Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of The Odd Laws podcast.
Speaker 3: I'm Joe, wasn't Thal.
Speaker 4: And I'm Tracy all the way Tracy.
Speaker 2: It feels like everybody, whether they want to come after
Speaker 2: the banks, right, there is this effort so many of
Speaker 2: our episodes, whether we're talking about crypto, whether we're talking
Speaker 2: about private credit, whether we're talking about payments, it's this goal,
Speaker 2: this dream of like, let's chip away at some of
Speaker 2: these bank businesses or these businesses that were associated with
Speaker 2: some sort of legacy institutions.
Speaker 5: The banks.
Speaker 2: They mostly seem to be doing pretty well still, but
Speaker 2: there's this dream that they can all be sort of
Speaker 2: like disintermediate away, or that each one of these functions
Speaker 2: that they do can be better done somewhere else.
Speaker 4: Yeah, So let's see. I have been in financial journalism
Speaker 4: for all my most twenty years now, which is kind
Speaker 4: of crazy and makes me feel very old. But for
Speaker 4: as long as I can remember, someone has been trying
Speaker 4: to either reinvent bank lending or reinvent the payment space.
Speaker 4: And I guess I can see a few reasons. So like, genuinely,
Speaker 4: some payment architecture is really old fashioned especially in the
Speaker 4: US where you know, sometimes you still have to write
Speaker 4: a check for something. Yeah, blows my mind. The US
Speaker 4: didn't get chips for a really long time, chips and
Speaker 4: credit cards and stuff like that. But also if you
Speaker 4: think about the payment and lending and financial market just
Speaker 4: in general, it's one of the biggest out there, right,
Speaker 4: Like you're talking about all the economic activity basically, and
Speaker 4: so if you can get a tiny slice of that
Speaker 4: through interchange or fees, then you can see how people,
Speaker 4: you know, people are really interested in that space.
Speaker 2: No completely, and we know that there are a lot
Speaker 2: of fintech companies for a long time, I mean some
Speaker 2: of the most you know, the earliest Internet success stories
Speaker 2: period where you know, this is deaf, nothing new, And
Speaker 2: of course one of the first ever was PayPal, which
Speaker 2: recognized that with the Internet was going to come all
Speaker 2: kinds of new opportunities for payments and sort of quasi
Speaker 2: peer to peer, literal peer to peer transactions.
Speaker 3: Et cetera.
Speaker 2: PayPal is still, of course extremely important part of the
Speaker 2: payments infrastructure. But yeah, there's so much going on. But
Speaker 2: to your point, lots of companies have gotten those little
Speaker 2: slices and made incredible fortunes.
Speaker 4: Yeah, we also did an episode on buy Now, Pay
Speaker 4: Later a couple months ago, and there are clearly some
Speaker 4: interesting questions brought up by the expansion of that space,
Speaker 4: and you and I talked about how wherever you go
Speaker 4: on the internet nowadays, you get like, you know, probably
Speaker 4: at least two or three little buttons that offer you
Speaker 4: installment loans on your purchases. And obviously the concern is
Speaker 4: whether or not people are taking out credit that they
Speaker 4: shouldn't necessarily be. There's a big discussion about that, and
Speaker 4: also the transparency of the credit that they're taking.
Speaker 2: Out right, and we'll get into this. There are pros
Speaker 2: and cons. I guess relative to credit cards. Thing with
Speaker 2: credit cards is that there is decades and decades of
Speaker 2: data on them, and we know how they're used, and
Speaker 2: there's really good risk profiling and scores and all this
Speaker 2: credit scoring and all this stuff. BNPL is sort of
Speaker 2: more novel. And so therefore, to what degree do we
Speaker 2: know how as as an asset or as a function
Speaker 2: it performs across different cycles. Do we know the cohort
Speaker 2: of people who use BNPL as well as we know
Speaker 2: the people the types of people who use credit cards
Speaker 2: seems a little bit, at a minimum, a bit more ambiguous. Absolutely, Well,
Speaker 2: we've hinted at what we're going to be talking about.
Speaker 2: I mentioned PayPal, We talked about BNPL. We are going
Speaker 2: to be speaking with one of the original members of
Speaker 2: the PayPal mafia. We're going to be speaking with Max Levchin.
Speaker 2: He is the founder and CEO of a firm one
Speaker 2: of the biggest BNPL companies publicly traded to Max. Thank
Speaker 2: you so much for coming on Odd Lots.
Speaker 5: Thank you for having me. I'm a big fan of
Speaker 5: the show. Thank you a bit of a privilege to
Speaker 5: be here.
Speaker 2: Thank you for saying that on the recording, and so
Speaker 2: we always love hearing it, but we love when we
Speaker 2: love when it's on the public record as part of
Speaker 2: the episode, Thank you so much. Where did you get
Speaker 2: the idea to start affirm but prompted it?
Speaker 6: But a two sided coin, both sides bad of personal
Speaker 6: experience actually tying neatly to the PayPal story. So I
Speaker 6: came to the US at sixteen from Soviet Union, and
Speaker 6: so you can imagine I understood very little about borrowing
Speaker 6: and credit and things like that. And so I got
Speaker 6: my first credit card on campus at college at eighteen,
Speaker 6: didn't fully understand what I was signing up for, certainly
Speaker 6: didn't read the fine print where it said zero percent asterisk,
Speaker 6: don't worry about it.
Speaker 5: Borrowed a bunch of money, financed my.
Speaker 6: First startup from that very same credit card, promptly got
Speaker 6: into more than I could afford to pay for. Startup failed,
Speaker 6: eventually got some nasty calls from collectors, paid it off,
Speaker 6: and four years later or five years later, took this
Speaker 6: little company PayPal Public was basically an penalty wealthy overnight
Speaker 6: went to buy a fancy car that you know, as I.
Speaker 5: Originally deserved it the right page of twenty three I.
Speaker 6: Wanted to show off to my then girlfriend now wife
Speaker 6: and was declined for credit. And not only did I
Speaker 6: feel completely screwed by the moment where I found out
Speaker 6: that you're supposed to make the minimum payment and by
Speaker 6: the way, interest a cruise into principle, and this seemingly
Speaker 6: low APR is actually not what it seems to be
Speaker 6: because I missed some date of the specific amount that
Speaker 6: I was supposed to pay. It bit me again five
Speaker 6: years later it was like, oh, by the way, wreck
Speaker 6: your credit rating too, so you can't get alone for anything,
Speaker 6: even as you're sort of proudly sticking a finger at
Speaker 6: the article and newspaper saying, you know, the company public
Speaker 6: youngests whatever. And so that was the thing that stayed
Speaker 6: with me for years. My friends would prank me at restaurants.
Speaker 6: They would ask the wait staff to tell me that
Speaker 6: my credit card was declined, which by then was a
Speaker 6: different credit card.
