How can we make a product that just completely obliterates this whole nasty yuck part where everybody understands they're getting screwed, including you, you just don't know how, and clean it up and make it transparent to the point where it is better than a credit card?
Max Levchin took out his first credit card as a college freshman for a free T-shirt. It trashed his credit. Years later, he started Affirm, a lending company that has never charged a late fee. Welcome to Intelligent Finance, a Plaid podcast with the people building the financial products you use every day. Plaid CEO Zach Perret sits down with Affirm founder and CEO Max Levchin to talk about how Affirm makes 0% loans work and how AI is changing who gets approved. Here's Zach and Max.
Thank you for being here, Max.
Pleasure. Thank you for many years of partnership and building a really wonderful product.
You were born in Kiev and became a programmer at quite an early age, but I believe if I heard the story correctly, you learned to program or you taught yourself to program on paper instead of actually using a computer. Is that roughly right?
Yeah. But it wasn't that weird. It sounds like this really quaint sort of a crazy thing, but if you have access to a computer a very limited number of hours per week, but you really want to program, at some point you sort of ask the question, how do you do that without a keyboard? And just write down code, and you still have these notebooks filled with very carefully written code.
And what made you want to program so badly at such a young age?
I originally actually got asked by my mom, who was told by her Soviet research authorities to become a programmer because that's what she needed to process a lot of data in her lab, and she was told, 'Here's your state-assigned computer. Learn how to program. Report back in a week.' She was like, 'You're a smart kid. Help me out.' And so I was like, 'Sure, why not? I have nothing else to do.' And then I was like, 'Oh my God, this is the best thing ever. That's the only thing I'm gonna do with my life.' And so I got the bug very early.
Have you ever built anything with your mom?
Yeah. It was actually pretty funny. One of the very first things she saw... So she was never into computer games, but she saw an implementation of Snake on some computer, and she was like, 'Okay, I want to build this myself.' And it became this competition where I would build Snake, then she'd build an elaborate one. But I occasionally worked on her more prosaic stuff in the lab. But actually one of the more endearing, amusing realities with my mom, when we moved to the US a bunch of years later, she remained a software engineer, and I would be in the middle of some PayPal IPO prep or even in later years at some Affirm product meeting, and she'd be like, 'Hey, hey, I need you to call me.' Like, 'What's up?' 'I'm trying to debug this query.' She did a lot of database work. Like, 'This really elaborate left outer join. I just can't make sense of it.' Like, 'All right, hang on, everybody. I gotta help my mom do some code.' It was delightful.
Mother and son pair programming a little bit.
That's pretty fun. So you moved to the US at what age?
16. A lot of people have these amazing life missions and life stories that when you actually go back to the very early days, it turns out there were some handful of things that kind of inspired it in one sense or another. Oftentimes you can draw the lines in reverse, but you can't necessarily draw them looking forward. One of them I think for you was getting a credit card when you were... Was it in high school or in college?
I was... Let's see. Like it happened today. I was walking through Champaign-Urbana, and I had not had any credit cards up until that point 'cause it was only two years off the boat. Just got to freshman year at U of I, and there were credit cards being pushed right there from a table on campus, and a free T-shirt. And T-shirts... I remember this is how I got T-shirts and snacks in college.
Yeah. So you sign up for a credit card and you get T-shirts.
And so it was like, well, I need a T-shirt, and I think I need a credit card. And the credit card was really just too good to be true. It was 0% financing for some 12 months or whatever, and I'm not gonna shame the bank that gave it to me, but you've heard of it, so it wasn't like a completely unknown bank either. So I got this credit card, and then soon thereafter I started my first company, which had nothing to do with payments, but feeding myself became an important problem, and a startup at that time was certainly making no money whatsoever. And so I was living initially entirely out of this credit card, and then over time some of my business expenses were being covered by this very credit card. And everything worked beautifully except for the fact that I didn't realize there was this minimum payment thing. Just didn't read the fine print and hadn't been in the US long enough. And so some number of months later, I got this very angry call from a collector explaining to me how I owed a ton of money, and I was like, 'Oh, I didn't realize I was supposed to make payments on your schedule. I just thought like at some point I'm gonna make payments.' I learned that, but when I look back I realize that not only did I completely mess up this sort of no payment thing, my credit score was trashed because I was 90 days past due on the first transaction, so I was like, oof, full on dangerously close to write-off territory. And because the credit card was what's called deferred interest, where it wasn't actually a 0% credit card, it was a credit card that took no interest from you so long as you were exactly on time with some number of conditions, which I of course wasn't 'cause I wasn't paying attention. So not only, to add insult to injury, I was suddenly in quite a lot of debt, which I vaguely understood, but also it was a lot more debt than I expected 'cause interest compounded from the moment I swiped that card, and it was getting expensive to run a company. And I basically was unable to borrow a penny anywhere else anymore because my credit score was promptly in the high 500s. And so I was suddenly very exposed financially, barely aware of what the hell happened. And so that definitely stays with you.
