WEBVTT - Affirm and Max Levchin 0:00:04.400 --> 0:00:07.800 Welcome to Tech Stuff, a production from I Heart Radio. 0:00:11.920 --> 0:00:14.320 He there, and welcome to tech Stuff. I'm your host 0:00:14.440 --> 0:00:17.239 Jonathan Strickland. I'm an executive producer with iHeart Radio and 0:00:17.239 --> 0:00:21.520 how the tech are You? Listener Gustavo Ricarte asked if 0:00:21.640 --> 0:00:25.040 I could do an episode about the fintech company, a 0:00:25.200 --> 0:00:29.080 firm which was founded by Max Levchin, one of the 0:00:29.120 --> 0:00:32.680 co founders from PayPal. In fact, I would say this 0:00:32.720 --> 0:00:35.760 episode is going to be at least as much about Max, 0:00:35.800 --> 0:00:39.120 possibly more, but a firm will play a huge part 0:00:39.159 --> 0:00:42.800 in it too. And you know what, this story has 0:00:43.040 --> 0:00:46.720 some really amazing things in it. There's a lot of drama. 0:00:46.920 --> 0:00:51.440 There's a cameo by Elon Musk, there's an evolutionary step 0:00:51.440 --> 0:00:54.880 in artificial intelligence, and we're going to start it all 0:00:54.920 --> 0:00:59.840 off with a little nuclear disaster. That's actually not a joke. 0:01:00.320 --> 0:01:06.200 We really are, Okay. So Max Levchin, who is formally no, 0:01:06.440 --> 0:01:13.000 not not former but for mole lead known as Maximilian Rafaelovitch. 0:01:13.520 --> 0:01:18.600 Levchin grew up in Kiev in Ukraine. Now back then, 0:01:19.080 --> 0:01:21.880 when he was a child, Ukraine was part of the 0:01:22.000 --> 0:01:27.080 United Socialist Soviet Republic or USSR. They gave the Soviet Union, 0:01:27.600 --> 0:01:31.760 and in nine on the outskirts of a city called 0:01:31.959 --> 0:01:36.920 trip yat ninety miles north of Kiev, the Chernobyl nuclear 0:01:37.000 --> 0:01:42.080 power plant experienced a meltdown. And perhaps one day I 0:01:42.120 --> 0:01:46.360 will do a full episode about the Chernobyl disaster, though 0:01:46.480 --> 0:01:49.400 it's it's kind of hard for me to justify doing 0:01:49.480 --> 0:01:52.960 that because there's already an incredible mini series that aired 0:01:53.000 --> 0:01:57.400 on HBO that gives amazing insight into what happened and 0:01:57.440 --> 0:02:01.280 why the disaster was as catastrophic as it was. The 0:02:01.360 --> 0:02:04.840 too long, didn't read version is there was a combination 0:02:05.360 --> 0:02:09.520 of bad engineering decisions and worst bureaucratic red tape that 0:02:09.680 --> 0:02:14.600 made a disastrous situation way worse than it could have 0:02:14.639 --> 0:02:19.079 been otherwise. But suffice it to say that the disaster 0:02:19.120 --> 0:02:23.400 at Chernobyl irradiated the surrounding area, which is putting it lightly. 0:02:23.919 --> 0:02:25.760 Maybe one day I will go into more of the 0:02:25.800 --> 0:02:29.799 technical side of what happened at Chernobyl um and just 0:02:29.880 --> 0:02:33.440 leave all the bureaucratic stuff for that incredible mini series. 0:02:33.720 --> 0:02:38.880 But let's get back to Kiev. So Max's mother, Elvina Seltzmann, 0:02:39.760 --> 0:02:44.000 was a physicist and her job was at the Institute 0:02:44.040 --> 0:02:47.280 of Food Science and Kiev, and specifically she worked in 0:02:47.280 --> 0:02:51.280 the radiology lab, So her lab would receive samples of 0:02:51.320 --> 0:02:55.240 food and then the lab would test those samples to 0:02:55.320 --> 0:02:59.560 check on contamination and pollution, specifically the radioactive kind. I mean, 0:02:59.800 --> 0:03:01.960 some of this was coming from the areas that were 0:03:02.440 --> 0:03:05.000 around nuclear power plants, so this was a way of 0:03:05.200 --> 0:03:10.320 keeping tabs on how things were going in those environments. Now, 0:03:10.600 --> 0:03:13.200 the story goes that in April of nineteen six, not 0:03:13.320 --> 0:03:16.560 long after the Chernobyl accident, which still had not been 0:03:16.600 --> 0:03:21.360 fully revealed by the Russian government, Like, people knew that 0:03:21.400 --> 0:03:24.440 there had been an incident in Chernobyl, but they didn't 0:03:24.440 --> 0:03:27.280 know much more than that, because the government was trying 0:03:27.280 --> 0:03:30.320 to keep a very tight lid on what had happened, 0:03:30.320 --> 0:03:35.280 not just to prevent panic, but also to not let 0:03:35.880 --> 0:03:39.560 the United States know about the severity of the problem, 0:03:39.720 --> 0:03:42.800 because that would be admitting weakness. There were other elements 0:03:42.800 --> 0:03:48.600 as well. Anyway, around that time, Elvina had received a 0:03:48.640 --> 0:03:53.080 loaf of bread from the north of Kiev, so closer 0:03:53.120 --> 0:03:56.640 to where Chernobyl was, and was meant to do tests 0:03:56.680 --> 0:03:59.560 on it, and she saw that it was actually luminescing 0:03:59.600 --> 0:04:04.240 it was lowing in her lab and immediately she knew 0:04:04.680 --> 0:04:10.520 that this was an incredibly severe problem and that the 0:04:10.920 --> 0:04:13.720 incident at Chernobyl was way more serious than what the 0:04:13.760 --> 0:04:17.159 government was living on too, and so she wanted to 0:04:17.200 --> 0:04:20.440 take the opportunity to try and rescue her family. So, 0:04:20.720 --> 0:04:24.120 fearing for her family's safety, she rushed herself and her 0:04:24.160 --> 0:04:28.080 family onto a train bound for Crimea, which is hundreds 0:04:28.160 --> 0:04:32.520 of miles away and presumably in a zone that would 0:04:32.520 --> 0:04:36.000 be safe from the radiation of Chernobyl. By the time 0:04:36.200 --> 0:04:39.960 their train arrived in Crimea, the Soviet authorities were already 0:04:40.000 --> 0:04:42.960 in action. They were using Geiger counters to scan each 0:04:43.000 --> 0:04:46.760 and every person who had fled over to Crimea and 0:04:46.839 --> 0:04:53.599 checking for radioactive contamination. When they scanned Max, the Geiger 0:04:53.680 --> 0:04:58.559 counter went off, and in fact, according to the counter, 0:04:58.680 --> 0:05:03.720 it looked like Max's leg was giving off radiation, and 0:05:03.800 --> 0:05:07.839 so there was a very real possibility that doctors would 0:05:07.839 --> 0:05:14.600 amputate Max's leg. There was uh, not a full understanding 0:05:14.839 --> 0:05:21.400 of what radioactive or radiation poisoning entailed, though they were 0:05:21.440 --> 0:05:25.840 getting a pretty drastic crash course in it in the 0:05:25.960 --> 0:05:30.120 so Union at this time, so this was something that 0:05:30.160 --> 0:05:33.000 could have happened. Max could have ended up having a 0:05:33.080 --> 0:05:36.240 leg amputated when he was just a kid. But Elvina 0:05:36.320 --> 0:05:38.880 had Max taken off his shoes and when they scanned 0:05:38.960 --> 0:05:42.039 him again, the Geiger counter didn't go off, but it 0:05:42.080 --> 0:05:44.039 did go off over the shoes, and it turned out 0:05:44.120 --> 0:05:46.960 Max had stepped on a radiated thorn from a rose 0:05:47.000 --> 0:05:51.080 bush and the thorn had stuck into issue and that's 0:05:51.080 --> 0:05:55.400 what was tripping the Geiger counter. That is a heck 0:05:55.480 --> 0:05:59.120 of a childhood memory. Now, just so y'all know, I 0:05:59.160 --> 0:06:02.960 am only lightly older than Max, like literally by a 0:06:03.000 --> 0:06:06.679 couple of weeks. I am older than Max. I cannot 0:06:06.720 --> 0:06:12.159 imagine having had that experience as a child. Now. Max 0:06:12.240 --> 0:06:15.360 was also really interested in computers. He had been programming 0:06:15.400 --> 0:06:19.159 on things like calculators. He had designed programs on paper 0:06:19.400 --> 0:06:23.560 because he didn't always have access to an actual calculator 0:06:23.640 --> 0:06:26.120 or computer. He did have the opportunity to work on 0:06:26.200 --> 0:06:29.000 some computers when he would occasionally help his mom in 0:06:29.040 --> 0:06:32.760 the food science lab, but the family didn't own a 0:06:32.760 --> 0:06:38.599 computer of their own. In as the Soviet Union was crumbling, 0:06:39.160 --> 0:06:42.360 his family immigrated to the United States Because in the 0:06:42.400 --> 0:06:49.640 Soviet Union, which was rapidly deunionizing, inflation was out of control. 