Speaker 5: But when I would turn deep purple and basically be like,
Speaker 5: oh my god, like it happened again, Like what? And
Speaker 5: you know, eventually I knew the joke. But I was
Speaker 5: in my mid.
Speaker 6: Thirties when I realized that that's now more likely a
Speaker 6: joke than that credit score.
Speaker 5: Bite from eighteen.
Speaker 6: So in my late thirties, I sat down with a
Speaker 6: friend from high school, college and PayPal. You know, I
Speaker 6: have many of these friends who's I met when I
Speaker 6: was just getting my feet wet in America, and ultimately,
Speaker 6: you know, we built this amazing company together. And asked
Speaker 6: him the obvious question, twenty years too late, why didn't
Speaker 6: we try to fix that yuck that comes with having
Speaker 6: credit cards as a young person, And he said, you know,
Speaker 6: I don't know, but we built so much great AI
Speaker 6: at PayPal, fighting fraud and doing all these really interesting things.
Speaker 6: Surely we could do a better job scoring credit for
Speaker 6: young people like you were at eighteen and then twenty three.
Speaker 6: Then what currently happens? And that was sort of the
Speaker 6: seminal moment, and a couple of years later.
Speaker 5: We started a firm.
Speaker 4: So I have a bunch of questions already. Firstly, what
Speaker 4: kind of car was it? Did you get it?
Speaker 6: In the end, I had to pay cash for right,
Speaker 6: I actually wired money, and it would begin like an
Speaker 6: eight am visit to a dealership, ended up like it's
Speaker 6: five pm. You're wired, hasn't cleared yet, you can't drive
Speaker 6: off the slot and drama at the time.
Speaker 5: Don't judge me.
Speaker 6: It was a black hardtop Mercedes convertible.
Speaker 3: No judgment at all.
Speaker 4: I'm judging a little bit.
Speaker 5: I was really young.
Speaker 6: I was very much trying to impress the girl who
Speaker 6: is now my wife and the mother.
Speaker 5: It clearly works.
Speaker 4: Okay, another question, So.
Speaker 2: You know, I just I love those those Mercedes. I
Speaker 2: think that's there's one of the if I have some
Speaker 2: rough conception, no judgment, I think those are great design cars.
Speaker 4: Anyway, Should we just talk about cars?
Speaker 1: Yeah?
Speaker 3: We could?
Speaker 4: Okay, Well, you mentioned the underwriting process. And this, in
Speaker 4: my mind, is supposed to be what makes the buy now,
Speaker 4: pay later BNPL model different. Right, Like the underwriting process
Speaker 4: is more technologically driven, perhaps more nuanced. Talk to us
Speaker 4: about what you do differently versus you know, a credit
Speaker 4: card company or a bank or someone like that.
Speaker 6: Sure, and you're pulling in a thread that's gonna take
Speaker 6: a long time to Onwinyl, try to be fiffy, but
Speaker 6: this is where the rage kicks in. So one of
Speaker 6: the things that happens with credit cards, at the very core,
Speaker 6: they tell you a bunch of things they don't actually want.
Speaker 5: You to do.
Speaker 6: So credit card business model is a crull of interest
Speaker 6: into principle. So this exponential function of your signing up
Speaker 6: for apr X but you don't actually know what's gonna
Speaker 6: cost you, is all the fact that as you make
Speaker 6: the minimum payments or whatever the payments you're making, whatever
Speaker 6: you're haven't paid off, the interest that you've recrued folds
Speaker 6: right into the principle, and it compounds and compounds and compounds,
Speaker 6: and so the longer you take to pay it back,
Speaker 6: the more it will cost. Which seems obvious, but it's
Speaker 6: impossible for most merimortals to predict, and they love it
Speaker 6: when you're late because they are late fees which are fixed,
Speaker 6: and so the less you spend, the higher the percentage
Speaker 6: the late feed represents. So it's this sort of amazing
Speaker 6: business model, which is why you know one of your
Speaker 6: recent episodes puzzled over how are these rates so high?
Speaker 5: The rates themselves are actually not the problem. The problem
Speaker 5: is the structure.
Speaker 6: As you fold interest into principle and pay and pay
Speaker 6: and pay late.
Speaker 5: Fees, it can be extraordinarily expensive.
Speaker 6: And so from the very beginning of affirm we ask
Speaker 6: the question, how can we make a product where you
Speaker 6: don't have this weird misalignment of interests where the lender
Speaker 6: tells you please pay your bills on time, but when
Speaker 6: they're saying soda vocea is, but not too on time,
Speaker 6: and ideally take as long as possible because that's when
Speaker 6: we make the most money.
Speaker 5: So the obvious answer is, of course obvious.
Speaker 6: Make a plan that you commit as a lender that
Speaker 6: you'll never change, and don't charge.
Speaker 5: Late fees, and that's it.
Speaker 6: If you agree to those design principles, you are not
Speaker 6: going to make more money if someone is late and
Speaker 6: you're not going to make more money. If they take
Speaker 6: longer to pay you back, obviously you'll make less money.
Speaker 6: Because getting money to lend isn't free either. We have
Speaker 6: to pay for our source of capital as everybody else does,
Speaker 6: which means that it immediately rotates you sort of one
Speaker 6: hundred and eighty degrees where you say I only want
Speaker 6: to lend money when I have a lot of conviction
Speaker 6: the person is going to pay me back on time,
Speaker 6: because if they don't, I am just going to lose money.
Speaker 6: And so we put those two principles down in the ground,
Speaker 6: very very early on. It's literally written down to the
Speaker 6: foundation of the company. We will not misalign ourselves with
Speaker 6: our borrowers. From that came a lot of things like, hey,
Speaker 6: we need to understand your cash flow.
Speaker 5: We don't really care what your credit rating is.
Speaker 6: Maybe you gained it, maybe it's an accurate, maybe your
Speaker 6: eighteen year old immigrants does not matter.
Speaker 5: We need to understand what your actual capability is.
Speaker 6: We have to have the right to tell you you
Speaker 6: are over extending yourself, not just once every few years
Speaker 6: when you renew your credit card agreement, but for every transaction.
Speaker 6: You have to be able to underwrite and decide yes
Speaker 6: or no for every single moment that you create these
Speaker 6: payment plans, because that allows us to not lose money
Speaker 6: because we are aligned with you. When you pay us
Speaker 6: back on time, we'll make some money. If you do own,
Speaker 6: we're just going to be a warse off. And so
Speaker 6: that is the foundation of Affirm's take on bnpl Many
Speaker 6: people have come along since and sort of change the
Speaker 6: model a little bit. They introduce laid fees, all kinds
Speaker 6: of other fees we never have and never will. But
Speaker 6: even with those modifications, the model is still better than
Speaker 6: credit cards because of this individual underwriting moment and in
Speaker 6: our case, no fees of any kind.