And the startup that you were working on, was that the precursor to PayPal or something else?
No, that was T minus three relative to PayPal.
T minus three. Okay, what was T minus three? What was the idea?
The very first startup was called SponsorNet New Media. We were building the world's first web advertising network.
Sounds quaint, but it was in fact the world's first web advertising network.
Amazing. Okay, so you clear the threshold, and what comes next?
I packed up my stuff into a truck, drove cross-country, moved in with one of my earlier failed startup co-founders, slept on his floor and concocted ideas for starting companies, and then met this guy Peter Thiel and started a company with him.
And that is a story that's been very, very well covered. But maybe just give us a couple of the high level points, especially as they relate to some of the things that you're thinking about now. So like, you did a lot of work with risk, for example.
Yeah, so obviously the initial idea for PayPal was not PayPal, it was actually... So my focus in college, had I stayed, would certainly have been cryptography, and even broader, number theory was sort of my first and major love, which recurs throughout my life in different ways. But as I was sort of thinking through application of number theory, in particular crypto, I really wanted to build... Again, this is like mid, late '90s, so none of this exists yet. But we're just starting a handheld device revolution, and we're storing fairly sensitive documents in these handheld devices, like PalmPilots and sort of Newtons even, and no one encrypts anything. It was like, well, as a security guy, how will I possibly let this happen? So I wanted to start a company that would help you encrypt your proprietary documents on your handheld devices. That's what I pitched Peter, who was the first backer, and then soon thereafter first CEO of the company, which eventually became PayPal, as we realized that nobody actually cares about encrypting any of this stuff on a handheld. But people do want to accept credit cards online. And from a demo that I built, it gets attention of a bunch of eBay sellers, and PayPal becomes PayPal. But as we got going on that, because I had no background in credit cards online or credit cards anywhere, I vividly remember being asked by one of our future investors, 'So what are you gonna do about chargebacks?' And I was like, 'Oh.' They're like, 'Oh, you have no idea what that means, do you?' Like, 'Of course I'll look it up.' And so I was like, 'Nah, I really don't, but we'll figure it out.' And so fast-forward a year, and we're losing like $10 million a month to fraud of various kinds. And so my work at PayPal pivoted from building a thing to protecting a thing. And I spent a lot of my time initially building kind of very basic systems to combat fraud and manage risk. And then over time realized that actually background in number theory lends itself nicely to machine learning. And so I recruit a fairly sizable team of really, really good machine learning folks, primarily out of Stanford, but also some UI people actually. And we built the very beginnings of what became foundational PayPal technology around detecting large scale distributed fraud, preventing people from sort of what's called scalable fraud, where you can script or programmatize attacks. And so all of that these days is kind of a baseline. Like, you do it, we do it, everybody has to. In '99, 2000, it was sort of like, whoa. Like, you know, I remember showing this to law enforcement folks, and they're like, 'This is amazing. Like, this takes us days to manually cross-reference on paper.' I was like, 'Yeah, I don't know how you do it. We have a million users,' which seems quaint and tiny, but they're like, 'Oh, we do this with tens of perps, and we're barely keeping up.' So those were fun days.
Just drilling a little deeper, how did you see so much fraud? Was it organized rings? Was it just kind of randomness?
It was largely organized crime. I mean, fraud changes, but it kind of also stays the same. There's always some form of people that steal credentials and try to bilk them for stored funds or funds they can borrow. This was also fairly early in online security. This is when it was barely safe to put your credit card in online. People were worried about that.
So people just wouldn't encrypt it, and so people would just like congregate in these online forums and you had to like know someone who knew someone to get yourself an account. But I signed up for these forums, and I would watch people talk about like, 'Oh, you know, I just got myself 100,000 credit cards. I need to test them.' And like, cool. Go sign up for PayPal. They accept credit cards. And like, just like try, you know, and set up a fake eBay seller and just like get some money. And so that's an attack vector, which none of this is now possible, so these are all fun and games now. But back then, it was enormous. A lot of it came from Eastern Europe, which I had a secret advantage. I spoke at least a handful of, or read fluently a handful of Eastern European languages, so I would lurk on these forums.
How funny. How funny. Okay. We're gonna fast-forward through some things. You left kind of shortly after the acquisition. You then launched a company called Slide, and that sold to Google. You also were around or maybe even a part of the launching of Yelp.
And were close with them. And then you started a kind of a venture incubator. Is that... What was it? It was HVF. Is that correct?
It stands for Hard Valuable Fun.
And actually it was a second incubator. So I started another one. That's where Yelp came from and Slide and a couple other things. And the lesson from Slide was it was a pretty hard project, so we built a very large social media kind of experiment, for lack of a better term. It was hard to build, took a long time. It was actually fairly valuable at its peak and obviously sold for a bunch of money to Google. But weirdly enough, despite being a social media and sort of a gaming-oriented social media, it was actually not a lot of fun for me.