0:06:50.440 --> 0:06:55.880 The money was starting to become like completely valueless, so 0:06:56.120 --> 0:06:59.240 this was a move for survival. They moved to the 0:06:59.320 --> 0:07:03.240 United States, and he had held out hope that his 0:07:03.240 --> 0:07:05.320 family would be able to buy a computer once they 0:07:05.320 --> 0:07:07.400 got to the US, but they only had a few 0:07:07.480 --> 0:07:10.840 hundred dollars to their name when they arrived in the States, 0:07:10.840 --> 0:07:13.960 and of course they had no established credit in the States, 0:07:14.360 --> 0:07:16.760 so there was really no chance for him to get 0:07:16.800 --> 0:07:18.920 a computer of his own. So the reason I bring 0:07:19.000 --> 0:07:21.520 that up is that, as it would turn out, the company, 0:07:21.560 --> 0:07:24.200 a firm that we'll talk about later in this podcast, 0:07:24.720 --> 0:07:28.600 is designed to help consumers buy things they need or 0:07:28.920 --> 0:07:33.480 in some cases many cases, things they want when they 0:07:33.520 --> 0:07:36.240 may not have the full amount of cash on hand 0:07:36.280 --> 0:07:41.200 to actually buy it. So this story is really kind 0:07:41.200 --> 0:07:44.080 of a fundamental one when it comes to why a 0:07:44.200 --> 0:07:46.840 firm exists. But let's get back to Max for a bit. 0:07:48.120 --> 0:07:52.800 His family settled in Chicago. Max was sixteen, and boy howdy, 0:07:52.880 --> 0:07:56.240 this kid was way more forward thinking than I was. 0:07:56.320 --> 0:07:58.520 So while I was running a D and D games 0:07:58.640 --> 0:08:01.720 and then later on a D and D second Edition, 0:08:02.440 --> 0:08:06.600 he was studying computer science. He attended the University of 0:08:06.640 --> 0:08:10.800 Illinois at Urbana Champagne, and while there he founded several 0:08:10.880 --> 0:08:14.680 companies as he studied computer science. This was in the 0:08:14.760 --> 0:08:18.360 early days of the web. I think of this time 0:08:18.720 --> 0:08:20.920 this is about the time I was finally coming around 0:08:20.960 --> 0:08:23.600 to the Web. I had previously turned my nose up 0:08:23.640 --> 0:08:25.600 at it when I first was exposed to the World 0:08:25.640 --> 0:08:28.000 Wide Web, because I just thought it was slow and 0:08:28.080 --> 0:08:31.480 clunky and that it didn't have the usefulness of something 0:08:31.520 --> 0:08:34.719 like a tel net and FTP servers did. So I 0:08:35.200 --> 0:08:38.600 was very The web is another one of those examples 0:08:38.600 --> 0:08:40.040 of something where I was like, oh, this is never 0:08:40.040 --> 0:08:44.199 going to take off. Clearly, I have a terrible ability 0:08:44.280 --> 0:08:48.440 to see into the future. But le Gin saw the 0:08:48.600 --> 0:08:53.520 potential to monetize a business on the web, and so 0:08:54.320 --> 0:08:58.400 most of his early companies were ways of trying to 0:08:58.400 --> 0:09:02.640 sell advertising space, like banner ads on websites. So he 0:09:02.679 --> 0:09:06.360 was essentially acting as a broker, you know, pairing advertisers 0:09:06.400 --> 0:09:10.360 with websites that are willing to host an ad. So 0:09:10.400 --> 0:09:12.720 he did not invent the banner ad. It's not like 0:09:13.120 --> 0:09:15.200 he's the guy who created that, but he got in 0:09:15.360 --> 0:09:19.160 on the ground floor. Now, most of his companies didn't 0:09:19.280 --> 0:09:24.160 go anywhere, but one of these advertising companies got the 0:09:24.240 --> 0:09:29.480 attention of a larger entity in the advertising business. This 0:09:29.520 --> 0:09:32.920 was a company that was called link Exchange, and link 0:09:33.000 --> 0:09:35.600 Exchange was in turn, only in business for a couple 0:09:35.640 --> 0:09:39.160 of years before it got acquired by Microsoft. It did 0:09:39.200 --> 0:09:42.000 continue to operate under the brand name link Exchange for 0:09:42.240 --> 0:09:45.880 several years even after that acquisition. But anyway, that's not 0:09:45.920 --> 0:09:48.640 really important to our story. What is important is that 0:09:49.520 --> 0:09:53.199 Legend being able to sell his business to link Exchange 0:09:53.720 --> 0:09:57.920 meant that he actually had some decent money when he 0:09:58.000 --> 0:10:02.080 graduated college, and he used that money to fund a 0:10:02.160 --> 0:10:06.320 move from Chicago to California, you know, the tech mecca 0:10:06.679 --> 0:10:11.800 of the United States, or Techa for short. I guess. Anyway, 0:10:11.880 --> 0:10:14.160 he got there, didn't have quite enough money to really 0:10:14.240 --> 0:10:17.840 establish himself, so he crashed at a friend's house, a 0:10:17.840 --> 0:10:22.400 friend who was attending Stanford, and so he essentially grabbed 0:10:22.400 --> 0:10:25.880 some floor space in his friend's apartment outside the University 0:10:25.880 --> 0:10:29.600 of Stanford. And at least the story I read was 0:10:29.679 --> 0:10:34.679 that he would spend his days kind of crashing lectures 0:10:34.880 --> 0:10:37.199 at the university, just kind of coming in and listening 0:10:37.200 --> 0:10:39.720 to lectures, which you know, you could get away with 0:10:39.720 --> 0:10:41.640 with big universities. I mean, a lot of those lecture 0:10:41.640 --> 0:10:45.280 halls seat hundreds of students, so it's not like they 0:10:45.360 --> 0:10:47.200 check you when you come in to make sure that 0:10:47.240 --> 0:10:49.840 you're taking the class. So he was sitting in on lectures. 0:10:49.880 --> 0:10:52.720 And the story I heard was not that he was 0:10:52.960 --> 0:10:55.720 so hungry for more information and wanted to get the 0:10:55.720 --> 0:11:00.640 benefits of a stand Stanford University education without actually, you know, 0:11:00.800 --> 0:11:03.160 enrolling in the school, but rather it was a more 0:11:03.200 --> 0:11:07.600 practical consideration of just getting out of the apartment and 0:11:07.720 --> 0:11:10.160 also getting out of the heat of the day staying 0:11:10.160 --> 0:11:15.160 in a nice air conditioned location while watching a lecture. Now, 0:11:15.320 --> 0:11:18.040 one of the lectures he attended, which really ended up 0:11:18.080 --> 0:11:21.160 being more of a tiny seminar, was one that was 0:11:21.200 --> 0:11:24.480 attended by like half a dozen people, and it was 0:11:24.559 --> 0:11:28.520 led by an entrepreneur named Peter Thiel. And there's someone 0:11:28.559 --> 0:11:32.559 else I could do a full episode about. Levechin and 0:11:32.640 --> 0:11:36.480 Feel met after the seminar, and they chatted and found 0:11:36.480 --> 0:11:40.000 that they had a lot in common. They both were 0:11:40.040 --> 0:11:45.920 incredibly enthusiastic about tech and entrepreneurship, and ultimately they decided 0:11:45.960 --> 0:11:48.800 to go into business together. So they first created a 0:11:48.840 --> 0:11:53.679 company called field Link, which was a digital security company 0:11:53.760 --> 0:11:57.640 and made software that allowed personal Digital assistance or p 0:11:57.800 --> 0:12:00.920 d A s create an encrypted IT folder into which 0:12:01.000 --> 0:12:04.240 the user could safely store data. Quick quick word on 0:12:04.320 --> 0:12:09.640 PDAs or personal Digital assistants. These were devices that were 0:12:09.760 --> 0:12:14.200 smartphones without the phone part. So before smartphones, we had 0:12:14.240 --> 0:12:17.240 these devices called p d a s where you would 0:12:17.320 --> 0:12:20.960 have things like you would store a contact list, and 0:12:21.040 --> 0:12:24.720 you would have maybe a note taking app in in 0:12:24.840 --> 0:12:28.600 that particular PDA, you would have a calendar, you might 0:12:28.679 --> 0:12:31.520 have access to email, like you could connect to a 0:12:31.640 --> 0:12:36.679 network and actually um send and receive emails. A lot 0:12:36.679 --> 0:12:39.160 of these. The way that worked as you would synchronize 0:12:39.160 --> 0:12:41.880 your p d A with a computer. So when you 0:12:41.920 --> 0:12:44.800 would do that, it would load new emails into the 0:12:44.880 --> 0:12:47.000 p d A which you could then read and respond to, 0:12:47.280 --> 0:12:49.640 but it wouldn't actually send anything out. It didn't have 0:12:50.160 --> 0:12:52.520 native connectivity. For a lot of these PDAs. It was 0:12:52.559 --> 0:12:55.840 only when you synchronize with the computer again that it 0:12:56.480 --> 0:12:59.040 would go through and say, hey, here's some emails this 0:12:59.760 --> 0:13:03.000 guy I created or this woman created or this person 0:13:03.080 --> 0:13:06.160 created when they were using this medi a, Uh, send 0:13:06.160 --> 0:13:09.400 those out. And so you might compose an email at 0:13:09.400 --> 0:13:12.360 two PM, but it doesn't go out until six pm 0:13:12.400 --> 0:13:16.240 when you synchronized it with your computer. But PDAs were 0:13:16.720 --> 0:13:19.520 an early hint of