guys and I think I've heard you say that you want to be like the modern American Express of the American Express for, for, for the younger generation. But I feel like American Express and some of these other reward credit cards are also doing a great job of attracting these consumers because everyone trying to max out credit card rewards, it's like a big thing on social media. You do all these like eight layers of credit cards and whatnot. And like if you pay them off in time, you get to get free trips to Italy and whatnot. So how do you compete with something like that?
- [18:32]
B
We don't. I think there's a lot of attention given to credit maxing or point maxing, two X's. I don't remember exactly the spelling, but I think that's actually more entertainment and a lot of work. The reason we're paying attention to that particular trend on social media is because it sort of boggles the mind that someone to go through that much trouble to get a free trip to Italy. Nothing wrong with a free trip to Italy. I would love one myself. But free trip to Italy is like more fun to watch than to actually execute these like Ponzi scheme of moving from card to card to card. I think most people use card, including a firm card for purchases. And we mostly see our card used for basically situations when the consumer says, this is expensive, I'm not going to put on my debit card. Most of our customers, generally speaking, use debit cards for huge percentage of their purchases. They sort of dip into credit cards when the transaction matters to them so much that they need to think about it. And so a firm card is the replacement for that credit card transaction where you can say, instead of getting out my card, getting into debt, not knowing exactly when that's going to wrap up, I'm going to take out a firm. I know exactly how that thing works. 12 months, 6 months, whatever, some interest or no interest at all. 40% of our transactions last quarter had no interest at all attached to them because of these promos. And we end up just picking up all that volume from the mostly debit consumer. Our card is cool In a sense that when we built it, we thought, why create two cards, a debit and a credit, if we can have both? So it's a debit card, connects to your existing bank account. If you just swipe a firm card, you will get those debit transactions that way, too. If you want to buy something that requires a little more consideration, you flip a bit, the card switches into credit mode, and then you have yourself in a firm loan.
- [20:18]
A
Yeah, that does sound pretty good. Going back to credit cards, one of the things that got a lot of attention was President Trump.
- [20:25]
B
He.
- [20:25]
A
He proposed capping interest rates on credit cards to 10%. And I feel like, does that, does that help or hurt a firm or does it matter at all? Because I feel like if there's a 10% cap on credit cards, that might make credit cards more attractive to consumers, but it's also going to hurt these credit card companies that have built this business model around high interest rates.
- [20:46]
B
I suspect. I mean, I'm definitely not privy to sort of any of the credit card side of the world, just given how we position ourselves sort of the other side of it. I don't know if it helps us or hurts us. I think in general, directionally, I agree with the administration that we have a bunch of problems that we correctly associate with credit card spend. And so in my opinion, and you know, I'm a little bit of a veteran in the space, so maybe my opinion is well informed. I think the uncapped revolving is the biggest problem. Like the rate itself. If you revolve on a 36% APR card for three months is going to cost you pennies.
- [21:31]
A
Yeah, you're cooked.
- [21:33]
B
Actually, it's not going to be very much at all. That's the exact. See, this is the intuition. You got to work on the intuition. So if you take $1,000 borrow, it paid off in a month and a half, 36% APR, giant APR, what do you think it's going to be? You're not paying $360 of interest. You're going to pay like a few dollars of interest because the period is so short. If you take $1,000 loan for 10% APR and then revolve for the next 10 years, you're going to pay an enormous amount of interest because of this exponential compounding. And so this is the thing that people have a fairly hard time estimating intuitively, like high apr, more expensive. It is only more expensive if you compare it on the same timeline. The antidote to Americans abusing credit cards or being abused by credit Cards, more like is. Is just telling people, here's exactly how long you need to take to pay this back. We institutionalize it by saying, like, we're not going to give you a choice. You're not going to go six months, but maybe I want to take longer. It's like, no, it's six months. Like, we're going to agree six months or 12 months or whatever, and then it won't change. And the quid pro quo is we will never raise a penny. If you're late by a little bit. If you need a break because you lost your job, had some sort of an emergency, we won't change the price at all. Like, you take. You need a month off, fine, we will work with you on that, but we're not going to increase the price. So from my point of view, just reining in this idea of permanent revolving would do so much more for the industry and for consumers, more importantly, than any specific number on the rates. That's my opinion. So that's been my thrust for a very long time. Just. Just stop compounding. Stop revolving really is, you know, the.
- [23:09]
A
Compounding will just eat you up and just.
- [23:11]
B
It just eats you up.
- [23:12]
A
You know, you're a year in and you're like, I went from 3,000 to 8,000 to 12,000. And then. Yeah, you're drowning.
- [23:18]
B
Exactly. And the other side of it, of course, is credit cards very conspicuously don't prescribe how much to pay every month because the higher your balance, the more money they'll make. And so this notion like this, this game they play, where it's like, well, 3% is the minimum, that's all you really need to do. By the way, the default button that's selected is the minimum payment. Very convenient. Not a lot of money. Stay in debt forever. And so it's the stay in debt forever that's, to me, the most important part of this whole game.