And it sort of... It caused me to reflect pretty seriously on like why did I not enjoy myself nearly as much building essentially, for lack of a better term, a games company, which it should be a lot of fun, while I couldn't remember anything but sort of extremely fond memories from PayPal, which was basically a bunch of fraud fighting and like trying to outsmart the bad guys and all of that. And so ended up going through this long reflection period of... By long, I mean like a month. Like, what's fun for Max? And it turns out that actually building financial systems is probably more fun than just about anything else for me, which is how I ended up doing Affirm.
Okay. And so Affirm, how did you come up with the idea for it? I know that you'd done a lot of things that were similar before, but talk to me about like the very beginning stages of it.
Like everything else, these things have a neat origin story, but in reality always have kind of a jagged edge of, you know, how did you actually get there? So one of my Affirm co-founders, but also a longtime co-conspirator at PayPal and before and after, this guy Nathan, we kept on talking about, well, what else... Like, hearkening back to the happier days of PayPal, the question we kept on trying to find answers to, why didn't we try to go below the rail? So the proverbial rail is the credit card networks or, you know, the NACHA protocol, why did we not go as far as taking the risk on the actual quality of the funds? We relied on bank accounts telling us the funds are good, or credit cards telling us the funds are good, debit card networks, but we never actually lended money ourselves. And I didn't really have a great answer, so like, 'Eh, seems like just not a thing PayPal was gonna do.' Like, we had our ACH arb was fine. And we kept coming back to like, well, so is that because we couldn't stomach the risk or because we just didn't think of this? And we both agreed that probably just didn't think of it. Like, we could build a model to underwrite transactions and actually take the full principal risk on the amount. That sort of was the thread we pulled on enough to like, why don't we build something? And so Nathan eventually dropped out of Palantir to help me start Affirm to find out if we can build an underwriting model. The original theory was very, very simple. Of course, we knew about FICO. We thought FICO quite a capable model. It's like, well, can we do better?
And so we built a version of an underwriting model primarily scoring the quality of the consumer to decide and test, back tested against some data we had access to, and like, eh, seems like we could actually do better than FICO. So we sort of promptly started asking ourselves, 'Well, how do we get this deployed?' Like, we have a thing that's better than the best, you know, publicly used score. And so we went to see some people in the lending world that we knew from past lives, and they all said like, 'We're not gonna lend money against your model. Like, you think your model is so good, you lend your own damn money.' Like, okay. It's like telling entrepreneurs what not to do. What do you think is gonna happen? So we then started like, so should we launch our own competitor to a lending club or something where like, you know, loans are the currency, and both of us are like, 'However, neither one of us is a marketer.' Like, we wouldn't know how to... Like, standing on a street corner waving a flag saying, 'Please borrow money from me' is, we're obviously going to get the worst adverse selection possible.
That's not the way. So what is the way?
Spent a fair amount of time talking about that, and then I somehow chanced on a report, sort of two different reports actually. One of them was extolling the virtue of point of sale issued cards.
So these are the cards you go to your favorite department store, they tell you if you get this card, it's 0%.
Like, oh, I've seen this before, 0%.
And for 9 or 18 months or whatever, you're gonna can buy whatever you want so long as you make this precisely articulated schedule.
And 2% off of whatever you buy at the store.
And so I was like, 'I've seen this before. That's the thing that trashed my credit score 15 years ago.'
And so it sort of all came back rushing like, ah, I hate these cards. But the report said this is a faster growing type of credit card, and reason being it's the retailer doing the marketing. There's no marketing involved. It's their customer, your underwriting, your capital, their discount rates.
So you're standing in a JCPenney store, the person across the register says, 'Hey, would you like to apply for a credit card? You get $50 off or $5 off,' or whatever it is.
Yeah. And so like this is our in. So if we have, if we think we have a better credit score, we should just build our own version of this thing. And the more I looked at it, the more I sort of realized that this is actually a pretty great marketing approach, but it also unearthed all of my, 'I feel so screwed by this product.' Like, I'm a barely 20-year-old kid trying to start a company, and now I feel like I trusted someone, you know, for a T-shirt and a credit card. Like, it's ruined what I thought was my future forever. There's no credit cards or any other kinds of credit access in the future. So I'd sort of gone from we should build a better score and flex our big math brains to we should do something about these cards that don't tell you everything or at least tell it to you in a way that you cannot fully understand, only to then find yourself in debt and on the floor and getting kicked while you're down. So that sort of shaped the original sort of foundation stones of the mission.
And so you have this idea. You've built a better FICO. You've decided that you don't wanna go B2B with it, or it's too hard to go B2B with it, so you decide to go direct to consumer with it.
But via these merchants. How do you get a merchant to actually do it?