the revolution that was to come. 0:13:19.520 --> 0:13:23.120 I mean, obviously when partnered with connectivity features, whether it 0:13:23.200 --> 0:13:28.160 was wireless connectivity to like WiFi networks, or wireless connectivity 0:13:28.160 --> 0:13:31.760 in the form of cellular connectivity, it would completely change 0:13:31.760 --> 0:13:34.520 the world. That's where you know, the smartphone would really 0:13:34.960 --> 0:13:41.839 pick up and and carry that forward. Well, they created 0:13:41.880 --> 0:13:46.960 an offshoot service for this encryption solution that they had 0:13:46.960 --> 0:13:50.480 created for PDAs, and that offshoot was a way to 0:13:51.200 --> 0:13:54.600 transfer money digitally between p d a s where you 0:13:54.600 --> 0:13:59.000 could have someone essentially digitally wire money to someone else 0:13:59.280 --> 0:14:02.600 by connecting the two PDAs together. And they called this 0:14:02.800 --> 0:14:06.680 service PayPal. That service turned out to be the most 0:14:06.679 --> 0:14:10.600 popular aspect of field Link. Theel and Lefin would change 0:14:10.600 --> 0:14:14.920 the company's name, but not to PayPal. They changed it 0:14:15.280 --> 0:14:20.960 to a company called Confinity. We'll talk more about Confinity 0:14:21.040 --> 0:14:25.520 and its evolution toward becoming PayPal after we take this 0:14:25.600 --> 0:14:39.480 quick break. We're back and enter Elon Musk, who was 0:14:39.560 --> 0:14:42.160 more than two decades removed from being the guy who 0:14:42.160 --> 0:14:44.720 said he was going to buy Twitter, entered into an 0:14:44.720 --> 0:14:47.920 agreement while waving due diligence and then said just kidding 0:14:47.920 --> 0:14:50.560 and tried to back out of the deal. At this point, 0:14:50.640 --> 0:14:53.320 Musk was not anywhere close to that. He was a 0:14:53.400 --> 0:14:56.320 student at Stanford and he had founded a company that 0:14:56.360 --> 0:15:00.240 he called X dot Com. Now, like PayPal, X dot 0:15:00.280 --> 0:15:03.960 Com was in the digital money transfer business, though this 0:15:04.240 --> 0:15:08.640 was by linking accounts to email rather than linking accounts 0:15:08.640 --> 0:15:12.800 to a personal digital assistant. Musk feel and left End 0:15:12.840 --> 0:15:16.320 saw two potential pathways that were before them. So in 0:15:16.400 --> 0:15:20.720 one path, X dot Com and Confinity slash PayPal would 0:15:20.720 --> 0:15:24.440 squabble over market share. Both ventures were still very young 0:15:24.480 --> 0:15:27.480 at this point and they could get nasty and potentially 0:15:27.520 --> 0:15:31.000 put both companies at risk because there was another digital 0:15:31.240 --> 0:15:34.320 money transfer service that was on the rise at this point. 0:15:34.400 --> 0:15:36.840 So the worry was that if they tried to compete 0:15:36.840 --> 0:15:39.320 against each other, they both would get defeated by this 0:15:39.640 --> 0:15:44.680 third competitor. So the other pathway was to combine forces 0:15:44.800 --> 0:15:47.760 and to corner the market early on, giving a much 0:15:47.800 --> 0:15:50.080 better chance for success in the long run. So they 0:15:50.160 --> 0:15:54.520 chose option to X dot Com and Confinity would combine. 0:15:55.440 --> 0:15:59.200 They ultimately called the new company PayPal, and the service 0:15:59.200 --> 0:16:01.920 would follow X dot COM's lead, with user accounts tied 0:16:01.920 --> 0:16:05.920 to an email address rather than to a personal digital assistant. 0:16:06.640 --> 0:16:09.600 This would put Levchin, feel and Musk, as well as 0:16:09.680 --> 0:16:13.000 a bunch of others further down the line, into a 0:16:13.040 --> 0:16:16.560 group that would later get the name the PayPal Mafia. 0:16:16.720 --> 0:16:19.520 So this tongue in cheek nickname implies that this small 0:16:19.680 --> 0:16:23.400 influential group would see their power and wealth grow substantially, 0:16:23.520 --> 0:16:26.200 which is true. All three of the folks have described 0:16:26.240 --> 0:16:28.440 so far are billionaires in the Musk, of course, is 0:16:28.440 --> 0:16:32.000 the richest person on the planet, so it is very 0:16:32.080 --> 0:16:36.560 much true that they saw their fortunes rise. Legend served 0:16:36.600 --> 0:16:39.960 as Chief Technology Officer or c t O of PayPal. 0:16:40.920 --> 0:16:44.960 THEIL initially served as chairman and Musk became the CEO 0:16:45.200 --> 0:16:47.840 for a few months, but then THEEL would take on 0:16:47.920 --> 0:16:50.280 the role of CEO as well. Musk would step down 0:16:50.400 --> 0:16:54.880 later in that first year. One of Levchin's responsibilities was 0:16:54.920 --> 0:16:57.960 coming up with a way to prevent fraud a PayPal 0:16:58.440 --> 0:17:00.640 and Levechin and his team came up with a method 0:17:00.720 --> 0:17:05.080 to prevent automated scripts from accessing PayPal services. In other words, 0:17:05.359 --> 0:17:08.600 to prevent bots from being able to log into PayPal 0:17:08.800 --> 0:17:13.479 and to go through transactions automatically, it had to be 0:17:13.520 --> 0:17:16.520 a human being behind it. So the method that they 0:17:16.840 --> 0:17:20.800 they relied on used distorted text that humans would still 0:17:20.840 --> 0:17:24.320 be able to read but a program wouldn't, and it 0:17:24.440 --> 0:17:26.959 was an example of what would later be referred to 0:17:27.359 --> 0:17:32.680 as a capture. Capture stands for completely automated public touring 0:17:32.760 --> 0:17:36.800 test to tell computers and humans apart. And to be clear, 0:17:37.280 --> 0:17:40.440 Legend and his team didn't invent this. They were not 0:17:40.520 --> 0:17:44.320 the first to use this particular approach to kind of 0:17:45.160 --> 0:17:48.040 separate out the bots from the humans, but they would 0:17:48.600 --> 0:17:52.159 be the first to really commercialize the process, and it 0:17:52.240 --> 0:17:55.639 became known as the gal Speck Levechin test. Galsbeck in 0:17:55.680 --> 0:17:58.359 this case refers to David Gausbeck, who served as a 0:17:58.400 --> 0:18:02.520 technical architect at PayPal for about a decade. Now this 0:18:02.640 --> 0:18:05.840 is where that evolutionary step in ai I mentioned at 0:18:05.880 --> 0:18:09.040 the top of the show comes in. Let's break this 0:18:09.080 --> 0:18:14.280 down first. The phrase Turing test is in the acronym capture, right, 0:18:14.359 --> 0:18:16.320 And for those who are not familiar with what a 0:18:16.359 --> 0:18:20.360 Turing test is, the phrase as we use it today 0:18:20.600 --> 0:18:23.879 typically means some form of test to see if a 0:18:23.960 --> 0:18:27.679 human can tell if a respondent is another human or 0:18:27.880 --> 0:18:31.600 is in fact a machine and AI. So the classic 0:18:31.640 --> 0:18:34.440 example is you have a human who sits down at 0:18:34.440 --> 0:18:38.040 a computer terminal and they can type into a chat 0:18:38.119 --> 0:18:40.840 program and they're trying to figure out if the entity 0:18:40.960 --> 0:18:45.080 on the other side of this digital conversation is another 0:18:45.200 --> 0:18:48.520 person or if it is actually AI. And if human 0:18:48.560 --> 0:18:52.400 testers cannot reliably tell the difference, the AI is said 0:18:52.440 --> 0:18:56.000 to have passed the Turing test. Now with a capture, 0:18:56.480 --> 0:18:59.399 it's kind of a reverse of this, and the capture 0:18:59.400 --> 0:19:01.520 itself is all tomate it. So instead of having a 0:19:01.640 --> 0:19:04.239 human administering the test, you have the computer doing it. 0:19:04.560 --> 0:19:07.560 And the idea is to create a scenario where a 0:19:07.680 --> 0:19:11.119 human can easily, at least in theory, pass a test, 0:19:11.720 --> 0:19:15.680 but a machine can't. So back in the primitive days 0:19:15.840 --> 0:19:19.879 of the early two thousands, using a block of text 0:19:19.960 --> 0:19:23.960 and image of text that has some distortion effects would 0:19:23.960 --> 0:19:27.640 be enough. Humans would be able to recognize the swirling 0:19:27.760 --> 0:19:32.000 characters sometimes presented in different colors, but computers, which we're 0:19:32.000 --> 0:19:36.679 looking for more uniform representations of those characters wouldn't be 0:19:36.760 --> 0:19:39.320 able to do it. So to the computer, the the 0:19:39.680 --> 0:19:42.600 lower case are, for example, wouldn't look like an R, 0:19:43.080 --> 0:19:45.200 so the computer would be stumped. It wouldn't know that 0:19:45.200 --> 0:19:48.760 that was in fact an R Now that would set 0:19:48.840 --> 0:19:52.560 off a see saw like relationship in the AI community. 