Can Affirm take down the credit card industry? It’s CEO Max Levchin’s 30-year plan

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Transcript

Alan Murray: Leadership Next is powered by the folks at Deloitte, who, like me, are super focused on how CEOs can lead in the context of disruption and evolving societal expectations. Welcome to Leadership Next, the podcast about the changing rules of business leadership.

I’m Alan Murray, and I’m here with my incomparable co-host, Ellen McGirt. Bam. Ellen, how are you? I have a question for you when you tell me how you are.

Ellen McGirt: I am great. I am back to full health and I’m happy to be back on the job and—what’s your question? I’m dying to know.

Murray: My question is: Do you know what the PayPal Mafia is?

McGirt:  You know, I do, and I feel a little bad about it because, Alan, I know that you only know me as a loyal Fortune employee but for a brief period of time, maybe six seven years, I did work for a competitor magazine and I did get a chance to meet and interview almost all the PayPal Mafia.

Murray: Wow. But Fortune, I believe, and we can ask our guest this, I believe, that PayPal Mafia was a phrase that not everyone loved that came out of a Fortune cover story. And it’s the founders of PayPal, who then went on to create many other businesses. That includes Elon Musk, it includes Reid Hoffman, it includes Peter Thiel and it includes our guest, Max Levchin. Welcome to Leadership Next.

Max Levchin: Thank you for the wonderful intro, and that’s correct, for better or worse.

McGirt: I’m thinking the PayPal mafia cover was an iconic moment in business. You scooped everyone as you often do. But you were all very different from each other. I mean, Alan, you just named sort of a gallery of personalities, and it was extraordinary how well PayPal did and all of your various inputs and influences and how interesting careers you’ve all had outside of it once you parted company. So I think, maybe mafia is not the right the right framing for it, but it was certainly an interesting moment. Max, what do you think?

Levchin: It was definitely a zeitgeist-y, if that’s an appropriate adjective. We don’t love the mafia term, just for the record. I think most of the PayPal crew thinks of ourselves, still, as really good friends. Even the occasional rivals maintain really good friendships. And so we all really enjoy each other’s company and do not think of ourselves organized crime.

Murray: So that will be the last reference to organized crime in this podcast. So let’s dive into what you’re doing now, Max. Affirm. Let’s just start with what you were trying to do when you founded Affirm.

Levchin: Sure. I was born in Ukraine and came to the U.S. as a teenager. Before PayPal before, before university, before everything, really, as I started my sort of American life. I found out the hard way that if you don’t have a credit record you don’t exist, and I sort of got this sort of canonical on-campus credit card, promptly ruined my credit rating, like all the things you’re supposed to do, as in large air quotes. And that stayed with me both metaphorically and practically. The week PayPal went public, I was suddenly wealthy and tried to buy a new car, which was my first new car, only find out that my credit rating was so poor that the dealer who had read the article about PayPal going public and recognized my name said no matter how great it is to be you, you’re going to pay cash because your credit score is awful. And right in front of my then-girlfriend now-wife she’s always you see, she met me before all of this began, and so I think she already knew I was a complicated man when it comes to credit anyway. And so the punchline is that I filed it under, hmm, it’s interesting. Reality does not correspond to credit scores very well does it?

And because the PayPal crew keeps in touch. I spend a lot of time hanging out with one of my earliest earliest PayPal co-conspirators whose name doesn’t frequently get mentioned, but he’s another one of these just utterly brilliant people that I met as early as high school, names Nathan Geddings. He went on to found Palantir Technologies. He’s just a really, really, really high IQ person. He and I worked on fraud and credit underwriting for PayPal. And we’re having lunch as we did a lot back in those days and he posed the question, why hadn’t PayPal tried to build the better credit score? And the memory of being declined for the silly car purchase. Having my card but one of the sort of, it’s interesting, but one of the burnt in my memory moments in my life was I turned 35 or 36, and went to a really fancy dinner that I tried to pay for with my credit card. One of my friends conspired to help the waitperson pretend that the card was declined. He meant no harm. I remember turning purple with embarrassment. And in that moment I said, Nathan, you’re right. We should have fixed the bleep credit score and the origin story of Affirm starts there. So you know what, I’m going to do something about this.

