Max Levchin is one of the founders of PayPal, a company that made it easier for consumers to transfer funds to one another and provided an easy-to-install payment processor for businesses. Now he’s seeking to once again reinvent consumer finance as CEO of his new company Affirm.
Affirm was founded out of Levchin’s company building investment vehicle HVF, and over the past two years has been focused on reimagining how consumers apply for, receive, and pay back micro-loans instead of going into credit card debt.
It’s also quietly raised $45 million in debt and equity financing from investors that include Khosla Ventures, Lightspeed Venture Partners, and Nyca Partners, while building up a team of 32 employees to engineer and deploy its technology.
That includes re-assembling many of the members of the old PayPal risk team, including Nathan Gettings, who is Levchin’s co-founder and Chief Risk Officer at Affirm. Along with them on the founding team is former ngmoco Chief Data Officer Jeffrey Kaditz, who serves as Affirm’s CTO.
Re-Inventing Financing With Split Pay
With its first product, Split Pay, Affirm hopes to provide a new way for consumers to finance their purchase at the point of sale. Rather than using a credit card and being charged interest each month they have an outstanding balance, Split Pay provides an easy way for consumers to apply for and receive a short-term loan to finance the transaction.
“We spent the last two years trying to hone in on what the prototypical consumer would be,” Levchin said. Affirm hopes to target Millennials, who he believes are mistrustful of the current financial products out there. And they have good reason to be: Levchin notes that the standard credit card APR calculation is not designed to be consumer friendly.
With Split Pay, Affirm wants to give that group a way to purchase items that may not have that might be more than their monthly cash flow, but to do so in an affordable and transparent way. As a result, its financing is structured more like a mortgage or car loan, and provides consumers with a full report on the overall cost of the product and interest, plus how much they’ll pay each month.
Lending Backed By Big Data
By itself, Split Pay might not be so revolutionary. But on the back end, Affirm has built a new method of evaluating creditworthiness and lending risk that goes well beyond your typical FICO score and could lead to many more financing approvals while also lowering the amount of money consumers pay in interest when financing purchases.
When signing up for Split Pay, consumers enter a small amount of personal information, including name and phone number, and Affirm is able to evaluate a person’s credit history in real time. In a matter of seconds, the system can approve a consumer for financing and show the structure of their offer.
Affirm has integrated with a number of large databases of consumer finance information, and over time will be increasingly using its own data to confirm the creditworthiness of its users. But “the most important set of data is our operating data,” Levchin says.
(As a side note, Levchin hates the term “secret sauce”… “I don’t like putting the veneer of magic over technology,” he says.)
By understanding the loans that Affirm approved and had paid off, the company can build on and improve a new model for consumer finance. That stands in contrast to the current credit card debt model, where financial institutions benefit the longer that consumers take to pay off a bill, and from each late payment.
That will enable it to help consumers save money on their purchases as opposed to putting them on a credit card, and could also have benefits for repeat users. If you successfully pay off a Split Pay financing, for instance, you’ll be more likely to be approved for a larger amount or on more favorable terms a second time.
“The goal is not to create revenue from people going into debt,” Levchin said.
A New Way For Merchants To Get Paid
Affirm makes money both as a payment processor — taking a small portion of each sale — as well as from interest it collects from consumers. The company is also taking on all risk from loans that default, which means that merchants who sign up will get paid whether or not a consumer successfully paid back the loan.
For a growing group of merchants, adding a new, risk-free way for consumers to finance purchases has a strong appeal. As a result, Affirm has managed to sign up more than 100 e-commerce companies to test out the product.
To support those early adopters, Affirm is working closely with its initial partners to ensure things run smoothly. But there will come a time when the company hopes to provide a self-serve widget — kind of like PayPal’s Buy Now Button — that will allow merchants to deploy Affirm as a payment option on their own.
Because it has a dual revenue model, and because the team believes it can do a better job of determining the risk of lending to consumers, Affirm can likely produce better margins than typical loan processors. Ultimately, that means it can pass on savings to consumers in the form of lower interest rates than competing financing options.
Levchin said it wasn’t his intent to take over as CEO of Affirm, but he missed running a company. In the four years since Google acquired Levchin’s social gaming company Slide, he’s been mostly focused on building up his so-called “mad scientist lab / investment vehicle” HVF. But the opportunity at Affirm was too big for him to be sitting on the sidelines.
“I originally planned to be Chairman, not CEO,” Levchin told me. “But I realized would rather be an active member of the team than watch someone else run it.”
As a lending company, Levchin says several things matter as it scales up — you have to increase your book of loans, make sure lenders aren’t too highly concentrated, and get high approval and repayment rates, all while increasing the number of merchants that use the product.
But those are all challenges Levchin seems not only prepared for, but excited about.