Speaker 2: Just to be clear, So let's say I wind up
Speaker 2: at some website and maybe I want to buy like
Speaker 2: some Nikes or something like that, and I see the
Speaker 2: Affirm option. How do you know how good of a
Speaker 2: credit I am in that moment?
Speaker 6: So it's not an effort free thing for you to
Speaker 6: use a firm. You'll have to click on a firm
Speaker 6: and we will ask you, if we've never seen you before,
Speaker 6: we'll ask you to provide some information for us. That
Speaker 6: information will allow us to tap into the standard set
Speaker 6: of records that the credit bureaus.
Speaker 5: Aggregated about you.
Speaker 6: If there's enough data there for us to use our
Speaker 6: custom credit score, we'll render a decision based on that.
Speaker 6: If there's not, we'll actually say, hey, we don't fully
Speaker 6: understand your personal financial situation. We would like to have
Speaker 6: a peek at your bank account cash flow and decide
Speaker 6: how your cass and flows relative to your ability to
Speaker 6: pay us back. All of this is made possible with
Speaker 6: really good news technology, So this takes seconds, even though
Speaker 6: it probably takes about as long to do as it takes.
Speaker 5: To describe it.
Speaker 6: But we'll look through your personal financial state of right
Speaker 6: now and make a decision not just whether it's he
Speaker 6: yes or no, but also how much of a risk
Speaker 6: you have of that financial situation changing and that price
Speaker 6: is the credit?
Speaker 4: Do you use any creative data points you mentioned checking
Speaker 4: against the type of item that people are buying, So
Speaker 4: that's one thing I imagine could be interesting, like if
Speaker 4: people are buying groceries on installment, does that mean they're
Speaker 4: more of a credit risk than someone who's I don't know,
Speaker 4: buying a computer or a big ticket item. And then
Speaker 4: the other thing I'm very curious about, and I think
Speaker 4: I've told this story before on add lots. But I
Speaker 4: remember going to see a startup that eventually failed, and
Speaker 4: they were in the peer to peer lending space, and
Speaker 4: they describe some of the stuff they were doing with
Speaker 4: underwriting where they were like trying to measure people's impulsiveness
Speaker 4: by how quickly they moved a slideer for a loan
Speaker 4: and stuff like that, which freaked me out a little
Speaker 4: at the time.
Speaker 5: It would freak me out too.
Speaker 6: So, no, we do not do telemetry as a variable
Speaker 6: into underwriting. So before I get into what we do use,
Speaker 6: it bears mentioning that the variable to use in underwriting
Speaker 6: is a very very highly regulated domain of lending and underwriting.
Speaker 5: There's lots and lots of laws going back quite far.
Speaker 6: Things like Fair Credit Act and any other sort of
Speaker 6: subsequent additions to both federal and state level law that
Speaker 6: prohibits you from using kind of the obvious things you
Speaker 6: wouldn't want people to use, like your race or your gender,
Speaker 6: or your age or your creed cannot be a factor.
Speaker 6: It's actually a federal offense to do that. And so
Speaker 6: we don't do any of those things. We go as
Speaker 6: far as to say if it correlates to some of
Speaker 6: those things, we also could use it, and that too
Speaker 6: is a subsequent law as well.
Speaker 5: So so first of all, we're very very.
Speaker 6: Thoughtful about making sure we don't step into a prohibited territory.
Speaker 6: It's called prohibited basis as the fancy term in the industry.
Speaker 6: What we can use and what we do use. As
Speaker 6: you mentioned, merchants share with us what's being purchased. Despite
Speaker 6: the burrito gate that sometimes comes back in the press,
Speaker 6: people don't actually use a firm to finance Mexican food
Speaker 6: or other cuisines. They do sometimes use a firm for groceries,
Speaker 6: but it mostly is, or almost entirely really is for
Speaker 6: things like I'm throwing a giant party and I need
Speaker 6: several hundred dollars worth of food stuffs, and that's a
Speaker 6: lot to pay down with my debit cards, so I'm
Speaker 6: going to use a firm instead. So the average sized
Speaker 6: transactions for us is roughly three hundred dollars. So it
Speaker 6: gives you a sentence for what people use a firm for.
Speaker 6: So that's just you know, apper pos where it's being used.
Speaker 6: What we gleaned from the information about what's being purchased.
Speaker 6: One good mental model, which this is like an approximation,
Speaker 6: but a decent one. If the useful life of the
Speaker 6: item is meaningfully shorter than the time it takes you
Speaker 6: to pay it back, you may find yourself questioning the
Speaker 6: quality of the item long afterwards disappeared. And so a
Speaker 6: natural question we should be asking is what do we
Speaker 6: understand about this item, but also maybe the item's history
Speaker 6: of quality before we say, oh yeah, sure by this
Speaker 6: thing that's going to be out in six months and
Speaker 6: pay for it over two years. So maybe the most
Speaker 6: useful thing I can say about actually what variables, what
Speaker 6: new variables w we've introduced into our underwriting, vast, fast,
Speaker 6: vast majority of them, In fact, all of them actually
Speaker 6: influence a decision we make by one or two percent
Speaker 6: at most. Anytime someone tells you I found this magic
Speaker 6: variable and if I just look at that, it's like
Speaker 6: thirty percent better underwriting or five percent better in defaults,
Speaker 6: they are lying, probably to themselves more than to you,
Speaker 6: but they're definitely lying. Anything like that just immediately becomes
Speaker 6: brittle as the macroeconomic reality changes, as people suddenly don't
Speaker 6: care about the item or whatever it is that they
Speaker 6: found that's this magic bullet of like suddenly I know
Speaker 6: who's a good risk.
Speaker 5: It just disappears. And so you actually.
Speaker 6: Want lots and lots of subtle factors that are also
Speaker 6: compliant with all the various regulations, helping you shape a
Speaker 6: score that will tell you how likely this person is
Speaker 6: to pay back.
Speaker 5: That's what we use.
Speaker 2: Let's go back to the just the core of the
Speaker 2: business model. So let's imagine there is a shirt that
Speaker 2: costs one hundred dollars and I have an opportunity to Okay,
Speaker 2: I'm gonna buy it with a firm, so to be
Speaker 2: four payments of twenty five dollars and there's no interest,
Speaker 2: and so for me, that is almost a free lunch
Speaker 2: because the time value of money, et cetera. All Right,
Speaker 2: I'm spreading this out over four payments.
Speaker 4: You're gonna work that hundred extra and.
Speaker 2: I'm gonna that extra, that extra seventy five dollars after
Speaker 2: the first payment, I'm gonna know.
Speaker 5: As you should. Yeah, great way, okay.
Speaker 2: So I'm gonna make that first payment and i'm gonna
Speaker 2: then that seventy five dollars. I'm gonna put that into
Speaker 2: an index fund. Okay, And so you make money because
Speaker 2: the retailer is paying you a cut because that you've
Speaker 2: brought someone into the door. So talk about how is
Speaker 2: that cut determined, how much are they paying you for that,
Speaker 2: and how competitive is it against other potential BNPL companies
Speaker 2: or perhaps new entrants that haven't come into the market yet.