0:19:52.720 --> 0:19:56.520 So computer programmers would create software that would get better 0:19:56.760 --> 0:20:00.440 at recognizing characters, even ones that had been distorted. That 0:20:00.480 --> 0:20:04.160 would mean that earlier versions of capture would become obsolete, 0:20:04.480 --> 0:20:07.240 because the whole purpose of capture is to prevent automated 0:20:07.280 --> 0:20:11.800 scripts from accessing something. And so capture designers would go 0:20:11.840 --> 0:20:14.240 back to the drawing board and launch a new version 0:20:14.280 --> 0:20:18.520 of capture, one that would exploit the limitations of text 0:20:18.560 --> 0:20:22.680 recognition software, for example. Then the computer scientists on the 0:20:22.720 --> 0:20:26.359 other side would train up the next batch of recognition software, 0:20:26.760 --> 0:20:31.040 which ultimately would defeat the newer capture strategy, and so 0:20:31.080 --> 0:20:34.400 on and so forth. From one perspective, you could say 0:20:34.440 --> 0:20:37.040 this was the evolution of computer security, and on the 0:20:37.040 --> 0:20:39.280 other you could say it was the evolution of AI. 0:20:39.359 --> 0:20:42.040 And it's kind of both um and in fact, we 0:20:42.080 --> 0:20:47.080 can see even more uh overt examples of this when 0:20:47.119 --> 0:20:50.440 you're looking at things like you know, you're presented with 0:20:50.760 --> 0:20:53.879 a panel of nine different pictures and you're told to 0:20:53.920 --> 0:20:56.080 pick all the pictures that have, say a fire hydrant 0:20:56.080 --> 0:20:59.200 in them. Well, in that case, not only are you 0:21:00.080 --> 0:21:02.359 UH acknowledging that you're a human by picking out all 0:21:02.440 --> 0:21:08.240 the fire hydrants, you're also empowering an image recognition software 0:21:08.240 --> 0:21:11.520 in the background because you are you're teaching the computer 0:21:11.600 --> 0:21:14.600 systems this is what a fire hydrant is, and this 0:21:14.760 --> 0:21:19.359 isn't So legend has played a part in that evolutionary process. 0:21:20.560 --> 0:21:23.960 In two thousand two, PayPal would hold an i p O, 0:21:24.119 --> 0:21:26.880 which is an initial public offering. Now, this is when 0:21:26.920 --> 0:21:31.399 a privately held company goes into a cocoon and emerges 0:21:31.560 --> 0:21:35.800 into a publicly traded company like a butterfly. UH. Investors 0:21:35.800 --> 0:21:39.280 then can purchase shares of that company on a stock market. 0:21:39.680 --> 0:21:43.680 PayPal made the transformation in February two two, with an 0:21:43.680 --> 0:21:49.560 initial valuation of the company at around eight hundred million dollars. Meanwhile, eBay, 0:21:49.840 --> 0:21:53.920 the web based auction site, had launched its own digital 0:21:53.920 --> 0:21:58.280 payment processing service called bill Point with Wells Fargo back 0:21:58.280 --> 0:22:01.280 in two thousands. So bill Point is the competitor I 0:22:01.320 --> 0:22:04.760 was alluding to earlier, the one that x dot com 0:22:04.800 --> 0:22:08.120 and Confinity needed to be concerned about. So bill Points 0:22:08.119 --> 0:22:12.000 stood as the major competitor against PayPal, but by two 0:22:12.080 --> 0:22:15.480 thousand two. Mid two thousand two, PayPal was on such 0:22:15.520 --> 0:22:18.680 a steep climb that eBay sought out an acquisition, which 0:22:18.720 --> 0:22:21.199 was announced in the summer of two thousand two and 0:22:21.280 --> 0:22:24.560 completed toward the you know, in October two thousand two. 0:22:24.800 --> 0:22:27.439 And the deal would be valued at one point five 0:22:27.720 --> 0:22:32.760 billion dollars, which is um a fair chunk of change. 0:22:32.960 --> 0:22:35.800 I think it was an all stock transaction. However, it 0:22:35.840 --> 0:22:40.200 wasn't like a cash purchase, so PayPal went public and 0:22:40.240 --> 0:22:43.560 it was acquired all in less than one year. Selections 0:22:43.720 --> 0:22:46.119 share of PayPal meant that he was more than thirty 0:22:46.160 --> 0:22:50.080 million dollars richer. As a result of this buyout, things 0:22:50.119 --> 0:22:53.960 moved pretty quickly. eBay's culture was different from Paypals, and 0:22:54.040 --> 0:22:57.240 that was a big issue personally. I've seen that happen 0:22:57.640 --> 0:23:01.080 a lot, so tangential to this story. Once upon a time, 0:23:01.119 --> 0:23:04.320 I worked at a company that did human resources management consulting. 0:23:04.520 --> 0:23:06.640 I won't name them, but I worked for them for 0:23:06.680 --> 0:23:09.399 seven years, and I like to say that I was 0:23:09.480 --> 0:23:12.480 kind of working for the bobs from the film office space. 0:23:12.760 --> 0:23:15.120 But one thing that our company really did was observed 0:23:15.160 --> 0:23:18.959 company culture, particularly in the wake of an acquisition or merger. 0:23:19.560 --> 0:23:22.600 That's because more often than not, there were disconnects between 0:23:22.640 --> 0:23:26.040 the two or more cultures, and these often would become 0:23:26.080 --> 0:23:28.560 the source of friction, frequently in the form of lower 0:23:28.560 --> 0:23:33.960 employee morale and productivity. So addressing culture is important. It's 0:23:34.000 --> 0:23:37.320 also really hard to do now. Whether or not eBay's 0:23:37.359 --> 0:23:39.800 culture rub folks at PayPal the wrong way, I can't 0:23:39.920 --> 0:23:42.840 really say, But I can't say that. Over the following 0:23:42.920 --> 0:23:46.679 few years, more than half of the founding members of 0:23:46.720 --> 0:23:51.159 PayPal chose to leave the company, and ultimately that included Levchin. 0:23:51.200 --> 0:23:54.160 Although he hung out longer than most because he really 0:23:54.160 --> 0:23:59.280 wanted to see a smooth transition over to eBay. Max 0:23:59.320 --> 0:24:02.640 looked around his next opportunity, which apparently was a very 0:24:02.800 --> 0:24:06.480 um traumatic experience for him because he found that if 0:24:06.480 --> 0:24:10.120 he didn't have something really occupying his time, he didn't 0:24:10.119 --> 0:24:11.879 know what to do with himself. His girlfriend at the 0:24:11.920 --> 0:24:15.480 time ended up dumping him because she said that he 0:24:15.520 --> 0:24:18.119 was like a junkie who was going without a fix 0:24:18.280 --> 0:24:20.760 because he didn't have a project to work on. She 0:24:20.760 --> 0:24:24.400 would eventually come back and the two would reconcile and 0:24:24.400 --> 0:24:27.280 and ultimately mary and have kids. So it all worked out. 0:24:27.320 --> 0:24:30.960 But at the time, it was looking pretty uncertain. So 0:24:31.320 --> 0:24:33.239 one thing he did was he had kind of an 0:24:33.280 --> 0:24:37.240 incubator that he designed, a company that's meant to help 0:24:37.280 --> 0:24:41.120 other companies, you know, launch, and within it he developed 0:24:41.160 --> 0:24:45.040 a sort of social media service that other platforms could use, 0:24:45.119 --> 0:24:49.520 called slide Now. Originally, the plan was to create a 0:24:50.119 --> 0:24:52.919 image oriented shopping service, so that when you went shopping 0:24:52.920 --> 0:24:55.119 for stuff online, you would see photos of the things 0:24:55.160 --> 0:24:58.119 you were browsing for and that would make the experience better. 