Murray: So you started Affirm to do that. But what’s happened in recent years is you’ve really latched on to what became something of a craze, which is the buy now pay later movement. How did you get from credit scores to buy now pay later?

Levchin: So sure enough, we build the credit score. Nathan is brilliant so he helped me build a pretty good score. And we went around the proverbial High Street offering it to various banks and other people that do lending. Every one of them told us if you are so smart, why don’t you lend your own money? And at some point we said, you know what? You’re right. We’re going to have to prove that our credit underwriting is better than what’s out there.

So we then sat down and said well, neither one of us knows anything about marketing. So we’re not really going to go out there and stand on the proverbial street corner and offer anybody loans. But we have to find demand from borrowers somehow. And I had long sort of been fascinated by this thing called bill me later, which before BNPL had a name and an acronym and was the hot craze. It was this really interesting company called Bill Me Later, that was acquired by PayPal, of all things, in sort of the heat of the 2008 financial collapse.

But the idea was pretty similar. It was this notion that you borrow money specifically for the purchase. And that of course was mimicking a long existing idea called a point of sale-issued credit card, when you would walk into a Macy’s or a department store somebody woud say hey, you want 10% off your cart or your dress or your slacks. You can get this credit card with a store name on it, and we’ll give you a special discount. And when you come back to the store again, you’ll use this card again and we’ll create loyalty that way. I  said that’s probably a really good hack because we won’t have to market, the merchants will market the product for us. We would just deal with the credit underwriting and facilitating the loan. The more I looked, of course Bill Me Later was no more, it became PayPal Credit, but the point of sale credit cards were still very much a thing. It turned out to be the fastest growing segment of credit cards. The more I looked into that segment, the more I realized that it was one of the schlockiest products. and that’s a technical term, ever offered.

Murray: Define schlocky. I think I know what you mean, but go ahead. You tell us why it was bad.

Levchin: So a great rule of thumb is that if it says in giant print “free” or “0%,” you’ll find an asterisk immediately after and in very small print it says but if you don’t make exactly the right number of pennies and dollars in exactly the right schedule for the following 96 months. If on the last day and the last hour, you’re a penny short, all the interest that could have compounded going back six years, whatever will have been due. So it’s known technically as a deferred interest loan or a deferred interest line of credit. And in the very small print which is the business model, it says that we’ll give it to you for free, no interest at all. However, if any of the many rules gets breached, it’ll be interest due and it flows back from the very beginning from the purchase time and that is how that particular industry makes money.

And so from, hey, I have a cool marketing hack to this is an enragingly bad product for consumers, we built what became BNPL. Which is in Affirm’s case, not just no deferred interest, which is true evil in my professional opinion, but also no late fees, no compounding interest, interest that’s actually fixed so consumers will know exactly how many dollars and cents they will ever owe us. We really build the company around this idea that we will do the right thing for the consumer, and especially if they are down on their luck, we will not make money from it. We will actually help them deal with their financial difficulties. [inaudible] Certainly we’re not the only company that built this buy now pay later craze, as you put it, but I’d like to believe that we ushered the change of financial services that really are for the people as opposed to against them.

McGirt: The work that you’re describing has the potential to impact all kinds of people who have been underserved by the banking industry in all ways that we know including payday lenders, and just the shlocky mechanics that you just described. You also described a person like yourself who is vulnerable to these kinds of things. How else have you learned to get to know the different kinds of customers who are vulnerable? I say that as someone who doesn’t get the chance to profile really smart technologies, leaders and founders so much anymore, but I spend a lot of time thinking about the racial wealth gap. I spend a lot of time thinking about inclusion and exclusion by design? How have you learned to get to know the various subsets of individuals who have been harmed by the financial services industry?

