Max Levchin needs little introduction in the world of tech. As an entrepreneur, he’s been the co-founder of PayPal (now public), Slide (acquired by Google) and Affirm (reportedly about to go public), some of the hottest startups to have come out of Silicon Valley. And as an investor, he’s applied his power of observation and execution also towards helping many others build huge technology businesses.
We sat down with Levchin for a recent session of Extra Crunch Live, where he spoke at length about what he sees as some of the big opportunities in fintech. Here’s an edited version of the conversation. You can watch and listen to the whole discussion — which includes stories about Levchin’s coffee and cycling habits, and how many times he’s seen “The Seven Samurai” (hint: more than once) — here, also embedded below, and you can check out the rest of the pretty cool ECL program here.
How e-commerce failed to evolve since his days at PayPal
Even going as far back as PayPal I think the industry has devolved. I think fintech had the promise of really bringing simplicity, honesty and transparency to the customer. Instead, we ended up putting a really nice user interface on products that are not designed with the user’s best interest in mind. I’m a big fan of throwing shade on credit cards, because I think fundamentally, their business model is remarkably similar to that of payday loans. You are allowed to borrow some money and don’t really know exactly what the terms are. It’s all in the fine print, don’t worry about it and then you just make the minimum payments and you stay in debt. Potentially forever.
So when we started Affirm, the idea was why don’t we shine an extremely bright light on everything with a view to making it really clear to people that it’s completely okay to borrow money. We’ve devolved the industry to such a bad state that credit — normally a good word — is about being in debt, and that is a terrible thing, because it implies that you’re not completely free, and you’re never going to be.
We built this company on the idea of bringing credit back into prominence, letting people buy things through a really simple product that tells them exactly what the schedule will be and what the true cost will be when they’re done with making these payments. And, you know, 10 years later, almost, we are now in all sorts of places — 6,000 brands and almost 6 million people are using us all the time. And we’ve never charged a penny of late fees.
Starting out with credit as the first product to tackle at Affirm
I think if you look at the world of buying, people generally don’t spend a ton of time thinking about money at a sort of a deep level of curiosity or intellectual stimulation. It’s a utility, and it should be. We think about investing, which is sort of some form of saving and/or putting money to work and, you know, creating a better future for ourselves and our kids. But mostly we think about money in terms of buying.
To the merchant, money is just a means of exchange. They don’t especially care for the complicated financing arrangements you might have on the consumer side; they would like to get paid right now. And that is how it should be.
How Affirm might extend its products and platform in light of COVID-19
COVID-19 has been a tragedy, so any form of saying, “Yay, opportunity,” … I want to make sure that I don’t jump into any sort of answer without acknowledging that fact.
Its impact on e-commerce has been probably best summarized as skipping four or five years of growth. Early growth rates in e-commerce were these sort of crazy doubling, quadrupling, very quickly. The last four or five years, it’s grown 18% or so.
By the time the dust settles on this pandemic, I think you will find lasting impact on e-commerce writ large, for Affirm and everything else. It’s as if we skipped a bunch of years.
My 70-year-old mom is shopping online like nobody’s business. She realized that she can order groceries online, and that’s a massive change in behavior. Everything’s online.
Affirm has all sorts of ambitions around how we can change the world for the better with honest financial products. But I’d rather deliver and then show it to the world instead of promising. We just rolled out a savings product. So one product is the mirror image of the other and shows a little bit of an answer to your question. Ask me again in six months how we’re doing there.
The future of credit scores
Affirm has built its own credit scoring engine of course, quite some time ago, and we keep on iterating on it. That is what’s at the heart of Affirm: We think we can evaluate credit using both traditional and nontraditional data while remaining compliant and while opening credit access to people that may or may not have been getting it before at a fair price.
If you look at how Square Capital works for small merchants … if you have the Square Terminal, they will look at your cash flow through that lens and be able to lend money to you. Brex does something quite similar by powering both your charge card and your loans. This is also true for Stripe Capital, Shopify Capital. The core of these is this idea that if you have extra information that it’s much closer to the real underlying reality of either consumer merchants financial life, you can really understand what they can borrow and what the risks are and then price accordingly That is the future of credit scores.
Fundamentally, these new credit scores, both on a merchant side and consumer side, are about financial inclusion. There are people who would lead a truly better life if they were able to afford a nicer car. For a job interview, or a better car to go do a 1099 gig job. There are all these economic levers that are either unlocked or locked by people’s credit score. So when the credit score is mispriced, they’re fundamentally precluded from advancing socially and advancing economically. That’s where the opportunities and the social responsibility really are.
What else still needs fixing in fintech
At some point hopefully the world will reopen physically. There will be literally millions of shops, from your favorite coffee shop that’s no longer there to your favorite boutique fashion shop that can’t reopen because their inventory is out of season and they’re bankrupt. They’re all going to need access to capital. That will be one of the greatest opportunities but also be one of the greatest challenges because you’re fundamentally assessing very small local entrepreneurs.
Also, if you go buy a car there’s always a bundle finance and if you actually want the car you don’t care about the loan … the loan says magical things like the car MSRP is X but if you borrow money right here right now, it’s actually a lower price … you feel like you’re getting a fantastic deal. You unpack it later on, and you realize that this whole thing is giant ripoff. I don’t know who and when, but that will be cleaned up.
I’m an investor in a bunch of little startups that are trying to disrupt and reinvent different ways of owning homes, which in the U.S. is both the American dream and the American tragedy.
There are still all kinds of really wacky things in payments that are just not done. Why is the U.S. so behind on contactless payments? If you look at everywhere [else] in the world, you can wave your card and go on and it just works. So I think that stuff is really an interesting opportunity.
The area that I’m most excited about are all these platforms that aggregate employment data. There are 1099 workers, but then there are little companies and people who own two trucks and employ a driver. One driver is themselves and the other one is another person. They all need some form of finance. That’s another place where data is abundant, and yet a huge number of people are constrained. I know people are working on it. But I think that that’s a big opportunity and a very important one.
The deeper you are in the workflow of a business, the more profoundly it shifts economics. The old adage is you want to lend money to somebody who doesn’t need it, because then they can pay you back. That’s actually not true. If somebody doesn’t need it, why would they borrow money? However, somebody that says, I can see in my workflow that if I buy five widgets, and I sell them at a 10% markup, and I do it again, but I have to wait for my sales to come through so I can buy five more widgets, what they really need is not to borrow money. They need a way to get 10 widgets. It’s a subtle detail, but knowing that you’re lending them money to get those extra five widgets is a profound changer of risk and therefore cost to the borrowers.
PayPal “mafia” is an iffy term, but was it really a thing? Could it be repeated?
“PayPal mafia” doesn’t bother me much because the original article that used it in 2007 described me as the consigliere, and I always thought the consigliere was the coolest guy in a mafia.
When we hired, we screened for entrepreneurs. One of the interview questions I asked everyone was: Where do you see yourself after PayPal? The right answer, the one that I rejoiced in hearing, was, “Oh, this is the last job. After this, I’m starting my own company.” As a result, we were basically pre-filtering for proto-entrepreneurs. I think there are other companies like that. I’d like to believe Affirm is like this because we now have a tiny little fledgling Affirm mafia with people who have left to start companies, not just the ones that we spun off like Resolve, but just people that said, “You know what? I’m ready.”