0:24:58.440 --> 0:25:02.320 But it then evolved into more of a photo sharing service, 0:25:02.640 --> 0:25:06.119 and it wasn't a standalone competitor to like Facebook or 0:25:06.200 --> 0:25:08.520 MySpace or that kind of thing. Instead, it was a 0:25:08.520 --> 0:25:12.040 behind the scenes media sharing service that those sorts of 0:25:12.119 --> 0:25:15.120 platforms you know, Facebook and MySpace could actually utilize. They 0:25:15.119 --> 0:25:19.080 were essentially apps that could work within those frameworks. In 0:25:19.800 --> 0:25:23.000 Google purchased slide for somewhere between a hundred two million 0:25:23.000 --> 0:25:25.840 and two dwenty eight million bucks. Uh. The amount actually 0:25:25.880 --> 0:25:28.600 depends upon which source you read, and according to a 0:25:28.640 --> 0:25:32.040 two thousand seven Business Week article, Levchin had previously thought 0:25:32.119 --> 0:25:34.679 that any buyout of less than one point five billion 0:25:34.720 --> 0:25:38.560 dollars would be the mark of failure. So I guess 0:25:39.160 --> 0:25:42.680 Sad Trombone, except Sad Trombone feels weird for a deal 0:25:42.760 --> 0:25:45.199 that was still more than a d fifty million dollars 0:25:45.200 --> 0:25:47.520 and maybe more than two hundred million, depending upon which 0:25:47.520 --> 0:25:51.800 sources correct. Google would later shut down Slide, because of 0:25:51.800 --> 0:25:54.840 course it did. I've done episodes about tools and services 0:25:54.840 --> 0:25:57.960 that Google has introduced or acquired and then subsequently shut down. 0:25:58.200 --> 0:26:01.199 It happens a lot some so that if you do 0:26:01.320 --> 0:26:04.200 create something really cool and Google buys it, you should 0:26:04.200 --> 0:26:06.439 probably resign yourself to the fact that the cool thing 0:26:06.480 --> 0:26:10.000 you made is not long for this world anyway. Legend 0:26:10.040 --> 0:26:13.040 briefly worked for Google, and according to some reports, that 0:26:13.119 --> 0:26:14.879 was the whole purpose in the first place. The Google 0:26:14.920 --> 0:26:18.120 bought Slide not to buy Slide, but to get access 0:26:18.119 --> 0:26:22.560 to Lefjin, and he wasn't really happy there. He didn't 0:26:22.880 --> 0:26:25.800 find that it was challenging him enough, so he left 0:26:25.840 --> 0:26:29.160 the company in pretty short order. He had also invested 0:26:29.160 --> 0:26:32.640 in various other startups along the way, including Yelp. In fact, 0:26:32.640 --> 0:26:36.639 he was the largest initial shareholder of Yelp, and he 0:26:36.720 --> 0:26:38.720 got a new idea for a company, the one that 0:26:38.760 --> 0:26:42.840 would be called a firm. Now before a firm, there 0:26:42.960 --> 0:26:47.760 was HVF. This initialism stands for hard, valuable and Fun 0:26:48.560 --> 0:26:53.000 and it's another incubator. It's the second incubator that lef 0:26:53.080 --> 0:26:56.200 Gin made. And again this is a company that helps 0:26:56.240 --> 0:26:59.840 folks bring other companies to life. So it's a company 0:27:00.000 --> 0:27:04.000 air you can kind of work on a concept and 0:27:04.080 --> 0:27:06.280 work on it on every stage, all the way up 0:27:06.320 --> 0:27:09.600 through the company launching. So essentially, HVF is kind of 0:27:09.600 --> 0:27:12.520 a safe space for companies to take shape so that 0:27:12.600 --> 0:27:14.639 they have the best chance of success when they actually 0:27:14.640 --> 0:27:17.320 go live. So sometimes that might mean sitting on an 0:27:17.359 --> 0:27:20.560 idea for a while because you're waiting or you're actively 0:27:20.560 --> 0:27:23.639 trying to develop the technology that will actually support the 0:27:23.640 --> 0:27:26.399 businesses mission. And maybe that I've got this great idea, 0:27:26.920 --> 0:27:29.199 the tech to make it happen isn't there yet, but 0:27:29.240 --> 0:27:33.240 it's on the horizon, and so I'm using the incubator 0:27:33.280 --> 0:27:35.360 to kind of flesh out my business idea while I'm 0:27:35.400 --> 0:27:38.520 waiting for the tech to mature. In other cases, it 0:27:38.560 --> 0:27:40.600 could mean holding off until you've really nailed down the 0:27:40.640 --> 0:27:42.920 business model for the company, because we've seen that over 0:27:42.920 --> 0:27:46.119 and over where the tech is there, but the actual 0:27:46.160 --> 0:27:49.840 plan on generating revenue isn't and ultimately the company fails. 0:27:49.880 --> 0:27:53.000 So that's the purpose of the incubator. Well, a firm 0:27:53.080 --> 0:27:56.359 would be a company that came out of HVF. The 0:27:56.400 --> 0:28:01.600 concept behind a firm is relatively simple. For generations. Wealth 0:28:01.640 --> 0:28:05.320 in America has been tied tightly to the concept of credit, 0:28:05.840 --> 0:28:08.480 and to build up credit you need to make use 0:28:08.480 --> 0:28:12.360 of tools like credit cards and loans, right, but these 0:28:12.359 --> 0:28:15.800 can be tricky to understand, and for younger generations, stuff 0:28:15.840 --> 0:28:19.320 like credit cards and loans represent a huge scary risk. 0:28:20.080 --> 0:28:23.159 We've been through enough economic recessions we're heading towards another, 0:28:23.680 --> 0:28:25.840 and the idea of having to purchase stuff on credit 0:28:26.119 --> 0:28:29.600 is kind of scary. The threat of insurmountable debt is 0:28:29.720 --> 0:28:34.119 very real, particularly for folks who already have substantial student debt. 0:28:34.200 --> 0:28:36.520 That's why there's this big move to have more and 0:28:36.560 --> 0:28:40.760 more student debt canceled, because it's holding people back from 0:28:40.760 --> 0:28:43.520 being able to engage more fully with the economy. There 0:28:44.160 --> 0:28:47.600 already saddled with such huge debt that they can't really 0:28:47.600 --> 0:28:51.280 think ahead to anything else. It's also a big challenge 0:28:51.320 --> 0:28:53.960 for people who have immigrated to the United States who 0:28:54.000 --> 0:28:57.360 have no pre existing credit history in the US. It 0:28:57.440 --> 0:29:01.360 can be hard to integrate into the system, and so 0:29:01.480 --> 0:29:04.520 there are millions of folks who are left behind because 0:29:04.560 --> 0:29:08.920 they aren't part of the traditional banking and credit system. 0:29:08.960 --> 0:29:14.840 A firm is a fintech company that partners with merchants primarily, 0:29:14.880 --> 0:29:17.680 although now they also have a standalone program, but we'll 0:29:17.680 --> 0:29:20.760 get to that. So what affirm does it is it 0:29:20.800 --> 0:29:25.680 offers a buy now, pay later solution to customers. So 0:29:26.440 --> 0:29:28.880 let's say that you wanted to purchase a new computer. 0:29:29.000 --> 0:29:31.880 Let's say that you're newly immigrated to the United States 0:29:31.920 --> 0:29:33.880 and you want to purchase a new computer, but you 0:29:33.960 --> 0:29:36.040 don't have the scratch to do it. You don't have 0:29:36.080 --> 0:29:39.719 all the money that you would need to buy it outright. Well, 0:29:39.760 --> 0:29:42.240 you might find that the seller you're looking at is 0:29:42.280 --> 0:29:45.240 partnering with a firm, and in that case you can 0:29:45.280 --> 0:29:49.600 take what is essentially a small loan to purchase the computer. 0:29:49.720 --> 0:29:53.480 So it's a loan specifically for this purchase. Then you 0:29:53.560 --> 0:29:57.320 pay back a firm in regular installments. A firm does 0:29:57.360 --> 0:29:59.440 have a bank partner to make this work in the background. 0:29:59.520 --> 0:30:03.040 It's c us River Bank, and there are a lot 0:30:03.080 --> 0:30:05.239 of things that have to happen in the background. For 0:30:05.280 --> 0:30:09.040 this to even be possible. We'll talk about that more 0:30:09.560 --> 0:30:12.680 later in this episode two. Now, when we come back, 0:30:12.760 --> 0:30:15.520 we're gonna talk more about what Affirm's model is like 0:30:15.680 --> 0:30:18.720 and how it does what it does, and also why 0:30:18.840 --> 0:30:23.760 some people have criticisms for this particular model of purchasing. 0:30:24.720 --> 0:30:36.600 But before we do that, let's take a quick break. Okay. 0:30:36.680 --> 0:30:41.440 So Affirm offers small loans to customers, loans that are 0:30:41.560 --> 0:30:44.920 enough to purchase something, whatever it might be, and you 0:30:44.960 --> 0:30:47.720 do that at the point of purchase, where you essentially 0:30:47.760 --> 0:30:51.680 apply for this loan. Affirm promises no hidden fees, no 0:30:51.920 --> 0:30:55.880 late charges. Uh you will if you get take out 0:30:56.320 --> 0:30:58.360 a loan with a firm and you refuse to pay 0:30:58.360 --> 0:31:01.280 it back, a firm can report to you to credit agencies, 0:31:01.320 --> 0:31:05.880 so that does have consequences, but they don't ding you 0:31:06.000 --> 0:31:08.800 for being a little late on your payments. You do 0:31:08.920 --> 0:31:12.280 have to pay interest on the loan, otherwise a firm 0:31:12.360 --> 0:31:16.360 would be writing off a way to make revenue. That 0:31:16.440 --> 0:31:20.000 interest rate, however, varies by retailer, and at least according 0:31:20.040 --> 0:31:23.440 to Medium, it can be anything from zero percent, meaning 0:31:23.840 --> 0:31:26.440 that there's no interest at all. You're literally just paying 0:31:26.480 --> 0:31:30.240 back whatever the cost of the item. Was, or it 0:31:30.280 --> 0:31:34.160 could go all the way up to nearly thirty interest. Now, 0:31:34.200 --> 0:31:37.000 whatever the interest rate is, it means that you'll pay 0:31:37.080 --> 0:31:39.880 that much percentage on top of the final price tag 0:31:39.920 --> 0:31:43.120 of the item you're buying. Right, So you know, if 0:31:43.120 --> 0:31:46.320 it's a hundred dollars and it's a thirty interest, it 0:31:46.360 --> 0:31:49.120 means ultimately you're paying back a hundred thirty dollars for 0:31:49.280 --> 0:31:53.520 the item. Um. That's a very simple example, but you 0:31:53.560 --> 0:31:56.320 get the idea. So the flip side of that is 0:31:56.320 --> 0:31:59.760 you're playing paying in installments, right, so you're paying smaller 0:32:00.000 --> 0:32:04.960 amounts over time, uh, that being three months, six months, 0:32:05.080 --> 0:32:08.720 or twelve months. Also, Affirm states that customers can pay 0:32:08.720 --> 0:32:12.080 off their loan early with no penalties or fees. So 0:32:12.320 --> 0:32:14.320 if you have the money to do it, you can 0:32:14.360 --> 0:32:18.520 pay off the balance and save yourself the interest that 0:32:18.560 --> 0:32:23.640 would otherwise accrue over time. So how does Affirm determine 0:32:24.040 --> 0:32:26.080 if a customer is a good fit for a loan? 0:32:26.960 --> 0:32:29.800 Because you wouldn't just go out loaning out cash to everyone. 