Speaker 2: Talk to us about how that price is for him.
Speaker 4: This is my question too, because when you go to
Speaker 4: check out, you see buttons, and the buttons I presume
Speaker 4: don't mean that much to people. You just click one
Speaker 4: of them. So how do you differentiate yourself?
Speaker 6: So we've been around for nearly fifteen years, and the
Speaker 6: way differentiated ourselves by the way we basically don't advertise.
Speaker 6: When you see us a checkout, that's when you learn
Speaker 6: about AFFIRM at some point, and then you come back
Speaker 6: to use again.
Speaker 5: And we have incredible retention rates.
Speaker 6: People who have used a firm a couple of times
Speaker 6: basically with ninety percent probability we'll come back to use
Speaker 6: a firm again, not necessarily the next week. In fact,
Speaker 6: we average something like five plus transactions per year, but
Speaker 6: when it matters to them, they will use AFFIRM. And
Speaker 6: the way we differentiated ourselves is we were there for
Speaker 6: them when they needed us and if they ever stumbled.
Speaker 6: Our best customers are the ones that email us or
Speaker 6: call us and say, hey, I was late to pay
Speaker 6: my bill, something happened. What's the layed fee? And we
Speaker 6: tell them there isn't one. That's the moment when they
Speaker 6: grasp how we're different from the rest of the industry,
Speaker 6: and that that's probably why they come back to us
Speaker 6: as often as much as they do. Something like ninety
Speaker 6: five percent of our transactions come from repeat customers. So
Speaker 6: just to give you a sense for the loyalty that
Speaker 6: we've engendered in our user base without ever making promises,
Speaker 6: you know, on broadcast media.
Speaker 5: If you will.
Speaker 6: So that's why they come back to the business model points.
Speaker 6: So first of all, probably worth expanding the aperture a
Speaker 6: little bit. So we offer both interest free and not
Speaker 6: interest free loans. The pain four that Joe described is
Speaker 6: exactly as it sounds. So in our case, there are
Speaker 6: no fees of any kinds. So if you see hundred
Speaker 6: dollars shirt and you say it's going to be four
Speaker 6: payments of twenty five.
Speaker 5: Dollars, that is it.
Speaker 6: You cannot You can take a decade and you wouldn't
Speaker 6: be able to use a firm pretty soon after you
Speaker 6: went well past the wind over payment. So the punishment
Speaker 6: for being late for too long is, hey, you need
Speaker 6: to pay us back actually before you can do this again,
Speaker 6: which I think stands to reason much more than actually,
Speaker 6: let us hit you with a thirty eight dollars laid feet.
Speaker 6: But that's besides the point. So that's one form of transaction.
Speaker 6: We also have what we call longer term zeros, which
Speaker 6: is for a thousand dollars fancy suit, you could potentially
Speaker 6: get a loan from a firm for twenty four months
Speaker 6: or even thirty six months, which will also be zero.
Speaker 6: In both of those cases, it's the retailer that's effectively
Speaker 6: paying your interest. I value of money becomes more expensive
Speaker 6: than period six months, so you've nailed the business model there.
Speaker 6: In some situations, the retailer just doesn't have the margin
Speaker 6: or isn't interested in paying your interest, and so they'll say, look,
Speaker 6: you're going to use credit card, you'll pay some interest.
Speaker 6: If you're going to use a firm, it's okay for
Speaker 6: us to have this transaction happen if you are willing
Speaker 6: to pay interest to affirm. And in that scenario, you
Speaker 6: will see both the principle and interest, will calculate it
Speaker 6: for you, both the rate and the dollars, and we'll
Speaker 6: show you the schedule, and before you commit to any
Speaker 6: of that, you will see and agree to the schedule.
Speaker 5: That we agree on.
Speaker 6: In the latter case, the consumers paying us something, the
Speaker 6: merchant is probably paying us something significantly less than what
Speaker 6: they're paying us if they're absorbing the cost of interest,
Speaker 6: the cost of time, value of money. The business model
Speaker 6: is really really simple in our case to understand the
Speaker 6: value is fixed, so whoever is paying us almost doesn't matter.
Speaker 6: That has to cover the fixed cost of underwriting, servicing,
Speaker 6: all the usual bits. Leave a little bit for us
Speaker 6: to actually be a profitable company, which we are, and
Speaker 6: also absorb the probability of default, which, by the way,
Speaker 6: all the way back to these alignment of incentives an
Speaker 6: easy check so the work like this whole idea of like, oh,
Speaker 6: you know, you're just not going to a profit when
Speaker 6: people stumble. Our delinquency rates are about half the industry
Speaker 6: of credit cards. That should give you a sense for
Speaker 6: we don't make nearly as many mistakes, or perhaps we
Speaker 6: are not willing to let people go late because we
Speaker 6: don't benefit from it.
Speaker 5: Back to this model. That's how it works.
Speaker 6: The competitiveness of this industry is just like any other
Speaker 6: competitiveness is of any payment industry. Payments are notoriously a
Speaker 6: competitive world. There's actually never been a monopoly in payments,
Speaker 6: full stop. There's a fun puzzle Wiser used to do
Speaker 6: this cocktail parties, like name a monopoly and payments. It
Speaker 6: turns out there has never been one.
Speaker 4: Interesting toughs cocktail party.
Speaker 3: Yah.
Speaker 5: I you know there's a reason I'm a fan of
Speaker 5: the show, right.
Speaker 6: I listen to you a pine and all sorts of
Speaker 6: esthetic things with great gusta, and so I think that's
Speaker 6: We'll tell you everything you want to know about the
Speaker 6: competitiveness of the space. But we have decided from the
Speaker 6: very beginning that we want transparency and honesty with everyone
Speaker 6: involved with our borrowers. That's why we say everything upfront.
Speaker 6: That's why we tell them, here's your disclosure on exactly
Speaker 6: the rates and the schedules with our merchants.
Speaker 5: We tell them, here is the price.
Speaker 6: You will have to pay us. If that's where you're paying.
Speaker 6: If you can't don't want to, that's fine. We will
Speaker 6: probably not be the right one for you. We won't
Speaker 6: make it up elsewhere. We're not going to take it
Speaker 6: out of the consumer's hide when they least expect it.
Speaker 6: That's just not the brand. There are definitely cheaper providers
Speaker 6: out there. There are plenty of brands that I'll say
Speaker 6: we're just like a firm, but way less expensive for merchants.