- [23:48]
A
Yeah, yeah, that's a good point. I want to zoom out a bit before we wrap up here. We know we just wrapped up the holiday season, and I think one of the quotes that I saw from you was that the holiday season, you said the holiday season was a referendum on affordability, which is. Which is a loaded phrase right there. Max, can you kind of talk about what you mean by that? Yeah, go ahead.
- [24:08]
B
It sort of echoes a little bit of the conversation we just had where, you know, the holiday season, on the one hand, it's a shopping extravaganza. Like, you have a lot of, you know, you're buying things for yourself, you buy things for your family, buying things for your friends. And so at any given time we interview consumers every year, have been for a decade now. The questions we basically ask them is obviously will you use a firm? You know, how would you use a firm? But the kind of more important question perhaps is who is in your shopping circle? Are you buying for yourself? Only buying for your family, buying for your friends, buying for extended family? So it's a good way of figuring out how affordable things appear to be to the end consumer. And this year we did not. I mean there's a lot of talk of vibe session where people are feeling concerned. The economy is not doing well. That's not how they're shopping. They're actually feeling pretty good. I think a study came out just today showing that people actually expect growth and kind of a happier times in 26, which they sure shopped that way during the holiday season. So I'm not surprised by the sort of hopefully uplift in people's moods. But it's always the question we have to ask as well as being asked by our consumers. Every time we approve a loan we're asking ourselves alright, come January, are you going to be okay? Cool, I'm ready to make my first payment or was this a terrible mistake and what do I do with myself? And so it's working out great. So far I think the demise of American consumer has been greatly exaggerated. People shop just fine. We posted some amazing numbers and we, you know, we don't appear to be in a down downfall or spiral, which is some of the critics will have you believe.
- [25:48]
A
I think that's been like the biggest shocker for someone like me who studies the markets every day. It's just the resilience of the consumer. Just it has not. The spending has not stopped and there hasn't been any major cracks there. Everyone thought there was going to be. Hasn't been the case. And the American consumer continues to push forward.
- [26:06]
B
I think the most important thing I'll say before, and I'll say it again, just so long as we are close to full employment. American consumers get paid well. We earn excellent salaries, we buy things for pretty good prices, sort of the talk of tariff induced inflation has been appears to be exaggerated to at least a fairly significant degree. If you get paid well, the holidays are coming up, you're going to buy gifts for family.
- [26:32]
A
Yeah, as long as people have their jobs, they're going to keep spending. And that seems to hold up so far and that's keeping the economy moving forward. The stock Market move. Everything just keeps on chugging along as long as the American consumer is their power and everything.
- [26:44]
B
Exactly.
- [26:45]
A
Max Levchin, thank you so much. I gotta say, man, I'm really inspired by your story as well. I know we didn't get a chance to touch on it, but going from being an immigrant from Ukraine, PayPal, mafia, just boss stuff right there. Talked about your car. Hopefully you went to the car dealership and just kind of showed them like, a printout of, like, the Washington Journal there.
- [27:00]
B
So.
- [27:00]
A
So Wall Street Journal and being like, hey, guys, come on.
- [27:04]
B
The guy recognized me. I'll tell you the full story. So the guy recognized me, said, I know who you are. You're. So I. I flew to la. The goal was to buy a convertible and drive it to San Francisco. I wanted to win it in my hair and success, you know, and brought my girlfriend, which is now. Who's now my wife, and embarrassed myself because the guy was like, no, sir, your credit is terrible. I just checked it. It's like, oh, wait a second, I know who you are. You're. You were one of those PayPal guys that you just had a big, successful IPO. They're like, yeah, so how about a car? He's like, cash. You can pay me cash and I'll sell you a car. So I actually went to, like, I literally got my bank at the time to wire the dealership the full price of the car, and they're like, okay, you can drive it off the lot, but I was supposed to leave to drive back to San Francisco at, like, 2pm we left LA at like 6 or 7, and, like, we're still driving at 2 o' clock in the morning. Got pulled over because, like, driving a convertible with no plates at 2 o' clock in the morning.
- [28:01]
A
Story.
- [28:01]
B
Story gets better and better.
- [28:03]
A
That's a boss move. That's. That's amazing. Max, again, I appreciate you coming on and, you know, thanks so much, and hopefully we'll have you on again soon.
- [28:11]
B
Great to be here. Thank you.
- [28:12]
A
Appreciate it, man. Thank you.
- [28:13]
B
Thank you.
- [28:15]
A
Well, all right, guys. Hope you enjoyed that conversation with Max Levchin. I'll be honest, you know, I'm still not a big fan of buy now, pay later. But what I do like about affirm is that they don't charge compound interest like credit cards do, which is what leads that debt spiraling out of control. Let me know what you guys thought about the interview. Are there any questions that you wish that I asked or anything that I should have pushed back more on? Let me know in the comments on Spotify and YouTube. And while you're at it, consider giving us a five star rating wherever you listen to your podcast. All that engagement really does help us out and allows us to book great guests like the CEO of a firm. Thank you guys again for listening, watching and commenting. Shout out to Mike and Connor for all the work behind the scenes and we'll see you guys here next week.