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Speaker 1: Welcome to the Bloomberg Markets Magazine Interview. I'm Shanali Bask

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Speaker 1: For every Markets magazine, we go in depth with a

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Speaker 1: key newsmaker, an industry up and comer, or a disruptor,

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Speaker 1: And this time we spoke to Max Levchin, the CEO

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Speaker 1: and founder of a firm. He doesn't think he should

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Speaker 1: be buying a cup of coffee on a revolving credit

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Speaker 1: line and have to pay it off over the next decade.

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Speaker 1: And that could be the elevator pitch for a firm

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Speaker 1: and other players in the world of buy now, pay

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Speaker 1: later finance bnpl as. It's often called promises to be

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Speaker 1: an alternative to high interest credit cards and a lifetime

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Speaker 1: of debt, and the concept is nothing new. A customer

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Speaker 1: pays for one thousand dollars television and pays for it

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Speaker 1: over four two hundred and fifty dollars payments, and that

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Speaker 1: affirm it acts like a zero percent loan, but if

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Speaker 1: a customer pays late, then many of a firm's rivals

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Speaker 1: will charge late fees. The use of bnpas has exploded

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Speaker 1: in recent years, with more than twenty four billion and

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Speaker 1: BNPL loans estimated to have been created in twenty twenty one,

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Speaker 1: according to a critical analysis by the Consumer Financial Protection Bureau.

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Speaker 1: But as BNPL has gone mainstream, it has attracted more competition,

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Speaker 1: with PayPal and Apple joining the FRAY, and more regulatory oversight,

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Speaker 1: with the CFPV concerned about some aspects of the model.

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Speaker 1: Here's Max Levchin on what caused the buy now, pay

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Speaker 1: later revolution.

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Speaker 2: America runs on credit, and that's not a bad thing.

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Speaker 2: You can borrow today to go to school and get

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Speaker 2: a better education and have a marketable degree. And we

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Speaker 2: buy homes on credit so that we have a nice

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Speaker 2: place to live and build a family and create more

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Speaker 2: opportunities for American economy to grow from the labor of

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Speaker 2: our children. And so the credit is not a bad

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Speaker 2: thing at all. The problem was credits that on the

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Speaker 2: consumer side of things, it evolved into what should be

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Speaker 2: known as buy now and pay forever, which is lines

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Speaker 2: of credit on a piece of plastic known as credit cards.

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Speaker 2: If you are not extraordinarily well to do, and that's

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Speaker 2: vast majority of Americans, you will eventually find yourself revolving,

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Speaker 2: which is your carrying a balance and you don't know

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Speaker 2: exactly what you're going to be out of debt, and

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Speaker 2: you seem to be paying and pay and paying, and

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Speaker 2: yet your total indebtedness doesn't seem to be going down

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Speaker 2: very much. Around two thousand and eight, entire generation of

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Speaker 2: what then kids who are now millennials saw what happens

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Speaker 2: to their parents who were knee deep in debt and

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Speaker 2: didn't know exactly how to get out of it, and

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Speaker 2: realize that there's got to be a better way. The

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Speaker 2: birth of buy now, pay later, and in particular what

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Speaker 2: we call internally honest finance, which is what AFFIRM wants

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Speaker 2: to be. Or is is this idea that there's got

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Speaker 2: to be a better way instead of buying now and

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Speaker 2: paying forever, maybe you could have certainty and control around

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Speaker 2: your personal finances that does not require walking around with

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Speaker 2: an Excel suppasheet at all times. All of that is

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Speaker 2: a secular momentum began years ago, and we were there

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Speaker 2: to grow with it a firm. In particular, and by

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Speaker 2: now pay later large is the secular shift by young

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Speaker 2: consumers away from revolving credit and credit cards into much

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Speaker 2: simpler to understand pay over time individual transactions.

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Speaker 1: You were talking about the post two thousand and eight

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Speaker 1: generation and the worry about their parents being saddled with debt.

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Speaker 1: But there's another generation that is still settled with debt,

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Speaker 1: and now they're credit card debts, student loan debts, and

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Speaker 1: debts tied to homes if you can afford it. How

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Speaker 1: do you speak to kind of the financial habits of

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Speaker 1: this country and what might need to change.