Levchin: Couple of things. There’s no substitute for talking to the people. So in the earliest days, and now it’s advice for every CEO and every product-minded CEO, which I certainly count myself among, get on the phone and answer customer service calls. And in the world of lending it’s a lot more personal, if you will, that by which if it doesn’t work, what are you going to do about it? It’s the I have to declare personal bankruptcy, and I still owe you money. And the only answer, of course, is go deal with that. That’s it. We’re going to step very far out of your life and we’re going to see you come back from the financial brink that you’re in. Fortunately it’s not a super common thing in our world, but things like hey, I lost my job. I used to do this basically to just give myself a boost emotionally, back in the day, not as much these days, but I would listen in the calls where somebody would call in who didn’t understand that we did not have late fees. So the conversation goes like this: Okay, so I’m a couple days behind. Was totally not my fault. My dog ate my homework. Here’s the thing, I already made my payments. Can I talk to you about the late fee that you guys charge? But we don’t charge late fees. What what? We don’t charge late fees. Oh my god, you guys are amazing. I’ll tell all my friends. Every time I hear that [I think] this is so awesome. So I used to do that a lot.

Not all the conversations are quite that cheerful and you’ll learn a lot about people’s lives. And during COVID, and since the pandemic began, I tried to learn a lot about where people were losing their jobs and what did it look like and do they have savings, how are they behaving? And I spent a lot of time doing that and still do. One other thing I did which was really educational and, I think at the time, vaguely controversial but not so much anymore. I think  in 2015, I think, I joined the advisory board of Consumer Financial Protection Bureau. That’s the all-feared all-important CFPB and it was fascinating in the sense that you get to be in the room where debates rage about sort of what’s good and what’s bad for consumers, not just by practitioners in the industry, but also the regulators. You get a lot of really interesting points of view that way. They were unbelievably willing to share how they think about regulating the industries that they’re responsible for regulating and how they think about bad actors, good actors. I had a wonderful conversation with a lawyer there and basically repeated the no we don’t charge late fees. She was sort of really? That’s one of one. That was very educational. The most interesting part of the CFPB experience was you get to encounter consumer advocacy groups that represent all sorts of folks from all sorts of walks of life, everything from indigenous people to folks that were affected by a hurricane. So you just get these really, sometimes, devastating perspectives from people that you would not have related to otherwise.

[Music]

Murray: I’m here with Joe Ucuzoglu, the CEO of Deloitte US, and the sponsor of this podcast for all three of its seasons. Thank you for that, Joe.

Joe Ucuzoglu: Pleasure to be here, Alan.

Murray: Joe, business is facing so many challenges these days. The continued pandemic the battle for talent, supply chain problems, rising inflation and now, on top of all that, the war in Europe. How are companies responding to all this disruption?

Ucuzoglu: Alan, you’re seeing a remarkable level of optimism in the face of so many varied challenges. And by and large, I attribute that to a recognition that this is just the new normal, the constant curveballs that will be thrown at us, but at the same time given how successfully so many of these organizations have navigated through these things over the past couple of years, a growing confidence that we’ll be able to continue to navigate the issues that get thrown at us and grow our businesses. But to do that we are absolutely seeing a new brand of leadership emerge, grounded in resilience, in agility, in a learning mindset. These are the most important leadership attributes in an environment where we should just expect that change and disruption are going to be at a consistently high level of intensity.

Murray: The problems aren’t going away, Joe, right? You have to manage through them.

Ucuzoglu: I had a CEO say to me recently that if you put together a list of the top 20 risks one week, something big is going to hit the next week and it probably isn’t even on that list. That’s just a reflection of the number of different phenomena in the world right now. And the level of complexity that businesses are managing through.

Murray: Joe, thank you.

