A little over a month ago, we got a really impressive quarter from Affirm Holdings. The buy now pay later powerhouse posted a 12-cent earnings beat off an 11-cent basis with much higher than expected revenue. The stock shot up more than 11% the next day, reaching a high of $79 and change a couple days later. Since then though, Affirm has gradually drifted lower because of concerns about the state of the consumer to the point where it's now back to $65 and change, trading like that great quarter never happened. I think that's crazy because the Fed just cut interest rates again last week and even before that we got a ton of very positive quarters from all sorts of retailers suggesting the consumer's doing fine. But don't take it from me. Let's check in with Max Levchin, the co-founder and CEO of Affirm Holdings, one of my favorite guests, to get a better sense of how things are going. Mr. Levchin, welcome back to Mad Money.
Thank you for the kind words.
So, Max, I got to tell you, I own this stock, my Chapel Trust. It's called Capital One. It's killing it. And then it just bought a network, Discover. Killing it. But I remember when I look at a card company like Capital One, I always say, you know what, there are people who don't pay. And because of them, I'm paying a huge amount. Now, how about we just cut out all the people who don't pay, and then I don't have to pay much at all. Correct.
You're summarizing our business model pretty well right there. If you get really good at underwriting, you don't have to charge late fees. You don't have to throw in some hidden charges here and there. You most certainly don't have to hide your business model in fine print. So, yep, that is correct.
At the same time, the more it's used, the better I am at it versus just using the same model I've been using since 1980. Correct.
That is right. We seem to have uncovered something that's always been true. Just the industry drifted away from it over the years.
Okay. So, you and I both had very similar experiences. I had seven credit cards. I finally got maxed out, and I was paying more than I was eating and I didn't know what to do. But that was because I felt that was my fault. Is it the consumer's fault that they're paying that much?
You know, the system is designed to take advantage of those who don't want to do exponential math in their head, don't have the time for it, maybe just don't have the understanding. So, not really your fault for getting entangled in it, but it's basically impossible to get out. And you're totally right that the stories are just about the same. I came to us as a teenager, had no idea how the credit cards work, promptly got myself overextended, and then took a decade to climb out of the cycle of debt. And the reason I started Affirm is to demonstrate that there's a better system. And it's now been used by 20, 30, 40 million Americans over the last bunch of years. And none of them have ever paid us a penny of late fees or revolving interest. And that is proof that you can build a better mousetrap.
All right, let's talk about usury. If I were king of the forest, I would say we should have no usury. That usury is bad. Doesn't go well with our country. It's not the type of thing that the founding fathers were thinking of. Let's ban usury. Could it be banned?
You know, I think it depends a little bit on how you define usury. But what I would get very quickly behind is let's ban junk fees. Let's regulate. You know, ban is a little strong, but let's regulate late fees. Some folks require late fees for the business model. We do not. But if you're going to start regulating things a little bit more tightly around borrowing, first things first, don't confuse people. Don't show them 0% that aren't zero. Don't tell them stories that aren't true. Definitely don't promise them rewards that they're never going to be able to claim. So transparency. By the way, we have a lot of laws on the books that tell us, hey, you got to be truthful. You got to be honest when you lend money. So just keeping those in mind would be a good start. But we also do not have a national cap on rates. We do have a law called Military Lending Act that says, hey, there is a cap. It just applies to a subset of people. And so extending that nationally wouldn't be a bad idea. There's a lot of great ideas out there, but it's going to equal just keeping it transparent, simple, capping out late fees, making sure people are informed exactly about how they're borrowing money and when they're out of debt. That would be great. Maybe my biggest wish incidentally is the industry would just go towards simple interest fixed-term transactions. The rate almost doesn't matter if you know when you're done paying off. If you have a schedule in front of you, you're borrowing today, you're done in six months, done in 12 months, whatever it is, that is a great outcome. Almost doesn't matter what your rate is. There's not enough time to accrue that much interest. If you borrow once or pay once and pay forever, which is what most credit cards are modeled to do, then the rate really does matter and you find yourself in debt you will never get out of.
All right. So, we had one of our enterprising researchers go on and sign up yesterday and within a few minutes he found out that he could spend $2,000. Now, how did you do that? How did you find that out from an address?
Well, there's a little bit more to the data that we pick up than just the answer. So, we look at both publicly available data and by publicly available in this case, I mean your researcher's credit report. So, we pulled that in in real time. Did not affect his credit rating. Didn't change his credit score. Want to be clear about that. And computed a proprietary score that we designed here and have perfected, I would argue, for the last 15 years. We looked at all the other obligations this person has. We made sure that we have a pretty good idea of what this person's cash flow looks like. And I don't know if that happened to this person, but in many circumstances, if we don't have a perfect picture from just that data, we might go as far as to ask them to provide their cash flow information and would do what's called cash flow underwriting. We really do understand exactly what's happening in their personal bank account. And that gets us to a number that we believe this person has the capacity to carry while adding to the rest of their mortgage, rent, car, whatever other payments they're obliged to do. Because we don't charge late fees, we have total alignment with our consumers. If they don't pay us back, we just lose money there. There's no magic in the business model. And that transparency aligns us fully with that person. So this $2,000 represents our belief of what this person can borrow. Perhaps they can borrow more. Perhaps they can do even better than that. But this is the number where we believe they're very, very safe.
Now, when I look at how your stock's done with all the other credit card companies, it's pretty much the same other than the ones that charge really incredible rates. I mean, incredible for the company, not incredible for you. And what it reminds me is that the level of underwriting that you just described is far more thorough if those rely on the scores. You used a term in a great interview with Bloomberg that the scores can be gamed. How do you game the scores? I don't know how.
You know, there's all sorts of companies out there and I don't want to...