0:32:30.400 --> 0:32:34.360 You need to at least be reasonably sure that whomever 0:32:34.400 --> 0:32:36.640 you're learning the money out to is going to be 0:32:36.680 --> 0:32:38.840 able to pay you back. Otherwise you're going to find 0:32:38.840 --> 0:32:42.080 yourself out of business, essentially robbed by folks who took 0:32:42.080 --> 0:32:44.760 out loans and then skipped on them, or people who 0:32:44.760 --> 0:32:47.280 took out loans and then, through whatever reason, we're unable 0:32:47.320 --> 0:32:50.120 to pay those loans back. In either case, the end 0:32:50.120 --> 0:32:53.000 effect is that you are left holding the bag if 0:32:53.000 --> 0:32:55.320 you've loaned that money out and they aren't paying you 0:32:55.360 --> 0:32:59.200 back for it. So AFFIRM judges a person's ability to 0:32:59.200 --> 0:33:01.920 pay back a loan own by doing a deep data 0:33:01.960 --> 0:33:06.760 dive on that person. AFFIRM searches through tons of data, 0:33:07.160 --> 0:33:11.360 including social media posts like this gets a bit creepy, y'all. 0:33:12.160 --> 0:33:14.960 A firm is essentially crawling through your payment history on 0:33:15.000 --> 0:33:19.880 any publicly available transactions, your social media history, getting an 0:33:19.920 --> 0:33:22.400 idea of how financially responsible you are. So you know, 0:33:22.640 --> 0:33:24.640 if you're posting lots of stuff about how you bought 0:33:24.680 --> 0:33:27.280 that sweet scooter but you have nowhere to live now 0:33:27.320 --> 0:33:29.680 that you can't make the rent, that might not help 0:33:29.720 --> 0:33:32.440 you out. When you apply to use a firm on 0:33:32.480 --> 0:33:35.680 a purchase, the evaluation only takes a few seconds, which 0:33:35.720 --> 0:33:38.240 is incredible, and that is something I find both impressive 0:33:38.280 --> 0:33:41.520 and scary. So there's this massive amount of information we're 0:33:41.520 --> 0:33:44.360 talking about the software has to comb through all this data, 0:33:44.440 --> 0:33:47.960 identify the points that relate to us, the potential customer, 0:33:48.400 --> 0:33:51.320 and then come to a conclusion. Now, I assume that 0:33:51.360 --> 0:33:53.960 behind the scenes, there's probably some sort of threshold or 0:33:54.080 --> 0:33:56.920 score that a customer has to meet. Uh. It could 0:33:56.960 --> 0:33:59.520 be codified as a score or a rating or something, 0:33:59.520 --> 0:34:01.440 but I don't know because the inner workings of a 0:34:01.520 --> 0:34:05.080 firm are mostly hidden. What I can say is that 0:34:05.160 --> 0:34:08.480 it doesn't just look at a person's FICO score. Uh. 0:34:08.520 --> 0:34:11.399 That's a score that judges a person's credit worthiness here 0:34:11.440 --> 0:34:14.920 in the United States, though reportedly, at least think in 0:34:15.200 --> 0:34:18.879 some journals I've read, a person does need a FIC 0:34:18.960 --> 0:34:21.920 a score of around five fifty to qualify for an 0:34:21.920 --> 0:34:25.560 affirm loan. Again, according to some sources, others dispute this. 0:34:25.680 --> 0:34:27.880 They say that you don't need to have any particular 0:34:27.920 --> 0:34:30.920 FICA score at all, so your guess is as good 0:34:30.920 --> 0:34:33.880 as mine. Now, this is what it's called a soft 0:34:33.880 --> 0:34:37.279 credit check. And that's important because and y'all, I know 0:34:37.600 --> 0:34:41.839 that this is bonkers, but a credit check alone from 0:34:41.920 --> 0:34:45.719 a lender, for example, can affect a person's credit score. So, 0:34:45.719 --> 0:34:48.520 in other words, your credit score could be one thing. 0:34:49.000 --> 0:34:51.680 Then a lender checks your credit score, then your credit 0:34:51.680 --> 0:34:54.120 score could be lower as a result of the lender 0:34:54.239 --> 0:34:57.320 checking it. This is kind of like the observer effect 0:34:57.320 --> 0:35:00.759 in quantum mechanics, this idea that by observe something, you 0:35:00.760 --> 0:35:04.399 actually affect the thing that is being observed. But yeah, 0:35:04.520 --> 0:35:07.279 hard credit checks can ding a person's credit score, even 0:35:07.280 --> 0:35:10.600 if that person is otherwise being a financially responsible person. 0:35:11.239 --> 0:35:14.440 No wonder. Younger generations don't trust credit cards, And to 0:35:14.480 --> 0:35:16.879 be clear, I'm not talking about when you check your 0:35:16.880 --> 0:35:19.400 own credit that should never have an impact on your 0:35:19.400 --> 0:35:22.359 credit score, but if a lender orders the credit check, 0:35:22.880 --> 0:35:26.480 that potentially could do it. Now, the standard repayment plans, 0:35:26.520 --> 0:35:29.400 like I said, come in three, six or twelve months installments, 0:35:29.400 --> 0:35:32.760 And obviously the further out you spread payments over time, 0:35:32.840 --> 0:35:36.399 the less the individual payments will be the monthly payments, right, 0:35:36.960 --> 0:35:39.880 But then the longer you spread out, the more interest 0:35:39.960 --> 0:35:44.080 you will pay accumulatively. So while a twelve month repayment 0:35:44.120 --> 0:35:46.720 plan will mean you're paying out less money per month, 0:35:47.200 --> 0:35:49.080 once you toll it up, you'll have paid more in 0:35:49.160 --> 0:35:51.640 interest than if you had gone with three or six 0:35:51.680 --> 0:35:55.840 months of payment plan. Anyway, a firm is essentially sizing 0:35:55.920 --> 0:35:58.359 up each potential customer to get a judgment on if 0:35:58.400 --> 0:36:00.239 that person will be able to pay back the loan, 0:36:00.880 --> 0:36:03.239 and I can definitely see the business need for that, 0:36:03.840 --> 0:36:07.600 but it also feels invasive because frankly, it is I mean, 0:36:07.600 --> 0:36:10.759 it's going through your social media for goodness sakes, and 0:36:10.880 --> 0:36:13.920 it just makes me lean further away from credit and 0:36:14.000 --> 0:36:16.480 loans and stuff like that. And it really makes me 0:36:16.560 --> 0:36:21.160 understand the appeal of debit card culture, where you're only 0:36:21.200 --> 0:36:23.839 spending what you have. You know, you don't spend more 0:36:23.880 --> 0:36:25.799 than what you have and then put yourself at risk. 0:36:26.160 --> 0:36:29.239 But Leftin's whole perspective is fundamentally different from that. He's 0:36:29.280 --> 0:36:32.760 looking at how people who for whatever reason, have little 0:36:32.800 --> 0:36:36.200 to no access to traditional credit solutions and how they 0:36:36.239 --> 0:36:38.800 can take advantage of purchasing power that otherwise would be 0:36:38.800 --> 0:36:41.680 outside their grasp. So there are two sides to this coin, 0:36:41.719 --> 0:36:43.560 and I think it really comes down to how each 0:36:43.600 --> 0:36:49.080 individual out there judges how they feel about this situation. Like, 0:36:49.200 --> 0:36:52.040 I have credit cards, so it's not like I have 0:36:52.120 --> 0:36:55.520 completely abstained from this. I have a mortgage I pay, 0:36:55.640 --> 0:36:59.040 so there are definitely cases where I've got this thing 0:36:59.080 --> 0:37:02.760 going on right now, But I also can understand the 0:37:02.800 --> 0:37:05.480 reluctance to get into that world is scary to have 0:37:05.560 --> 0:37:09.000 that debt sitting over you. Now, for a firm to 0:37:09.040 --> 0:37:11.600 work it originally had to partner with the merchants like 0:37:11.800 --> 0:37:14.120 that was the only way was by getting a