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Speaker 2: I think we're doing our part when we speak to

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Speaker 2: the entire American populace. And by the way, we're now

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Speaker 2: live in Canada and certainly aren't planning to stop. And

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Speaker 2: just to North American giants. We have plans for a

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Speaker 2: worldwide version of this company. But we do see our

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Speaker 2: job as as much a tool for purchasing, as a

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Speaker 2: guide or copilot if fuel in your financial decisions. Our

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Speaker 2: job is to help you make sound financial decisions every

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Speaker 2: time you're deciding to buy or not buy, to finance

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Speaker 2: or non finance. And it's a big job, but somebody

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Speaker 2: has to do it, and we think we're up for it.

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Speaker 1: How are the financial habits of other places in the

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Speaker 1: world different than perhaps what we're seeing in this country

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Speaker 1: and even Canada.

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Speaker 2: The good news is that a lot of the world

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Speaker 2: is already buying things on installments, so we're not bringing

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Speaker 2: in an entirely new idea, and a lot of the

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Speaker 2: world runs on credit very cautiously, as in they are

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Speaker 2: prone to looking at financing things through the same lens

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Speaker 2: as we are. And so ask me again how we're

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Speaker 2: doing in other countries when we launch there. But we

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Speaker 2: feel very optimistic that the demand for the honest financial

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Speaker 2: products as we interpret them is going to be significant everywhere,

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Speaker 2: not just North America.

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Speaker 1: About a year or so ago, when Jamie Diamond was

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Speaker 1: asked about his biggest competitors, we talk about this a

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Speaker 1: lot that he named. Checked affirm that you and your

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Speaker 1: model is one of the biggest kind of incumbents to

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Speaker 1: the traditional financial industry. However, the banks have also seemingly

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Speaker 1: begin to partner with you more, particularly regional banks. What

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Speaker 1: role do they play in your lifespan?

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Speaker 2: I find it very flattering that someone as at the

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Speaker 2: very top of the Purple Bank in America sees us

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Speaker 2: as an important competitor. I don't think it's a statement

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Speaker 2: about us, It's a statement about the idea that revolving

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Speaker 2: on a cup of coffee is a model that's probably

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Speaker 2: going to go away over the next few years. So

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Speaker 2: I think that's good news, right large.

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Speaker 1: Do you think that the buy now, pay later model

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Speaker 1: creates new risks to an industry that are maybe underappreciated

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Speaker 1: from the get go.

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Speaker 2: I think by now pailiaire model creates risks for credit

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Speaker 2: card and frankly, it's a good risk that I am

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Speaker 2: happy to add fuel to that particular fire. You should

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Speaker 2: not revolve on a top of coffee. You should not

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Speaker 2: feel that you have no idea when you'll be out

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Speaker 2: of debt. By now, pay later and from in a

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Speaker 2: particular are the predictable outcomes product that is an alternative

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Speaker 2: to the completely unpredictable version that is offered to you

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Speaker 2: by traditional credit card issuers.

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Speaker 1: Max, you're kind of leading this hard charge. It seems

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Speaker 1: to kill the credit card. Where does this come from?

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Speaker 2: In you? I'm definitely not trying to kill the credit card.

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Speaker 2: I think there are folks for whom credit cards are

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Speaker 2: probably perfect. A lot of them live on coasts, make

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Speaker 2: six or more figures in salary, and really enjoy their

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Speaker 2: airline miles and perks and benefits, etc. But I do

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Speaker 2: think a tremendous number of people in quote unquote normal America.

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Speaker 2: I grew up after immigrating from Ukraine. I grew up

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Speaker 2: in Central Illinois, went to school in Central Illinois. For

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Speaker 2: plenty of people who revolve Half of this country revolves

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Speaker 2: on a five thousand dollars dollars plus. I don't think

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Speaker 2: it's a good thing. I think we would be a

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Speaker 2: financially healthier nation if we knew how to borrow intelligently

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Speaker 2: and not over ex center ourselves. So it's not a

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Speaker 2: quest against something, it's a quest for healthier financial lives

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Speaker 2: for everyone who doesn't live in New York and Los

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Speaker 2: Angeles and San Francisco.

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Speaker 1: Coming up, how buy now, pay later firms are responding

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Speaker 1: to higher interest rates. This is Bloomberg Welcome back to

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Speaker 1: the Bloomberg Markets Magazine interview. I'm Shinali. Bask BNPL has

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Speaker 1: been rising in popularity, but so has credit card debt.