Ucuzoglu: Alan, it’s a real pleasure.

[Music]

Murray: So Max, let’s talk about the roller coaster ride you’ve been on for the last two years. Affirm successfully did an IPO in January of 2021. Very good timing on your part. Congratulations. You raised over a billion dollars. The thing popped. It kind of doubled in value the first day. You were on a great ride. It was a craze, as you said, very popular. And then this year you’ve seen almost a 90% decline in your stock price and market value. So what’s going on there?

Levchin: I think I’m in pretty good company if you look at the cohort that went public around the time that we did or the rest of the tech market or the rest of the market these days.

Murray: I don’t know. Ninety percent may put you at the head of the pack.

Levchin: I think can probably name a few more that are right there with me.

Murray: Feel free.

Levchin: There’s no need to, it’s not exactly something that any CEO is excited about. The good news is that ultimately, I care about the stock price, I think it’s a very important thing for me to let my shareholders know should they be listening, That said I care about it, and I’d like to be graded in increments of we’re not in [inaudible] anymore, but the five year plan makes a lot of sense and we’re trying to build something for a long time. The daily fluctuations of AFRM would just make one’s stomach get into one’s throat just because it’s such a volatile time in the market.

And so as far as I can I try to look at our results of the company and expect the stock price to catch up to them. If you look at the results that we’ve posted, we’ve done extraordinarily well as a company between the day of our IPO and now, every metric that we publish has improved dramatically. So 90% down today and, perhaps, up or down tomorrow doesn’t really change what we’re building and how we’re going about building it. We’ve made a public commitment to the markets that we will get profitable in roughly at the beginning of the next fiscal year. That’s the plant and that’s what we’ll execute on.

Murray: Let’s stick with that for a second because part of what the market seems to be saying, obviously, Mr. Market is not always right, but what the market seems to be saying is, yeah, this was a popular thing and it was good for the consumers and you were growing like mad. But in an era of sharply higher interest rates, it’s not at all clear that you can make money. So why is the market wrong? Why is its perception of your future different from yours?

Levchin: I think the markets will be proven wrong when we declare profitability, and I intend to do so on the schedule that we promised. So I think that’s the best way I can prove the market wrong is by simply saying, Alright, see, I made a promise to do X and that’s what we did and that’s what we’ll keep doing. Structurally, the reason we can make money is the unit economics of Affirm, not necessarily true for the rest of the industry, but for us it has been true for a very long time, every transaction, every loan we underwrite has positive unit economics, which means that at the end, including things like losses for credits and all the other things in costs, we call it RLTC revenue loss, transaction cost, contribution margin or any other sort of margin metric, our margins are strongly positive. That means that so long as we keep growing so long as we make more transactions happen and people are still buying a number of things and Affirm is still growing a lot faster than the industry around us is, we will eventually make money because every transaction does create a positive margin.

So so long as we were prudent at managing risk. Obviously, there’s way to get it wrong, for example, if we are not tracking risk very carefully, you can start making negative transactions. That doesn’t bode well for lenders. You can also do lots of other irresponsible things, but we have run this company for 11 years in a very very responsible way. And for a long time—by the way the narrative two years ago three years ago, when we were competing in the world of zero interest rates and irresponsible spending by competitors, to put it bluntly, the conversation wasn’t can you make money? It was are you guys growing as quickly as possible? Who cares about the fact that you are promising, we kept on saying the same things then…

Murray: The good old days! We don’t care if you make money.

Levchin: I don’t think they’re the good old days at all. I don’t believe in building irresponsible businesses. I think the idea of a business is to create profit in a responsible way. Ideally, be driver of responsible financial behavior for all our economic stakeholders, consumers, merchants, shareholders. So we’ve always done exactly the same thing, except today, the rest of competition is finding out it’s really hard to make profitable transactions if you’re not used to it. We’re not. We always have done that.

