As much as we all can laugh and mock the, 'Oh gosh, they're financing burritos.' When you put your credit card down at your favorite burrito, you are financing that burrito, too. You may be personally paying it off at the end of the month, but half the country is paying interest to their credit card provider. That burrito gets right on top of that pile and immediately starts accruing interest. The sort of a, 'Oh gosh, a new way to borrow money. Let's stick with the old one because it's better' is pretty disingenuous.
This week on Bold Names, serial entrepreneur Max Levchin. You might know him as one of the co-founders of a company that became PayPal. And for the past decade or so, he's been at the company Affirm. Max started the buy now pay later company to try to make credit more transparent and therefore less risky. Max, thank you for joining us on Bold Names. You have been in the fintech space for most of your adult life. You've been heading up Affirm since its creation in 2012, really becoming one of the darlings in the buy now pay later space. That buy now pay later, it's not necessarily a new idea, right? Installment payments were really made popular in the Great Depression and kind of lost favor as we saw the rise of the credit cards years later. I'm curious, how did you think you could innovate in this space and what was motivating you? Why go into that area?
So two personal events actually shaped the foundation for the founding of the company. So I came to the US as a teenager from what was Soviet Union and as a semi-independent adult I tried to buy a car and was declined even though this happened right after we took my first successful startup, aka PayPal, public. So, I was independently wealthy, had a lot of money, millions of dollars, very successful. I did well. I did all right. And yet an auto dealer in LA told me, 'Your credit score is so low. I'm not going to sell you this car unless you pay cash,' which is what I did. But the reason I had such a low credit score wasn't entirely just due to the fact that I was a recent immigrant and had no history. I'd managed to get myself in real trouble getting a credit card in college, not fully understanding how it worked, missing minimum payments, getting into a 90-day delinquency, and basically just completely wrecking my credit history and score. I'd sort of become more and more motivated to build a product that 18-year-old, fresh off the boat, immigrant Max would understand and actually feel good about using. That's where Affirm came from.
But now because of a lot of the work you all have done, buy now pay later is becoming a force out there. The market size projected for this year is around half a trillion dollars according to Deloitte. They think it could be close to a trillion dollars by 2030. You've got more than 24 million users. How do those transactions work?
It's pretty simple. Every transaction for Affirm always begins with an active thought of 'I'm going to buy a thing and I'd like to borrow money to pay for it.' With Affirm, before you consummate the transaction, you actually see the payment schedule. You understand what it will cost you. You confirm that you do plan to use it. And then the transaction completes. You get the thing that you were buying and then we will bill you typically 30 days after this event.
What's the typical transaction size and what's the typical thing people are buying?
The average transaction size for us is about $270 plus or minus and it's just sort of trended down as people have been using the product in more and more places. Obviously, the average transaction out there is much, much lower. We're not especially commonly used for things like lunches.
Right? That's one of the big criticisms, right, that people are buying burritos with these things.
I do not believe Affirm is used to finance burritos. We are primarily used to finance things like bicycles, couches, electronics.
I mean, it's easy to use. I bought a couch a few years ago using Affirm. The idea of using cash for such a purchase really kind of hurt my head, but ignoring my wife's desire to have a new couch probably would have meant that I was sleeping on the old one. So, I turned to Affirm. Really the big draw was the direct to consumer seller which was kind of emerging about seven or eight years ago becoming very popular, had this very neat offer, right? It was zero interest, I think it was over a year's time and I could see the payments every month, I think it even came out automatically out of my debit card or my checking account. What was the pitch to merchants early on to make this work? Why were they willing to kind of go into business with you?
I think you almost reproduced a pitch just from your personal history. So, you want to sell it as a merchant to this consumer who's hesitant to put their credit card down for whatever reason. You know, maybe it's the 18-year-old Max confused about how credit cards work. Maybe it's a much more experienced consumer who says, 'Look, I don't love revolving. Revolving is expensive and I have no idea when I'll be out of debt.'
Revolving mean they don't pay it off at the end. It keeps going turning over month to month.
Yeah. They accrue interest upon interest upon interest. Interest of course compounds into principal and on it goes. But I do need the couch. Offering a payment plan that is super simple, super transparent. The costs are spelled out. Cannot change. Is pretty attractive and merchants would place those offers on their site and promptly see increments of 20, 30% more sales and so the product sold itself. The experience you had, the 0% one, is especially compelling. What really, obviously no one invented sort of free money in the future. What's really going on here is the merchant said, 'If you paid interest, it would cost you this many dollars. How about I use that as an incentive for you to transact? I'm not going to give you a 10% discount or 15% discount, sort of standard retail enticement. Instead, I will turn those dollars into essentially making that deal interest free.' Part of what we were hitting on, what we hit on 12, 13, 15 years ago when we started thinking about this product was this distaste for 0% but an asterisk. This idea that 0% in consumer finance is definitely not a 0% was a huge motivator. What I really wanted to prove to the world that there is a way to build a product where what you see is what you get. And so both merchants and consumers really latched onto this idea of honest financial products and we were there.
So how do you make your money?
Exactly as it sounds. In the world of merchants paying your interest, they will pay us slightly more and we get to keep that. In a world of consumers paying interest, we will tell you exactly how much of that interest we get. It's not free to run this business. We are not a bank. So we have to borrow money or finance our loan book somewhere. So there's cost of that. There's cost of servicing. Not everybody is able to pay their bills perfectly on time. We don't charge late fees which means we lose money which, you know, by the way that aligns us perfectly with our consumers. We don't want to lend money if we suspect there's a chance for you being late or not being able to pay you back. But bad things do happen to good people sometimes and so on. But it's a very simple business. Every loan has to be profitable. That means we have to be good at underwriting. That means we have to be honest and tell folks that should not be borrowing money right now, 'Hey, you shouldn't borrow. We're not going to be willing to give you a loan.' And if on average, every loan you make ultimately does pay you back with a little extra, it's just a matter of time until the extras add up to more than your fixed cost, at which point the company becomes profitable. And you can adjust it for GAAP principles. So things like stock-based compensation and amortization of various non-cash expenses need to be folded in but at some point you hit the scale where it is profitable and that, you know, it also kind of requires you to be pretty good at math if you're running a lending company and so we are naturally pretty good at forecasting.