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Speaker 1: Take a listen to just how much Americans have loaded

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Speaker 1: up on borrowing. Households in the US have racked up

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Speaker 1: more than seventeen trillion dollars worth of debt through the

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Speaker 1: third quarter of twenty twenty three, while the lion's share

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Speaker 1: of that is mortgages. What can't be ignored is the

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Speaker 1: stunning rise of credit card debts past one trillion dollars.

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Speaker 1: It's an emotional level for an industry that's quickly growing,

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Speaker 1: and with more credit card debt, there are also more

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Speaker 1: delinquencies still. By comparison to credit cards, the buy now,

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Speaker 1: pay later market is small globally. It's estimated to be

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Speaker 1: over three hundred billion dollars for twenty twenty three. According

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Speaker 1: to consulting firm Global Data. It's growing at such a

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Speaker 1: significant rate that it could hit more than five hundred

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Speaker 1: and sixty five billion dollars in twenty twenty six. Global

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Speaker 1: Data's report warned of the risks to such growth, saying

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Speaker 1: that if a borrower defaults, it could add more to

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Speaker 1: their total debt load, and the more debt and fewer

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Speaker 1: payments means more late fees for customers. Global Data says

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Speaker 1: that customer's credit scores could ultimately be negatively impacted and

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Speaker 1: that the industry could use more regulations and this echoes

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Speaker 1: the CFPB concerns. In a twenty twenty two report, which

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Speaker 1: cites the rapid growth of the BNPL model, a whopping

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Speaker 1: tenfold increase in just two years through twenty twenty one,

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Speaker 1: the bureau said that one risk was that customers could

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Speaker 1: become overextended, taking out too many BNPL loans across too

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Speaker 1: many lenders. Now the debts have piled up just as

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Speaker 1: the Federal Reserve has raised interest rates at the fastest

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Speaker 1: pace since the days of Paul Vulgar, leaving Americans vulnerable

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Speaker 1: to more expensive debts, and the move also caught some

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Speaker 1: businesses off guard, most notably with the regional bank collapse

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Speaker 1: of SVB. And with such an interest rate sensitive business,

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Speaker 1: I asked Max how a firm is responding to a

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Speaker 1: higher for longer environment.

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Speaker 2: As the Fed hype the rates at the unprecedented pace

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Speaker 2: all through last year. We have to adapt and move

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Speaker 2: with it. Obviously, we are not a bank. We were

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Speaker 2: not a depository. Therefore, we don't just have capital sitting

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Speaker 2: around for lending purposes. We have to go borrow or

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Speaker 2: sell our loans to buyers as the price of money

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Speaker 2: went up, so we have to figure out how to

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Speaker 2: finance our business our loans appropriately. The good news is

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Speaker 2: that we're able to maintain our margins and this notion

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Speaker 2: of higher for longer doesn't scare me one bit.

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Speaker 1: You're seeing the number of charge offstock to rise at

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Speaker 1: a lot of banks, and even with higher interest rates,

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Speaker 1: credit card debt in the United States has surpassed a

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Speaker 1: trillion dollars, a really landmark moment. So what does this

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Speaker 1: mean for customers of yours? For interest rates to be

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Speaker 1: higher for longer.

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Speaker 2: The thing that I would like to believe it means

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Speaker 2: for our customers is they will use a firm a

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Speaker 2: lot more than they use their traditional credit cards. We

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Speaker 2: are a better product. We are a viable replacement for

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Speaker 2: credit cards, and that's because we give you a sense

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Speaker 2: of control by always just closing exactly what the cost

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Speaker 2: will be upfront. We don't charge late fees, we don't

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Speaker 2: allow it to revolve, we don't have these ridiculous different

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Speaker 2: interest schemes embedded in our products at all. And so

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Speaker 2: it's a better product, and higher for longer, I think

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Speaker 2: means more people will use Affirm.

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Speaker 1: Are you saying that higher for longer, higher interest rates

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Speaker 1: means more people will be using buy now, pay later?

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Speaker 1: And why is that?

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Speaker 2: Manopulator means a lot of things to a lot of

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Speaker 2: different people. So I'll just speak to Affirm. I do

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Speaker 2: think that higher for longer means people will need and

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Speaker 2: crave certainty and clarity around cost of credit when you're

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Speaker 2: borrowing money, and it costs you more money than it

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Speaker 2: did during these or interest rate environment You want to

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Speaker 2: know exactly when you'll be out of debt. You want

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Speaker 2: to manage your cash flow much more precisely because every

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Speaker 2: dollar counts, and inflation definitely doesn't help that. And so

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Speaker 2: credit cards, which are these power tools with safety off

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Speaker 2: where you put it on your plastic and then you're

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Speaker 2: not really sure how you get out of debt, are

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Speaker 2: not great in this kind of environment.