McGirt: And that leads me to, I guess, maybe it’s probably a two part question. But the question is…how do you think about innovation? Clearly you’re mission driven. You’ve got purpose at the center of what you’re doing. And you’ve set some very clear stakes in the ground around how you’re going to behave with consumers. I’m sure that’s inspiring for your employees. So I’m curious as you look out on the risk assessment dashboard,on some of the big picture issues like global inflation, food insecurity, the smoldering crises of war refugees and climate change, and you think about what’s possible, how do you create an organization that thinks about inventing what’s next, given the purpose that’s at the core and the kinds of problems that we have in the world?

Levchin: I could spend an hour just on all these things. It is a privilege but also a great blessing to lead a company with a mission at the center. I think when, in the good old days sense, you go public and everything looks peaches and cream, maybe people don’t care so much about why they’re doing what they’re doing because it’s rewarding and fun and everything’s okay. When you’re looking at a super high volatility stock market and read the news as we do with the interest rates going up and inflation raging, and a war in my hometown and on and on and on, it’s a lot easier to motivate yourself, when you realize what you’re doing actually helps real people in a way that’s not just profitable, but also has a ton of purpose behind it. And so that has been a great backbone with which I get to lead the company. My management team gets to do the same. The way we try to innovate…again, nothing is better for innovators than constraints. If you tell yourself here’s a blank sheet of paper, at least in my case, you don’t know where to start. There’s so much opportunity. It’s beautiful without anything on it. Maybe I’ll wait.

If you tell yourself no, we will never charge late fees. No, we’ll never touch deferred interest with 10-foot pole because it is truly terrible. All these things that we said these are not good for consumers. These are bad things. We’re going to avoid them. And yet people still need to buy things and in the world of today, they actually need our help more than ever. Inflation strips away your ability to buy the things you need. And if it’s a suit to look good, and your next job interview as U.S. rolls back from full employment, that’s going to be a relevant thing. If you’re not employed and you still need to look presentable for that interview, the only way you’re going to pay for it is with a pay over time scheme of some kind and if I can help you not fall into the trap that is revolving credit e.g. credit card, that’s part of the mission. So I think these constraints actually drive us to invent new things.

By the way, the other constituent that we have are the merchants. They are just important to us and our job there is to help them bring what’s on their shelves into the hands of the willing buyer. We create more velocity of sales for them. And again, we’re doing it in a responsible way where they know the consumer isn’t going to wake up one morning and say oh my god, I bought that suit at place x and boy do I feel screwed because the interest has now overrun my life. And so we are [inaudible] to the brand of the merchant because we treat they’re, our shared consumer right, and we help consumers stay on the right side of their financial decisions. There’s always more ideas. The thing about about payments and credit and financial services. We’re not just trying to help you buy things. Fundamentally the mission of Affirm expressed as a product strategy is we’re helping your money go further. That’s really what we’re trying to do.

Murray: Yeah, so that’s the question I want to ask. Clearly a strong sense of purpose behind Affirm. If it’s such a good idea, and I certainly think it’s a good idea, you know, be totally transparent. We’re not going to have deferred interest. We’re not going to have hidden fees. We’re not going to have late fees. If it’s such a good idea, why aren’t you driving all the credit cards out of the market?

Levchin: We’re making a dent and, just so I’m clear, we’re trying. But this isn’t a great secret….

McGirt: That’s the 10-year plan.

Levchin: If we’re being for honestly, it’s like a 30-year plan. I intend to make it, but I think we are doing our best to provide a viable alternative. And just to use our super brief history of Affirm’s product roadmap, so we started with this idea that you’re going to buy a bicycle, you’re going to buy a couch, things that are expensive. Looking back at the 20-year-old Max, what do I need this credit card thing for?  I have a dorm room and it’s empty. And so we built what we call installment payment planner. It’s got a lot of names now but it’s the pay over time over many, many months, from six to 36 to replace credit cards for considered purchases, bicycles or couches. Then we realized that it even works for $200 things or $150 things. So more like a nice presentable dress or suit. So that’s what now colloquially known as the BNPL, paid for over six weeks. And then we realized that there’s still a lot of other things you buy that does not fit into either of those other two things that we launched, we just really started rolling it out, our answer to a debit card, we’re calling it debit plus, or you can think of it as credit minus. It’s basically a credit card minus the late fees minus deferred interest minus all the schlock. So we are absolutely chasing the credit card volume, which is on the order of a trillion dollars. So there’s a long way to go.