partnership, 0:37:14.680 --> 0:37:17.200 and because a firm would assume the risk of the loans, 0:37:17.280 --> 0:37:20.440 merchants tended to be pretty cool with using it. The 0:37:20.480 --> 0:37:24.280 merchants get paid either way, right, So if the person 0:37:24.320 --> 0:37:27.640 pays back a firm or doesn't, the merchant still gets 0:37:27.680 --> 0:37:30.759 paid the actual price of the item, So that's great 0:37:30.800 --> 0:37:33.879 for them. Now, a firm collects a small fee from 0:37:33.880 --> 0:37:37.640 each purchase. Uh, they also get the interest that's generated 0:37:37.640 --> 0:37:40.799 by the loan, and merchants can pay a firm for 0:37:40.920 --> 0:37:44.600 different levels of interest rates. So if a merchant wants 0:37:44.640 --> 0:37:48.239 to offer lower interest rates and therefore attract more buyers, 0:37:48.280 --> 0:37:51.160 like if a merchant says, you pay zero percent interest 0:37:51.320 --> 0:37:54.120 on this big ticket item, then it can pay a 0:37:54.239 --> 0:37:58.399 firm a feed to do that and affirm well, this 0:37:58.480 --> 0:38:00.640 is kind of in return for the money that affirm 0:38:00.719 --> 0:38:03.680 quote unquote loses by not having interest on the loan. 0:38:04.320 --> 0:38:07.160 Affirm will says sure, we'll offer them alone with no interest. 0:38:07.520 --> 0:38:10.000 You have to pay us to compensate us for that, 0:38:10.520 --> 0:38:13.080 and the merchant, if they want to move this big 0:38:13.080 --> 0:38:16.640 ticket item, might do that, and then the consumer at 0:38:16.680 --> 0:38:19.799 the other end gets a zero percent interest loan. Now 0:38:19.840 --> 0:38:23.600 that's incredible, right. If it's saying you're gonna have up 0:38:23.600 --> 0:38:27.080 to twelve months to pay this off and you will 0:38:27.080 --> 0:38:29.480 be paying only the amount that you need in order 0:38:29.520 --> 0:38:32.000 to buy the item, no interest on top of it, 0:38:32.520 --> 0:38:35.120 that's that's an incredible deal. Doesn't happen all the time 0:38:35.160 --> 0:38:38.160 because merchants again have to pay to offer those kind 0:38:38.160 --> 0:38:42.640 of zero percent uh interest rates. Now. One of the 0:38:42.640 --> 0:38:46.200 early merchants Affirm partnered with was one E. D. Flowers, 0:38:46.239 --> 0:38:49.080 and slowly Affirmed began to grow. It began to add 0:38:49.120 --> 0:38:52.360 more in network merchants over time. There's even a story 0:38:52.400 --> 0:38:54.880 that at one point Legend wanted to buy a gong 0:38:55.520 --> 0:38:58.080 so that the team could bang the gong whenever they 0:38:58.160 --> 0:39:02.000 landed another major merchant part or. In two thousand seventeen, 0:39:02.320 --> 0:39:05.560 Affirm launched its pay with a Firm service, which allows 0:39:05.600 --> 0:39:09.360 loans for purchases from any retailer. Essentially, So I'm guessing 0:39:09.400 --> 0:39:12.560 the gonging at that time must have been excruciating and 0:39:12.640 --> 0:39:16.600 never ending. Now one partner that at least initially really 0:39:16.640 --> 0:39:19.879 gave a firm a boost was Peloton, and this all 0:39:19.960 --> 0:39:23.560 gets concentrated into that very short, intense span of time 0:39:23.640 --> 0:39:26.160 during the early days of the pandemic, when much of 0:39:26.160 --> 0:39:29.839 the world was under quarantine rules. That's when Peloton saw 0:39:29.840 --> 0:39:33.719 an absolute explosion in orders. Now. Peloton, in case you 0:39:33.760 --> 0:39:37.440 don't know, is a company that sells high end stationary 0:39:37.520 --> 0:39:43.120 bikes and treadmills and offers web based subscription training services 0:39:43.440 --> 0:39:46.480 so that you can take classes from the comfort of 0:39:46.560 --> 0:39:50.160 your home. And they have different instructors who lead these classes, 0:39:50.200 --> 0:39:52.640 so you can find an instructor that you vibe with, 0:39:53.160 --> 0:39:57.480 take their classes on the equipment, and then Peloton gets 0:39:57.560 --> 0:40:00.319 data from your workout. You get feedback, all that kind 0:40:00.320 --> 0:40:03.080 of stuff. It's like working with a personal trainer, it's 0:40:03.120 --> 0:40:06.200 just you're doing it remotely. Now, early in the pandemic, 0:40:06.640 --> 0:40:10.200 Peloton saw this huge jump in orders and a firm 0:40:10.239 --> 0:40:13.080 as a buy now, pay later company, got a ton 0:40:13.280 --> 0:40:16.280 of business from folks who wanted a Peloton but didn't 0:40:16.280 --> 0:40:18.839 wanted to shout. The two to three thousand dollars needed 0:40:18.840 --> 0:40:21.800 to get one. There's a whole range of Peloton products, 0:40:21.840 --> 0:40:25.440 and it goes from somewhere like around the dollar mark 0:40:25.480 --> 0:40:27.720 all the way up to nearly four thousand dollars depending 0:40:27.760 --> 0:40:31.080 upon what it is you're buying. Now. According to the Generalist, 0:40:31.160 --> 0:40:34.920 Peloton sales at one time accounted for twenty eight percent 0:40:35.120 --> 0:40:41.400 of affirms overall revenue. Now, when nearly a third of 0:40:41.520 --> 0:40:45.000 all your revenue is coming from a single source, that 0:40:45.320 --> 0:40:48.560 can spell danger if something happens to that single source, 0:40:49.080 --> 0:40:52.839 and Peloton would have a dramatic fall from grace. In 0:40:52.960 --> 0:40:58.720 late one early two, the company reportedly had warehouses full 0:40:58.760 --> 0:41:02.279 of product that was selling like the after that burst 0:41:02.360 --> 0:41:05.440 of interest from twenty came out. It turned out it 0:41:05.440 --> 0:41:09.040 could not sustain itself, and as a result, Peloton found 0:41:09.040 --> 0:41:12.200 itself flush with stock. So it had an enormous amount 0:41:12.200 --> 0:41:18.200 of supply very low demand. Uh, it became really in 0:41:18.200 --> 0:41:21.040 in a precarious position. The company actually had to put 0:41:21.080 --> 0:41:23.800 a halt on production because it had nowhere to store 0:41:24.040 --> 0:41:26.759 the ding dang durn things because they were already chock 0:41:26.800 --> 0:41:30.560 full with inventory. And so this naturally raised questions about 0:41:30.560 --> 0:41:33.480 how that was going to affect a firm, the company 0:41:33.520 --> 0:41:37.560 that had depended heavily on those transactions. Now a firm 0:41:37.920 --> 0:41:41.840 had actually gone public in twenty one. And you know 0:41:41.920 --> 0:41:44.200 I mentioned already when I p O is the initial 0:41:44.200 --> 0:41:49.040 public offering. A firm's initial public offering was a roaring success. 0:41:49.080 --> 0:41:52.239 So the initial price for shares before it went on 0:41:52.320 --> 0:41:55.200 sale on the market was estimated to be somewhere around 0:41:55.200 --> 0:41:58.120 forty nine per share. That's what they thought it would 0:41:58.440 --> 0:42:01.960 open at. In stead had opened at nearly around ninety 0:42:02.000 --> 0:42:04.920 dollars per share. It closed trading for the day at 0:42:05.000 --> 0:42:10.960 ninety cents per share, so nearly twice as much. Ultimately, 0:42:11.280 --> 0:42:16.040 the stock price for Peloton in November of would hit 0:42:16.080 --> 0:42:20.440 around a hundred sixty eight dollars per share. Now, by 0:42:20.440 --> 0:42:22.400 the time it went public, a firm was working with 0:42:22.400 --> 0:42:24.960 more than six thousand retailers, so it's not like all 0:42:25.000 --> 0:42:29.319 of its financial eggs were in Peloton's shaky basket. But 0:42:29.400 --> 0:42:31.920 this still raised concerns. I mean, twenty eight percent of 0:42:31.920 --> 0:42:35.520 your revenue in twenty that's so much so when in 0:42:35.560 --> 0:42:40.800 the late earnings call, when it became clear that Peloton 0:42:40.960 --> 0:42:45.800 was in serious trouble, affirm reps quietly side scept questions 0:42:45.840 --> 0:42:49.160 that related to Peloton because that was obviously a question 0:42:49.200 --> 0:42:51.560 that was going to be very difficult to answer. And 0:42:51.640 --> 0:42:55.040 chances are the folks in a firm we're working very 0:42:55.080 --> 0:42:57.080 hard to find a solution themselves. At that time, it 0:42:57.080 --> 0:43:00.680 didn't have much that they could say. But you know, 0:43:00.719 --> 0:43:03.279 then we have the economic recession that's coming on, and 0:43:03.719 --> 0:43:07.400 that paired with the pandemic has really created a unique situation. 