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Speaker 1: Worry that as more customers look to affirm or to

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Speaker 1: buy now pay later models in particular, that the expansion

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Speaker 1: of a demand will lead to also more loose credit

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Speaker 1: underwriting standards in your industry.

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Speaker 2: Again, it's very hard to speak for the rest of

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Speaker 2: the industry, but I think we made our name and

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Speaker 2: our results of the last circle over the last year

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Speaker 2: and the last decade of operating in having the best

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Speaker 2: and the most thoughtful underwriting controls. As you saw deliquency's

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Speaker 2: rise over the last several quarters, for a bunch of

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Speaker 2: credit issuers, we kept ours essentially flapped to down.

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Speaker 1: You need a near perfect credit score to get a

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Speaker 1: credit card, or to get an auto loan or a

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Speaker 1: home equity line of credit in this country. With that

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Speaker 1: kind of tightening of credit standards across many of the

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Speaker 1: traditional lenders, do you think that that's fueled alternative types

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Speaker 1: of lending, particularly what you do at a and buy now,

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Speaker 1: pay later.

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Speaker 2: Banks sell these fairly archaic tools that are one size

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Speaker 2: fits all. You get a card, use it for everything,

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Speaker 2: you don't really know when you're got to get out

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Speaker 2: of debt. And on the risk management side, the bank

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Speaker 2: commits to a multi year relationship where maybe something changes

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Speaker 2: for you. Affirm is a much better model because we

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Speaker 2: underwrite every single transaction separately, as we look at the

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Speaker 2: item you're trying to buy, at the personal financial circumstances

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Speaker 2: of the person barring we can tell you, hey, this

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Speaker 2: is a good idea, or we can say you know what,

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Speaker 2: this is more than we think you can afford. These

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Speaker 2: are the nicest messages sometimes to offer to consumers, but

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Speaker 2: they're far healthier financially.

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Speaker 1: That's what's the future of FICO.

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Speaker 2: FIKO is the lingo fronca, the sort of venerable credit

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Speaker 2: score that's been around for a very very long time,

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Speaker 2: and it captures the financial reality of a lot of people.

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Speaker 2: It also excludes a fair number of people, in part

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Speaker 2: because it doesn't consider all the information that can be

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Speaker 2: gathered from the consumer as you make it under decision.

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Speaker 2: It also just overlooks people who don't have a rich

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Speaker 2: credit profile. I'm an immigrant. When I came to the

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Speaker 2: US thirty years ago. Now I existed, but my credit

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Speaker 2: score didn't because there was no history, and so FYCO

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Speaker 2: in of itself, needs to continue evolving. We announced that

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Speaker 2: we will be partnering with them to help them come

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Speaker 2: into the buy now, pay later age by working with

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Speaker 2: them to incorporate some of the variables that we have

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Speaker 2: figured out how to use for better underwriting. So I

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Speaker 2: don't think they're going anywhere. I think they're going to

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Speaker 2: continue to be the dominant name in underwriting.

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Speaker 1: When you're taking credit decisions into account, what type of

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Speaker 1: data are you collecting about consumers that are maybe broader

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Speaker 1: than a traditional credit card company or bank.

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Speaker 2: The FCO score speaks to just the person and their

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Speaker 2: overall financial health and their past ability and willingness to

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Speaker 2: repay their bills. It's very broad and kind of a

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Speaker 2: good foundation, But to approve or decline someone to a

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Speaker 2: specific purchase means you kind of have to understand what

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Speaker 2: the purchase is and we do do that, and I

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Speaker 2: think that's ultimately the future of underwriting.

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Speaker 1: You mentioned the fact that you were an immigrant and

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Speaker 1: couldn't get a card when you came here because of that,

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Speaker 1: and the credit history that you did or didn't have.

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Speaker 1: So are the things about the person themselves at the

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Speaker 1: borrower that you have to take into account.