Speaker 6: What that really means is that's because we charge all
Speaker 6: sorts of hidden feats, we have all sorts of other
Speaker 6: ways of taking it out of consumer skin. What this
Speaker 6: means practically, with fifteen years of experience is consumers as
Speaker 6: they cast their eye over the list of buttons, they say, well,
Speaker 6: the one I want to use is the one that's
Speaker 6: not going to get me if I stumble. And that
Speaker 6: makes for twenty four million active users in the last
Speaker 6: twelve months, and we feel like we've we've.
Speaker 5: Kept our promise and the consumers keep coming back.
Speaker 4: Just reiterating Joe's question.
Speaker 5: Though.
Speaker 4: On the merchant side again, I imagine they're getting offers
Speaker 4: from a bunch of different installment lenders BNPL companies, and
Speaker 4: I don't think they do. They care much about the underwriting.
Speaker 4: It's not really their problem, it's your problem, right, So
Speaker 4: I assume the thing they care most about is the fee,
Speaker 4: which seems.
Speaker 6: Like they actually care about three things. Okay, so they
Speaker 6: absolutely care about the fee like that.
Speaker 5: That would say, which which.
Speaker 6: Can range from as low as less than credit cards.
Speaker 6: So typical credit card rate today is on the order
Speaker 6: of between two and a half and three percent, depending
Speaker 6: on the size of the merchant.
Speaker 5: But that's kind of the average in the industry.
Speaker 6: We will definitely meet you around those numbers at the
Speaker 6: absolute lowest and goes up all the way to let's say,
Speaker 6: low single digit percentage points when you are subsidizing consumer interest.
Speaker 6: So we are not a cheaper than credit cards provider
Speaker 6: like that. That's not you know, don't want anybody tell
Speaker 6: that illusion. They care about the rate more than the rate.
Speaker 6: They care about incremental sales. So if your next marginal
Speaker 6: buyer is either a no thanks, or it will cost
Speaker 6: you five percent. If you have the margin of better
Speaker 6: than five percent, you don't want the items staying on
Speaker 6: your shelves. You would like to pay this five percent
Speaker 6: to get the marginal buyer.
Speaker 5: To say yes.
Speaker 6: And so because of that incentive, which I think is
Speaker 6: easy to follow, you do have lots and lots of
Speaker 6: merchants that say, all right, So what I really care
Speaker 6: about then is the approval rates, which is the second
Speaker 6: variable they care about. So as people come through and say, hey,
Speaker 6: I'm not going to use a credit card, not interested
Speaker 6: in buying unless I have an installment loan, let's say,
Speaker 6: from a firm, they need to know that that rate
Speaker 6: is going to be high enough. Otherwise why have a
Speaker 6: button that just sits there and looks pretty. And so
Speaker 6: our rates are typically higher than the rest of the
Speaker 6: industry because we are so obsessed with underwriting, because we
Speaker 6: have no crutches, eg Late.
Speaker 5: Fees, and so this underwriting thing, we don't really.
Speaker 6: Try to explain it to merchants at all. What we
Speaker 6: do say is look at our approval rates. If you
Speaker 6: see their approval rates are meaningfully higher than the industry,
Speaker 6: you know you're gonna get value from this. That's why
Speaker 6: it's worth paying more than credit cards. And so that
Speaker 6: is true, and that's what they do. The third piece
Speaker 6: they do care about. Every merchant knows that the second transaction,
Speaker 6: as they want the first transaction, costs them probably more
Speaker 6: than the margin in it. They're paying Google, they're paying Facebook,
Speaker 6: They'll soon be paying an LM provider or a child
Speaker 6: about provider to drive that first transaction in they want
Speaker 6: to sell you another thing, So they very much care
Speaker 6: about if they had sold that first transaction using a
Speaker 6: buy out pay Lada provider, it better not harm their
Speaker 6: brand because if they buy out Paylada provider is harassing
Speaker 6: the consumer for paying them back or has late fees
Speaker 6: or has unexpected fees, it's going to create.
Speaker 5: Negatively to the merchant's brand.
Speaker 6: And so they actually do care about late fees in
Speaker 6: a way that has less to do with financial consequences
Speaker 6: more with will people come back to us and use
Speaker 6: a firm again, or will they be like, ah, I
Speaker 6: hated that merchant. I got into some bad transactions. So
Speaker 6: that they care about all these things through their own.
Speaker 2: Lens, that makes a lot of sense. So let's say
Speaker 2: I start accepting your premise. Okay, this is per se
Speaker 2: better than credit cards. One reason that people can't just
Speaker 2: quit credit cards generally is not every place takes by
Speaker 2: now pay later. People want something in their wallet, right
Speaker 2: that they want something at the restaurant and wherever it
Speaker 2: is that they know it's going to be accepted now.
Speaker 2: For you are launching a card or you have a card.
Speaker 5: Right, we have a card.
Speaker 2: Ye, so you have a card, but I'm curious. You know,
Speaker 2: you mentioned, you referenced that recent episode that we did
Speaker 2: with Omar Drexler, and one of the things that he
Speaker 2: said about cards is they're very costly to advertise. The
Speaker 2: marketing expenditure for the card companies is very high. You
Speaker 2: mentioned that you don't do a lot of advertising. I'm
Speaker 2: curious though, on the card component specifically, you know, if
Speaker 2: you want to be quote top of wallet to consumers.
Speaker 2: The first thing I think I've read that phrase, I thought,
Speaker 2: I'm trying to quaint myself with the industry. So if
Speaker 2: you want to be top of wallet for the consumer
Speaker 2: in the card, can you do that with an advertising
Speaker 2: light model or do you really need to spend to
Speaker 2: get significant wallet share?
Speaker 5: You can?
Speaker 6: The card is available to our users. So this is
Speaker 6: not a thing that you will see on Times Square displays.
Speaker 6: This is a thing you find out from a firm.
Speaker 6: Once you are a borrower, once you're actually in good standing,
Speaker 6: you qualify for the affirm card as the Hey you
Speaker 6: really liked us, didn't you?
Speaker 5: This was great.
Speaker 6: You're transacting five times a year. If you want to
Speaker 6: take us with you to your retail shopping experiences, restaurant
Speaker 6: or otherwise.
Speaker 5: We have a way.
Speaker 6: It's called the Affirm Card. It's actually pretty magical. The
Speaker 6: card is a dual mode card. It switches from debit
Speaker 6: to credit explicitly as you tell it to. So when
Speaker 6: you're buying a burrito, we expect you to use the
Speaker 6: debit mode, which just literally takes the money from your
Speaker 6: account and that's it. There's no interest obviously, is just
Speaker 6: a pay now transaction. If you're buying a TV, you
Speaker 6: can buy it out with Affirm. In the app, you say, hey,
Speaker 6: my next transaction, I want that to be a twelve
Speaker 6: months maybe to zero percent loan because the retailer wants
Speaker 6: you to have it interest free. Maybe you're paying some interest,
Speaker 6: but you're setting up that transaction in the app, and
Speaker 6: then your card is ready when you tap it next time,
Speaker 6: it becomes.