0:43:07.880 --> 0:43:10.200 It's had a big impact with a firm. Now, as 0:43:10.239 --> 0:43:13.720 I record this, a firm's share price is at thirty 0:43:13.800 --> 0:43:18.120 nine dollars and some change per share. That's ten dollars 0:43:18.160 --> 0:43:21.520 lower than what a firm estimated it's opening price would 0:43:21.560 --> 0:43:24.239 be during its I p O. It is a far 0:43:24.440 --> 0:43:27.600 cry below the hundred sixty eight dollar height of the 0:43:27.640 --> 0:43:32.880 stock from November. Now, that being said, it is an 0:43:32.880 --> 0:43:35.880 improvement over where the stock was at a certain point 0:43:35.880 --> 0:43:39.120 back in May and May it dropped down to below 0:43:39.200 --> 0:43:46.320 fifteen dollars per share. So talk about dramatic changes in value. 0:43:46.440 --> 0:43:48.120 Right to go from a high of a hundred and 0:43:48.120 --> 0:43:50.640 sixty eight dollars to a low of fifteen dollars in 0:43:50.880 --> 0:43:56.280 less than a year. Now, again, a firm has recovered 0:43:56.360 --> 0:43:58.839 quite a bit since that fifteen dollar low. I think 0:43:58.840 --> 0:44:00.960 it was like fourteen dollars six three cents if I'm 0:44:00.960 --> 0:44:06.320 being more specific. But still thirty nine is not great, 0:44:06.400 --> 0:44:09.480 right when you when you once were at a sixty eight. Now, 0:44:09.520 --> 0:44:12.160 part of the issue is that so far a firm 0:44:12.200 --> 0:44:15.160 has not been a profitable company. It has operated at 0:44:15.200 --> 0:44:17.480 a loss. But then a lot of companies do that, 0:44:17.600 --> 0:44:20.680 especially early on. Right and a firm expects to reach 0:44:20.760 --> 0:44:24.520 income profitability by the end of fiscal year twenty twenty three, 0:44:24.640 --> 0:44:28.000 so the end of its fiscal year next year, it 0:44:28.080 --> 0:44:30.759 should be a profitable company, at least according to its 0:44:30.800 --> 0:44:34.560 own projections. Now, at least some analysts think that affirm 0:44:34.680 --> 0:44:37.920 is actually in pretty good position right now, and economic 0:44:37.960 --> 0:44:40.560 recession could mean that more people will start to rely 0:44:40.800 --> 0:44:43.879 on buy now, pay later solutions in order to get 0:44:43.920 --> 0:44:46.920 the stuff they need. That being said, there are other concerns. 0:44:46.960 --> 0:44:49.879 There are people who say, well, that could mean that 0:44:50.320 --> 0:44:52.839 fewer people will be willing to do buy now, pay 0:44:52.920 --> 0:44:56.440 later because they're worried about the debt. Then you have Apple, 0:44:56.560 --> 0:44:59.719 which launched its own service called Apple Pay Later that 0:45:00.440 --> 0:45:03.879 stands as a potential threat to affirms business. It also 0:45:03.960 --> 0:45:07.800 reaffirms that a firm was onto something with this business model, 0:45:08.280 --> 0:45:11.760 and a firm had to tighten its underwriting standards early 0:45:11.800 --> 0:45:13.920 in the pandemic, meaning that the company had to become 0:45:13.960 --> 0:45:17.320 more selective when it came to choosing who who would 0:45:17.320 --> 0:45:20.759 get loans and who would not. Uh so much was 0:45:20.800 --> 0:45:23.600 uncertain that you can understand where the company was coming from. 0:45:23.640 --> 0:45:25.680 You know, we weren't sure which businesses we're going to 0:45:25.719 --> 0:45:28.920 survive the conditions of the pandemic and which ones might 0:45:28.960 --> 0:45:32.000 fade away. And yeah, talking about this is ikey because 0:45:32.040 --> 0:45:34.080 at the end of the day, what you're really talking 0:45:34.120 --> 0:45:36.879 about are the human beings who need money in order 0:45:36.880 --> 0:45:40.200 to purchase stuff. I definitely feel way more sympathy for 0:45:40.239 --> 0:45:43.400 the people who rely on buy now, pay later in 0:45:43.480 --> 0:45:47.560 order to get necessities, rather than say, affluent folks who 0:45:47.600 --> 0:45:50.840 just want to spread out their payments for an expensive 0:45:50.880 --> 0:45:53.200 exercise bike in their homes. I don't feel a whole 0:45:53.200 --> 0:45:56.439 lot of sympathy for them. Now, you might wonder how 0:45:56.480 --> 0:45:59.080 the Heck Affirm can actually loan out money in the 0:45:59.080 --> 0:46:01.200 first place. I mean, it's how how do you have 0:46:01.280 --> 0:46:05.240 a company just magically grant money to people? Well affirm 0:46:05.360 --> 0:46:08.560 borrows from around twenty different banks and pension funds and 0:46:08.600 --> 0:46:12.680 other pools of cash, which, yeah, I mean pension funds. Man, 0:46:12.719 --> 0:46:14.239 what a world we live in to think of a 0:46:14.280 --> 0:46:18.759 pension fund is a viable place to borrow money from 0:46:18.800 --> 0:46:21.120 that that a pension fund deps when someone wants to 0:46:21.120 --> 0:46:24.560 buy an expensive toy. Now, maybe that's just me being 0:46:24.560 --> 0:46:29.359 particularly anti capitalist today. Sorry about that anyway. As long 0:46:29.440 --> 0:46:32.720 as folks are paying back their loans, everything works fine. 0:46:32.800 --> 0:46:35.839 But if there is a surge in delinquencies, it puts 0:46:35.840 --> 0:46:37.879 a firm in a really tough position because it will 0:46:37.880 --> 0:46:42.080 still owe the borrowed money to those various funds and banks. Now, 0:46:42.480 --> 0:46:44.800 I know I've talked a lot about finance in this episode, 0:46:45.040 --> 0:46:48.160 but we have to remember this is all built upon technology, affirms. 0:46:48.200 --> 0:46:51.840 Tech includes this process of evaluing a potential customer before 0:46:51.840 --> 0:46:55.080 approving a loan or denying it. We're talking about digital 0:46:55.160 --> 0:46:58.880 money transfers. We're talking about transactions that are mostly happening online. 0:46:59.320 --> 0:47:03.320 So there is a big tech aspect to this um. 0:47:03.440 --> 0:47:05.560 As for what's in the future for a firm, I 0:47:05.600 --> 0:47:08.480 don't know. And as for my own personal thoughts on it, 0:47:08.520 --> 0:47:11.960 I've got mixed feelings. On the one hand, I think 0:47:12.400 --> 0:47:15.160 a better solution for most people is to put money 0:47:15.200 --> 0:47:19.400 aside for purchases and just to to wait until you 0:47:19.520 --> 0:47:21.799 have the money to make the purchase. So, in other words, 0:47:22.080 --> 0:47:25.239 maybe using an app that lets you set aside the 0:47:25.280 --> 0:47:28.560 same amount of money you would be spending on a 0:47:28.640 --> 0:47:33.080 buy now, pay later scheme, but then just using that 0:47:33.160 --> 0:47:35.040 to outright purchase the stuff, and then you don't have 0:47:35.080 --> 0:47:38.200 to pay interest, right, You're just paying the asking price 0:47:38.239 --> 0:47:41.160 for whatever the product is. But that means you have 0:47:41.239 --> 0:47:43.239 to wait, and in some cases you may not be 0:47:43.360 --> 0:47:47.080 able to write for necessities, you might not have that luxury. 0:47:47.200 --> 0:47:50.520 And in other forms, I'm thinking, you know, there there 0:47:50.680 --> 0:47:52.680 is so much of our world that is based upon 0:47:52.719 --> 0:47:56.040 our ability to access credit, and for tons of folks 0:47:56.360 --> 0:48:00.439 that's an avenue that just isn't a viable option. So yeah, 0:48:00.560 --> 0:48:03.560 I have I have complicated feelings about this. I think 0:48:03.560 --> 0:48:07.480 it's a valuable service. It's just a valuable service that 0:48:07.640 --> 0:48:11.399 is built on top of or next to a an 0:48:11.440 --> 0:48:18.320 infrastructure that I personally find somewhat scary and nikki, but hey, 0:48:18.719 --> 0:48:20.600 you know, we got to navigate the world one way 0:48:20.680 --> 0:48:24.560 or another, right anyway, That's the story. On a Firm 0:48:24.640 --> 0:48:27.680 and Max Levchin hope you enjoyed. If you have suggestions 0:48:27.680 --> 0:48:30.680 for future topics, make sure you reach out and get 0:48:30.719 --> 0:48:32.080 in touch with me. One way to do that is 0:48:32.120 --> 0:48:34.920 to download the I Heart Radio app. It's free to download. 0:48:35.400 --> 0:48:38.040 Navigate over to tech Stuff, use a little microphone icon, 0:48:38.239 --> 0:48:42.280 leave me a voice message, or send me a Twitter 0:48:42.440 --> 0:48:45.520 request like this one was. And the Twitter handle we 0:48:45.640 --> 0:48:49.360 use is tech stuff HSW and I'll talk to you 0:48:49.400 --> 0:48:59.560 again really soon. Tex Stuff is an I Heart Radio production. 0:48:59.760 --> 0:49:02.600 For more podcasts from I Heart Radio, visit the i 0:49:02.719 --> 0:49:05.960 Heart Radio app, Apple Podcasts, or wherever you listen to 0:49:06.000 --> 0:49:06.920 your favorite shows.