Affirm CEO On Fixing America’s Broken Credit System

Thank you for having me.

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, 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 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 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 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 Affirm. 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 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 lend 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 lend your own money find out if you're any good, like never tried 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 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, 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, and they're all very young people. Those are all millennial consumers. And then our merchant partners in the very beginning of the beta would come back and say, 'Wow, 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.

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. Still 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 be a debit card where you pay it off at the end of the month, you never pay a penny of interest. That is true for 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 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. 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'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 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, 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 it's $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 an 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.

It's interest. We don't 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.

That Yep.

So, it's actually a funny story or funny causality. We are very good at it. 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 a 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 Affirm and its borrower is kind of the cornerstone of why we do what we do. 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.

I'm 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 obviously going to lose their jobs because restaurants are closing down or you know people are being told to stay home and so we have to plan for that and then 22 and then a little bit of the extreme hike in the interest rates had its consequences. But we've had a bunch of blips and every single time we didn't know what to expect, but we had 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 fully 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 they say in lending our front book. Whatever difficult things are coming ahead, we can adjust the front book coming in. The thing about the backbook which is always the you know you've made a bunch of loans and suddenly there's a recession and then you have 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 backbook 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 backbook 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.

Look, I think there definitely people who max out their credit card and go to the next thing they'll give them a loan. Reality is Affirm 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 it 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 $1,000 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 there gets philosophical quickly, so I'll try to get in and get out. Sure enough, there's credit and there's debt and this country is built on credit. And anybody who says otherwise is fooling themselves or, you know, trying to be an 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 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 a very sophisticated ways to finance their expansion etc. 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 see 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 Affirm, certainly using Affirm given the no late fees, no compounding, etc. 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're probably the best alternative to not just credit cards, but the overall kind of fault of the American credit system.

Hey so if you cast your mind back to 1985 or six 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 like, '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 gate was funny and entirely disingenuous and may have been planted by the credit card industry zealots for all I know. But we generally see Affirm 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, you know, 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 you know set of moral standards and it's done really really well and I'm sure some people use Affirm card to buy burritos and I don't think anyone is splitting them into four when you buy a low ticket item as they call it with Affirm 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.