Speaker 5: A loan automatically. It's a pretty magical experience. It's super popular.
Speaker 6: It's the thing that we haven't needed to advertise because
Speaker 6: we went from we have this card idea to about
Speaker 6: twelve percent of our users having one very very quickly,
Speaker 6: because it's just a really really good product. Again, our
Speaker 6: user their mindset has long been changed from revolving is okay,
Speaker 6: I don't understand it, but I don't care to. I
Speaker 6: don't like revolving. I don't want to pay LID fees.
Speaker 6: I don't want to pay excess of interest. This affirm
Speaker 6: thing is neat the card is a logical next step.
Speaker 6: It's how much more can I have of this type
Speaker 6: of financial life?
Speaker 4: How much insight do you have into how much people
Speaker 4: are borrowing from other BNPL lenders. So the sort of
Speaker 4: stacking issue, which has been discussed multiple.
Speaker 5: Times now it's a great question.
Speaker 6: We have a decent insight in the sense that we
Speaker 6: understand pretty well the overlap between user basis. So there
Speaker 6: are two prongs to this answer. This one it's worth
Speaker 6: delving into pretty deeply because this is where we differ
Speaker 6: from the rest of the industry pretty significantly. So before
Speaker 6: I get into the stacking part, I'll address the overlap.
Speaker 5: So we do a lot of studying just externally through surveys.
Speaker 6: Also, because when we log into your bank account, or
Speaker 6: we ask a provider to log into your bank account
Speaker 6: and pull in some of your transactional data, we get
Speaker 6: a glimpse into what else you're spending money on. So
Speaker 6: we to have a decent sense for where else you
Speaker 6: might be using Buy now, Pay later, And to date,
Speaker 6: the user base overlap with other providers quite minimal, so
Speaker 6: there's not a whole lot of stacking possibility, simply because
Speaker 6: people who use a firm tend to stay with affirm.
Speaker 6: They sometimes stray and use other providers, but it's quite
Speaker 6: minimal for a meaningfully lower transactional amounts. I think we
Speaker 6: average a significantly higher average transaction relative.
Speaker 5: To the rest of the industry.
Speaker 6: So far, that's not been a problem in the long term. You,
Speaker 6: of course, can make the argument like, sure, right now,
Speaker 6: you guys are all still tiny.
Speaker 5: You're going really quickly.
Speaker 6: Everybody's taking a bite out of the credit card industry.
Speaker 6: What happens five years from now when everyone is signed
Speaker 6: up for their favorite DNPL and they're now signing up
Speaker 6: for a second one. The right way to address this problem,
Speaker 6: and this is the right way, and it's traditionalist of me,
Speaker 6: but I really do believe is the right way is
Speaker 6: for everyone to report to the credit bureaus. Today, when
Speaker 6: we tap into one of the three major credit bureaus,
Speaker 6: we see what you're borrowing and relatively current state of
Speaker 6: you're borrowing from other traditional source of credit, and it
Speaker 6: is a variable that we use inside of our own
Speaker 6: underwriting affirm today is the only one that furnishes. That's
Speaker 6: another fancy industry term. Delivers the data of both positive
Speaker 6: and negative as you're on time, you're not on time
Speaker 6: to the credit bureaus. The rest of our competitive set,
Speaker 6: generally speaking does not, although everyone has experimented a little bit.
Speaker 6: From the very beginning, we saw the idea of building
Speaker 6: credit history and improving credit scores for people who are
Speaker 6: on time as a key value proposition for our borrower.
Speaker 6: We are not going to be the only lender for
Speaker 6: our consumers. They need to borrow for a car, they
Speaker 6: need to borrow for a house one day. That means
Speaker 6: whatever they're doing with us, especially if they're doing well,
Speaker 6: which ninety seven percent of our consumers are doing really,
Speaker 6: really well. They're on time all the time, it has
Speaker 6: to reflect in their permanent record somehow. So we've been
Speaker 6: furnishing basically from the very beginning. It took a long
Speaker 6: time to persuade not just the credit bureaus but also
Speaker 6: the companies that provide traditional credit scores to understand the
Speaker 6: data we furnish and treat it in the right way
Speaker 6: so that when you are in time, the score go up,
Speaker 6: when you're not on time, the scores go down, et cetera.
Speaker 6: And so we did all that work basically on a
Speaker 6: volunteer basis over the last decade and today right now,
Speaker 6: the state of the industry is if you are a
Speaker 6: b input for the NPL provider and you're not furnishing data,
Speaker 6: you kind of have no excuse. We pioneered this, We
Speaker 6: did all the work, We worked with the score builders
Speaker 6: and the credit bureaus, and we're now sending all of
Speaker 6: our data.
Speaker 5: And so we want everyone to join us.
Speaker 6: Because most people do pay on time, their credit histories
Speaker 6: should reflect their good repayment, but also people who should
Speaker 6: not be borrowing should be reflected. And I think that
Speaker 6: that's just really really important. If I can do one
Speaker 6: bit of advertising on your show, its wont before affirm
Speaker 6: it will be all of you out there. If you
Speaker 6: are in a buyout pay lator industry, furnish your damn data.
Speaker 6: It will help consumers and it will eventually accreate to
Speaker 6: your brand too. But for now we are the only
Speaker 6: major one.
Speaker 4: Wait, what's the resistance then, because it seems kind of obvious.
Speaker 4: If everyone cares about the underwriting, you would want more
Speaker 4: data out there, so why not provide it?
Speaker 6: So I don't want to pretend that I understand all
Speaker 6: the motivations, but I think a basic inferential thought might
Speaker 6: occur that if you're making a lot of money from
Speaker 6: late fees, it's a cool thing to tell your consumers.
Speaker 5: Don't worry.
Speaker 6: You can just pay me off anyone go on your
Speaker 6: permanent record. And if you don't make any money from
Speaker 6: late fees, you have no incentive to tell your consumers,
Speaker 6: Oh it's okay, just pay me something and we won't
Speaker 6: tell on you. The interesting connection between late fees and lack.
Speaker 5: Of reporting is unfortunately the underlying fact.
Speaker 6: And because we don't make any money from late fees,
Speaker 6: because we don't charge any we're very pro reporting.
Speaker 2: Just out of curiosity, since you're talking about late fees
Speaker 2: and credit and all that stuff. Here we are recording
Speaker 2: this on December second, twenty twenty five. You take the
Speaker 2: temperature of the consumer for us. I don't think you're
Speaker 2: doing seeing any signs of growing mispayments or anything.
Speaker 6: Like that, not as of December second. The important thing
Speaker 6: to understand, I'm asked this question fairly often. I am
Speaker 6: a great I am the firm is a great lens
Speaker 6: into the financial hearts and minds of North American consumer.