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Speaker 2: Yes, although that's a significantly harder thing. First of all,

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Speaker 2: there's a tremendous amount of privacy concerns that you want

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Speaker 2: to be on the right side of the one thing

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Speaker 2: that you can and we do sometimes get access to,

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Speaker 2: and it's profoundly could be a life changing access to

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Speaker 2: credit moment. For some folks, it's personal financial state as

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Speaker 2: seen through the lens of their bank account. If I

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Speaker 2: understand your personal cash flow, it doesn't really matter what

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Speaker 2: the credit history says. That's a financial picture that is very,

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Speaker 2: very difficult to capture in your credit bureau profile. And

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Speaker 2: that's primarily what the fighter square is built up. And

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Speaker 2: so there are hidden facets of consumers that we know

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Speaker 2: how to look at and manytional scores do not.

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Speaker 1: There are a lot of buy now, pay later companies.

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Speaker 1: When you are by now paying later, sometimes you can

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Speaker 1: pay or buy now, pay later with your credit card.

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Speaker 1: That means that you are borrowing money and then you're

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Speaker 1: borrowing again on a credit card. Does the model itself

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Speaker 1: create new risks? That seems like leverage on top of leverage.

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Speaker 2: Max Affirm is not an add on to your credit card.

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Speaker 2: It's a replacement, that's the idea. So what you're describing

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Speaker 2: is a behavior that we do not encourage, and in

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Speaker 2: fact very actively try to prevent consumers from doing. We

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Speaker 2: launched our Affirm card with a very clear view that, hey,

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Speaker 2: you can put that credit card back into a drawer

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Speaker 2: and never take it out. The Affirm card is both

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Speaker 2: debit and the borrowing capacity in a single product, but

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Speaker 2: both are safe. They're both Affirm powered pay later features

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Speaker 2: where you will either settle your bill quickly or you'll

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Speaker 2: pay over time. But there are no late fees, there's

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Speaker 2: no revolving, there's no leverage on leverage.

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Speaker 1: Something I wonder about the credit product is it is

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Speaker 1: kind of showing you that the buy now, pay later

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Speaker 1: model is not the end all be all that in

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Speaker 1: some ways, the credit model works even better.

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Speaker 2: The Affirm card is not a credit card, It is

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Speaker 2: a debit card first and foremost. When you swipe it

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Speaker 2: and move on, it will take money out of your

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Speaker 2: checking account, your existing checking account. The end that takes

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Speaker 2: two to three days to sell. But that is not

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Speaker 2: a credit transaction. It is a payment. You can say, hey,

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Speaker 2: that thing I'm going to buy, I am going to

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Speaker 2: borrow for this because it's more than I have in

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Speaker 2: my checking account. The card says, oh great, I know

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Speaker 2: what to do next. So when you swipe it, the

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Speaker 2: next transaction automatically becomes a lowe. Those two modalities, it's unique.

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Speaker 2: No one's ever done this before. It's a very very

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Speaker 2: different product. It's taken us a little bit of time

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Speaker 2: to figure out how to educate the consumer about it,

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Speaker 2: how to make it all work from compliance and risk

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Speaker 2: and underwriting and cost perspective. But it is not a

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Speaker 2: credit card. It is an anti credit card in fact.

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Speaker 1: So what is the purpose of the credit card for you?

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Speaker 2: Credit cards are kind of a cold burning plant of

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Speaker 2: the payment industry. I think it's time to abandon them

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Speaker 2: in favor of cleaner energy alternatives like the firm card.

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Speaker 1: But why is a firm card? And answer to the.

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Speaker 2: Credit card the credit card is you swipe it, you revolve.

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Speaker 2: You buy now and you pay for indetermined amount of time,

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Speaker 2: possibly forever. A firm card is a fixed term loan

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Speaker 2: for every transaction. There is no revolving. There is no

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Speaker 2: bucket odette to fill up and then figure out later.

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Speaker 2: It's a much simpler, higher control.

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Speaker 1: Product coming up the future, a buy now, pay later.

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Speaker 1: This is Bloomberg Welcome back to the Bloomberg Markets Magazine interview.

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Speaker 1: I'm Shanali Bask. The future expansion of fine now pay

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Speaker 1: later appears bright, but that kind of success also comes

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Speaker 1: with scrutiny from the CFPB working on regulations for the sector.

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Speaker 1: I ask Max how he views potential regulation, and then

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Speaker 1: also a private equity snapping up by now pay later

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Speaker 1: loans means, and how a firm is working with the

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Speaker 1: regional banks to help alleviate duration risk.

