Almost 40 percent of American households have some kind of credit card debt. A new startup called Affirm wants to provide an alternative. The company partners with stores to offer customers loans for big purchases, like a mattress or a bike. When it’s time to buy, you take out a loan through Affirm instead of swiping your card. Founder Max Levchin, who was a co-founder of PayPal, built the company after having his early credit card history impact his ability to buy things years later. Marketplace Tech host Molly Wood talked with Levchin about his credit card alternative. An edited excerpt of their conversation follows.
Molly Wood: How does Affirm work?
Max Levchin: Today you will find Affirm at a retailer. We would be offered at the point of sale as an alternative form of payment so you could borrow money to finance a mattress or a bicycle or any form of housewares.
Wood: And are you also doing a sort of different credit evaluation?
Levchin: Yes. The only way this could work is if we were very good at offering credit to people who would normally be priced out of it.
Wood: So if the goal is to help consumers manage their financial life better, why do this? Why allow them to take out high interest loans on things that they can’t afford?
Levchin: Our loans are simple interest loans as opposed to compound, which is also why we insist on saying here’s the rate, here’s the dollar amount, just to ground your understanding of the actual financial impact on your life. The other thing that you said, we underwrite the ability to pay. A very, very important pillar of the business is answering the question: Can this person afford this loan given everything we know about them right now? If the answer a model gives is no, that is not likely to happen, we will not lend.
Wood: But it is still debt?
Levchin: It is debt. I think debt gets a bad name for a good reason. But the actual concept is not inherently bad. If you look at American corporations, every one of them with very few exceptions has debt. The reason that’s fine and consumers get tripped up so much is because American corporations employ at least a handful and typically many lawyers saying let’s make sure you don’t get screwed.
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Wood: Why did you decide to start this?
Levchin: A couple different reasons. At PayPal we were really focused on payments, but we never really touched credits and underwriting and lending, which at the time I had a probably more black and white view of where I thought borrowing money is just a bad idea. You should not be in debt. But then I started to research point of sale lending, I had a recollection of a personal story when I was in college, a fresh-of-the-boat immigrant. I got myself one of those wonderful point-of-sale credit cards, missed a few payments in a row and found myself with credit history so trashed that I couldn’t buy a car for seven years on any terms. I was a pretty excellent risk by the time I was 24. PayPal was already public and we already sold it to e-Bay. And yet I would still go into a business and be told you can have any car you want as long as you pay cash.
Wood: I signed up for a credit card so I could get a free Frisbee in college. Same deal. Pretty much recovered from that 10 years ago.
Levchin: I got a t-shirt out of it. I clearly got ripped off on the Frisbee as well as the interest rate.
Wood: I mean we are in this moment where I think a lot of consumers just realize that a massive industry that they cannot get out of that is doing very well financially, is in no way working to protect their interests. How do you continue to convince people that you’re different?
Levchin: That’s probably our greatest challenge. No matter how hard we try we are lumped into the group of people that just doesn’t care that much. And that isn’t true for us and our customers certainly know that.
Wood: That sounds okay now that you’re a private company. At what point is there going to be more pressure to make all the money?
Levchin: I don’t know. I haven’t felt it yet. I think the reason Silicon Valley so rarely attacks industries like finance, or lending specifically, which have the skewed set of incentives where if your customers do poorly you do better, because Silicon Valley at its core is still mostly deeply idealistic. People who join Silicon Valley companies actually want to do well by doing good. They don’t always formulate it that way. They don’t always stick to that story. But a lot of young graduates that just come out of school with every skill necessary to do whatever they want, they do not want to join a company that says, “we’re going to rip off our customers, but hey we’re all going to get rich.” It’s easier to do in some industries. We can take humans to Mars and that’s a pretty unequivocally awesome thing and there’s not a whole lot of things we can do to do the wrong thing there. With lending it’s much tougher because there are many ways of making more money and screwing your customers in the process. The way we built this company is by massively over-amplifying the sense of mission. Part of it rubs off on the investor base. Every time we bring on an investor we tell him here’s how we play this thing, it’s not going to change. When we go public, if we go public, we will have to disclose that as a risk. You might not find this company to be the most profitable company in financial services, but you better expect us to have the highest level of customer satisfaction. We hold ourselves accountable that way. So far we have yet to find a confused investor that says wait a second, where’s the hidden profits.
Wood: What if JP Morgan buys you?
Levchin: I doubt they would. I’m pretty focused on building something that’s going to stand independently for a very long time.
Listen to our extended interview with Max Levchin here.