Speaker 6: We're outperated in the US, Canada and now UK. It
Speaker 6: is a specific set of people. These people are more
Speaker 6: financially responsible. They made a conscious choice. They picked us
Speaker 6: not just because it's installment pay and DA it's convenient.
Speaker 6: It's also because we told them we don't charge lazies.
Speaker 6: It's also because we told them you hate the asterisk
Speaker 6: next to zero percent. We don't have any asterisks. One
Speaker 6: of our core values is no fine print, and we
Speaker 6: mean it on and on and on and so it
Speaker 6: stands to reason that firm consumers will be probably much
Speaker 6: later into any kind of a macroeconomic earthquake territory, if
Speaker 6: there was one to come. But as of right now,
Speaker 6: we feel quite good about our book and also about
Speaker 6: the US consumer.
Speaker 2: I'm going to ask you a question, and I'm gonna
Speaker 2: mention a competitor. I won't make you name the competitor,
Speaker 2: but I'll just say it my question and then ask
Speaker 2: you about so. One of your competitors, Klarna, recently announced
Speaker 2: a new dollar peg stable coin and I'm very cynical,
Speaker 2: and so when I see like random companies announcing some
Speaker 2: crypto thing like, sometimes it makes sense, but often it's like, well,
Speaker 2: maybe is this just a good press release or something
Speaker 2: like that. And I haven't really looked at the Klarna one,
Speaker 2: et cetera. But for you affirm right now when you
Speaker 2: look at as someone who has been in the internet
Speaker 2: payment trenches for literally decades right now, do stable coins
Speaker 2: or anything crypto unlock anything for you right now when
Speaker 2: you think about the future and you think about opportunities
Speaker 2: that you can't do with traditional rails.
Speaker 5: The short answer is, I don't think so. Now.
Speaker 6: I'm also very cynical, so I think you're unfortunately tapping
Speaker 6: into the exact same mind flow.
Speaker 5: That you have. This is our way of loading.
Speaker 2: Them to want to come on the podcast and have
Speaker 2: you against it.
Speaker 3: But keep going, keep going.
Speaker 5: I you know, I am confident that.
Speaker 6: There is some thought that went to the press release,
Speaker 6: so I don't think it's a pure press release.
Speaker 5: So I will.
Speaker 1: Tell us about it.
Speaker 2: I won't make you, We're not gonna make you speculate
Speaker 2: on your competitor, but just tell.
Speaker 5: Sure.
Speaker 6: I will straw man the reasons why Yes, so why not?
Speaker 6: As obvious, I think you probably can do it much
Speaker 6: better job than I can.
Speaker 5: The why yes, So there are a couple of reasons.
Speaker 6: One, in general, if you have a lot of cross
Speaker 6: border commerce for an exchange, the complexity of just diligence
Speaker 6: around you, everything from sanctions to reserve accounts, et cetera.
Speaker 6: You can squint a little and say, you know what,
Speaker 6: if we just lived in dollar pegged stable coins everywhere,
Speaker 6: all at once, it would be a little bit easier.
Speaker 5: And I think that's true.
Speaker 6: E commerce is not a very significantly cross border discipline.
Speaker 5: And so before you sort of say, oh, it.
Speaker 6: Wouldn't it be amazing if I bought lots of things
Speaker 6: from Zanzibar and just paid them with affirm but they
Speaker 6: got stable coin as a settlement currency, they'll be very
Speaker 6: happy because they want dollars in this thing is essentially
Speaker 6: dollar equivalent.
Speaker 5: It's a good story.
Speaker 6: Just most people in the US don't buy a lot
Speaker 6: of things from Zanzibar like they buy some things in
Speaker 6: other countries. But most of the time, because we all
Speaker 6: want things shipped to us very very quickly, we're probably
Speaker 6: buying it from a US subsidiary. That's ware houses somewhere
Speaker 6: pretty close to the US, and.
Speaker 5: So it's not that big of a market just yet.
Speaker 6: But in like five years, if you see me putting
Speaker 6: out a press release, it's not because I finally realized
Speaker 6: that I'm missing out, is because there's enough cross border
Speaker 6: commerce in our scale where it starts to make a difference.
Speaker 6: That's the best I got in terms of why would
Speaker 6: you want to do this? The obvious of why nots?
Speaker 6: It's like, well, maybe you want to move money around
Speaker 6: person to person, but that's not our business. Maybe you
Speaker 6: want to believe that one day Joe will have a
Speaker 6: wallet full of stable coins. I really have a hard
Speaker 6: time imagining you sporting a whole bunch of different kinds
Speaker 6: of branded dollar pegged effectively equivalent stable coins, like a
Speaker 6: coupon book of I got my firm stable coin and
Speaker 6: my brand XYZ stable coin, and I'm going to choose
Speaker 6: between the two, Like none of that maybe.
Speaker 2: Solve the rule? What about for like rewards, that's one
Speaker 2: thing that credit cards currently have that like, oh, I
Speaker 2: get miles, Like could there be something with if I
Speaker 2: use this stable coin, I get remitted?
Speaker 3: But I don't know. I'm I'm just throwing stuff.
Speaker 6: Out there, so for what it's worth, I spend a
Speaker 6: lot of my time contemplating the word ecosystem and mostly
Speaker 6: raging against it because it is one of the less
Speaker 6: documented wealth transfers. And by the way, the credit card
Speaker 6: industry in general is a regressive wealth transfer where people
Speaker 6: who never revolve transactors like probably both of you and me.
Speaker 6: When I use credit cards, which is really rare these days,
Speaker 6: we're paying our bills at the end of the month.
Speaker 6: We're not paying a penny of interest. I think Joe
Speaker 6: on the record saying you've never paid any interest, and
Speaker 6: so I think that's that's a nice place to be
Speaker 6: if you can afford it. Telling people that they should
Speaker 6: just not bar and paid off at the end of
Speaker 6: the month is an incredibly lead the meat cake equillent
Speaker 6: for the twenty first century. Payments lots of people in
Speaker 6: America revolve half the country revolves at a ten thousand
Speaker 6: dollars and so the idea of those people caring about
Speaker 6: rewards is sort of preposterous.
Speaker 5: They do not.
Speaker 6: They care about making their minimum payment. People who are
Speaker 6: figuring out which reward scheme they want to be a
Speaker 6: part of. I'm just not so convinced that they're going
Speaker 6: to be calculated expanding their horizons to have more stable coins,
Speaker 6: because ultimately they're just getting dollars.
Speaker 5: In the world of a firm.
Speaker 6: People that we serve every single day, twenty four million
Speaker 6: of them in the last twelve months, they really really
Speaker 6: care about the interest rates they pay because a lot
Speaker 6: of them understand that the alternative is revolving and so
Speaker 6: for them being told, hey, your reward is a zero
Speaker 6: percent loan is incredibly powerful. And so before we get
Speaker 6: into using our hard earned revenue into stable coins, we
Speaker 6: will just give it back to the consumers in a
Speaker 6: form of no interest.