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Speaker 2: The collapse of SVB and the turmoil around regional banks

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Speaker 2: showed us that duration risk is just as big of

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Speaker 2: a deal as credit risk. Regional banks watch this with

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Speaker 2: horror and then ask themselves, all right, so who manufactures

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Speaker 2: loans that yield well? Our fairly short term, are liquid

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Speaker 2: and are really well managed in terms of credit? And

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Speaker 2: there's not a long list a firm is one such company,

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Speaker 2: and so we've seen tons of interest from regional banks.

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Speaker 2: For regional banks, anyone who's got significant consumer deposits, this

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Speaker 2: is a great place for them to put their money

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Speaker 2: to work, and we will take good care of it

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Speaker 2: in very short term infurmence.

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Speaker 1: What's the difference for you between working with a bank,

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Speaker 1: a regional bank, or a private credit firm, which have

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Speaker 1: been increasingly more important as the banks have been shrinking.

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Speaker 2: They're also insurance companies work with. We work with larger banks.

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Speaker 2: We also securitize our loans, and with really big banks,

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Speaker 2: we have multiple warehouse lines where if we feel that

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Speaker 2: we want to hang onto these loans on our own

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Speaker 2: balance sheet to wile warehouse them, and so in aggregate

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Speaker 2: it adds up to a very healthy ecosystem of funding,

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Speaker 2: and our cost of capital is something that we report

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Speaker 2: on every quarter. Obviously, these things have some amount of

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Speaker 2: lagging effect, whereas some of these deals renew, we renegotiate

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Speaker 2: to reflect the recent changes in the Federal Reserve action.

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Speaker 2: But ultimately it is the plurality and the diversity of

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Speaker 2: the funny ecosystem that we have created that has allowed

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Speaker 2: us to maintain our margins and also deliver good yields

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Speaker 2: to our partners.

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Speaker 1: You saw earlier this year KKR, for example, agreed to

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Speaker 1: buy as much as forty four billion of buy now,

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Speaker 1: pay later loans from PayPal, And could you see yourself

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Speaker 1: doing a deal so large.

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Speaker 2: I certainly can see us getting to that scale at

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Speaker 2: some point reasonably soon. So I feel great about the

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Speaker 2: precedent that's been said here. Obviously, camp comment about eighty

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Speaker 2: deals that are not publicology yet, but certainly the model

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Speaker 2: that that particular deal proves a model, and frankly, I

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Speaker 2: think creates another sort of standard approval on the buy now,

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Speaker 2: pay later industry.

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Speaker 1: The Consumer Financial Protection Bureau in particular has raised a

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Speaker 1: lot of concerns about the buy now, pay later model.

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Speaker 1: What kind of future regulation do you see or clamp

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Speaker 1: downs on the industry that could really change the way

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Speaker 1: it works.

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Speaker 2: I think regulation, when done right, is a good thing.

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Speaker 2: It creates equilibrium settings in the market, allows for fair competition,

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Speaker 2: protects consumers. So all of that I am generally in

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Speaker 2: favor of. I think binaipiliator industry, except for a firm,

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Speaker 2: as is frequently the case should not be unchecked in

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Speaker 2: its fee schedule setting. But there's plenty of late fee

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Speaker 2: harvesting as they call it, taking place in binopailiator and

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Speaker 2: a little bit of a spotlight from the regulators wouldn't hurt.

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Speaker 2: In places like credit reporting, you should be able to

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Speaker 2: build your credit score by using binopiliata providers in a

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Speaker 2: predictable way, and today we report majority of our competitors

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Speaker 2: do not. I think d large if you are building

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Speaker 2: a company that is committed to transparency, as we very

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Speaker 2: much are, regulatory attention is a cost. I think we

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Speaker 2: should expect more regulation, more attention. I don't think it's

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Speaker 2: going to be a dramatic change, of course, for US.

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Speaker 2: I kind of hope it caused some dramatic changes for

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Speaker 2: some of the folks that have already figured out the

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Speaker 2: business models that frankly are not particularly pro consumer.

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Speaker 1: That's all for this episode of the Bloomberg Markets Magazine Interview.

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Speaker 1: You can find more from Max at Bloomberg dot com,

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Speaker 1: the Bloomberg Terminal, and the latest issue of Bloomberg Markets Magazine.

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Speaker 1: I'm Shanlie Bassek, and this is Bloomberg