Murray: Well, we’re going to have you back in 30 years to talk about that. But Ellen, we should talk a little bit about what’s happening in Ukraine. This is your home country. How do you make sense of this moment in world history?

Levchin: I don’t know if I can. I’m no geo. So I read the same newspapers all of us do and I listen to the commentators and absorb the knowledge but I don’t think I have much to add to the conversation around where it came from. Which side of the responsibility gets placed where. The humanitarian crisis is very real and it hits me perhaps slightly more than the average because I have relatives in both the places, some where there’s no daily shooting and some where there are. So I think that’s that’s probably the most honest answer. The whole thing is terrible and I hope it’s peaceful eventually.

McGirt: We’re so sorry to hear that. Just as a follow up, I remember the last time I saw you many years ago, we were having a reporting lunch, and you told me story. Both our parents, your father and my mother in their retirement had started writing poetry. And we both learned the hard way that when they shared their poetry that they were not asking for actual feedback. They just wanted to hear that it was wonderful, and it was such a delightful shared moment. And then you talked a little bit about your dad, who was a pretty big deal in Ukraine. The story of your family’s escape and your statelessness. And the obviously the wonderful, happy ending for you in the United States feels like it’s playing out around the world, but particularly in that part of the world, in a very terrifying way. Could you tell us a little bit about that experience with the eye to giving us a little bit more insight into what it’s like for other people now.

Levchin: Excellent memory. I have to comment on that. I think since we last saw each other in person, my dad, very sadly, passed away.

McGirt: I’m so sorry to hear that.

Levchin: Thank you. But he was a wonderful guy and a gentle man and a gentleman. He taught me a lot. The long and short of my experience was we got exceedingly lucky. I think the reality of Ukraine today via almost seven, almost 8 million people that escaped. I got nothing on them. We left the country by plane. The scariest part of my journey out was a really rough border guard told us in no uncertain terms that we’re traitors and we’ll never be allowed back and all sorts of scary sounding things, took away my floppy disks which had my entire software collection on them, but that’s really other than the sense of hope we lost very little else. I think people who are running away from the war today are literally traveling with a suitcase and a half  and a kid on their shoulder. So that’s, that’s a little bit different. I feel enormous gratitude for the U.S. receiving us, but also an extraordinary sense of luck. Fast forward 30 years and you have what you have today.

Murray: Max Levchin from the days of PayPal we won’t use the M word, through Yelp, Evernote, Yahoo, the U.S. Consumer Financial Protection Bureau and now to Affirm, you’ve had just an amazing career. And you have a huge ambition for the next 30 years. And we’re going to mark our calendars and have you back to talk about the end of credit cards when that period is over. But thank you so much for spending the time with Ellen and Me on Leadership Next.

Levchin: Thank you. Thank you for having me. I really appreciate the nice words about Ukraine.

Murray: Leadership Next is edited by Nicole Vergalla, written by me, Alan Murray, along with my amazing colleagues, Ellen McGirt and Megan Arnold. Our theme is by Jason Snell. Executive producer is Megan Arnold. Leadership Next is a production of Fortune Media. Leadership Next episodes are produced by Fortune‘s editorial team.

The views and opinions expressed by podcast speakers and guests are solely their own and do not reflect the opinions of Deloitte or its personnel. Nor does Deloitte advocate or endorse any individuals or entities featured on the episodes.