Speaker 4: So we talked about how you make money, but we
Speaker 4: should talk a little bit about your cost side as well.
Speaker 4: I think you mentioned funding earlier. So you have to
Speaker 4: get money from somewhere, and you're paying for that money.
Speaker 4: What levers do you have to pull if the cost
Speaker 4: of money goes up? And again, I'm aware that we're
Speaker 4: recording this in early December and everyone expects an imminent
Speaker 4: rate cut, But in theory, if interest rates were to
Speaker 4: go up, what could you do to offset that additional cost.
Speaker 6: So the most important thing to understand about our business
Speaker 6: from the capital sourcing part of the game. Everyone understands
Speaker 6: that rates are are super volatile, but you know, if
Speaker 6: you look back a couple of years, they were very volatile,
Speaker 6: if for a brief not so shining moment, and so
Speaker 6: we all knew if possible. So all of our contracts
Speaker 6: with various lenders of money to us but also people
Speaker 6: who will buy our loans, they all adjust fairly gently
Speaker 6: over a course of a fairly long period of time.
Speaker 6: So it's not about can we deal with rising costs
Speaker 6: of credit for us? It's how quickly do they change
Speaker 6: for us? And of course we understand that they might
Speaker 6: change quickly. Therefore a lot of our contracts stipa that, hey,
Speaker 6: if they do move up, the adjustments to our cost
Speaker 6: will go fairly slowly over a period of time. So
Speaker 6: the more likely outcome in December is probably a downward
Speaker 6: motion of the credit rates, or perhaps they stay steady.
Speaker 6: But just the same as I described, we're not going
Speaker 6: to wake up to twenty five free basis points of
Speaker 6: incronal revenue. It will eventually come to us in a
Speaker 6: form of in chronal margin, but it will take its
Speaker 6: time because these contracts are just both up and down
Speaker 6: quite slowly, and we're in no way unique.
Speaker 5: In the industry. Everybody does that.
Speaker 6: The levers we have to deal with such cost changes
Speaker 6: are exactly what you would expect, so we will either
Speaker 6: pass it through to the consumers and moving up in
Speaker 6: the increments or down of twenty five basis points is
Speaker 6: not that significant then most people, I think generally don't
Speaker 6: care that much. In some cases we actually choose to
Speaker 6: tell hey, merchant X, you are providing these rates for nothing.
Speaker 6: You should continue doing so, but the cost to you
Speaker 6: will go up a tiny bit because the rates have
Speaker 6: change now because of time value of money the merchants
Speaker 6: pay us in real time, essentially as the transaction is consummated,
Speaker 6: the true cost to them is truly deminimus. And so
Speaker 6: in either of these two cases, so long as the
Speaker 6: movements are not very violent, it's not that major a
Speaker 6: component of our business.
Speaker 2: I just have one last question, AI, So setting aside
Speaker 2: the technology for the underwriting, which I'm sure is a
Speaker 2: very high tech, data intensive application, and setting aside that
Speaker 2: probably many of your engineers on staff are using code
Speaker 2: generating for that, just putting your tech, your tech had on.
Speaker 2: As someone who oversees a large organization people looking for
Speaker 2: how large language models in particular are being deployed in
Speaker 2: productive capacity at a firm today. Is any of this
Speaker 2: technology in use in production and saving human hours in
Speaker 2: some respect or another.
Speaker 5: Yes, emphatically. So.
Speaker 6: So we just wrapped up the cyber weekend Turkey, five
Speaker 6: Black Friends, Deciber Monday, whatever whatever you want to call yesterday,
Speaker 6: which was wonderful. And I don't actually have the stat
Speaker 6: yet because I will get the report immediately after this
Speaker 6: podcast is recorded. Well, I probably can't pre announce our results.
Speaker 6: We report early next year, but we will have handled
Speaker 6: tens of thousands of consumer contacts, people saying everything from hey,
Speaker 6: I just borrowed money from you, and I don't understand
Speaker 6: when my first payment is due, and you know, maybe
Speaker 6: it's because they hadn't read the email as clearly or
Speaker 6: were everything all the way down to I just borrowed
Speaker 6: money and I realized that I need a refund because
Speaker 6: I actually have no intention of buying this thing and
Speaker 6: all that stuff and a lot of it. We try
Speaker 6: to serve them in real time as they're kinds of acting,
Speaker 6: but plenty of people contact us right after or maybe sometime,
Speaker 6: you know, after the purchase. A huge percentage of that
Speaker 6: is handled entirely by AI.
Speaker 5: Now. Now that has not.
Speaker 6: Caused us to lay off our wonderful customer service staff
Speaker 6: at all.
Speaker 5: What it has allowed us to do.
Speaker 6: Is to go really deep into specialization. AI is very
Speaker 6: very good today at handling basic questions. It can do
Speaker 6: cool things like look up for your account and say, no,
Speaker 6: you're not late, you are a mistaken, don't worry about it,
Speaker 6: or yes you're related, but we don't charge late the
Speaker 6: so just please make yourself current and we'll move on.
Speaker 6: All of that can be handled by AI. One flee
Speaker 6: if it's something like I changed my name or I
Speaker 6: changed where I live right as I was consummating this transaction.
Speaker 6: There are all sorts of crazy things that come up
Speaker 6: that is something that a human can handle. AI models
Speaker 6: are not smart enough yet to handle some of these things,
Speaker 6: and also frequently enough. We wouldn't want the possibility of
Speaker 6: hallucination to derail what is a good customer relationship. So
Speaker 6: we've been able to move our human helpers into a
Speaker 6: much more sophisticated, much more specific role. So the theme
Speaker 6: in our customer service for last year has been specialization.
Speaker 5: Specialization, specialization, where.
Speaker 6: We train people now to serve very very specific subset
Speaker 6: of problems because they can be effective and move faster,
Speaker 6: and so these tools are actually making them more efficient
Speaker 6: by letting them focus on just a very specific thing
Speaker 6: that they're good at.
Speaker 5: So that's one example.
Speaker 6: We track all sorts of interesting metrics about AI tool
Speaker 6: usage internally. The interesting or sort of random factoid, our
Speaker 6: engineering group is not the single largest consumer of AI tools.
Speaker 5: I will not reveal exactly who it is. And by
Speaker 5: the way, like vast majority of or.
Speaker 2: Engineering US a hunt or something.
Speaker 6: It's actually finance. Our finance group uses these tools obsessively.
Speaker 6: I'm cheating a little bit here, So for a very
Speaker 6: long time. It's not the case anymore, but for a
Speaker 6: very long time because we are so AI and mL
Speaker 6: heavy company. One of the core requirements for any employee,
Speaker 6: but certainly in finance, was you have to know how
Speaker 6: to read code and probably write code, and so huge
Speaker 6: percentage of what we do in our finance group actually
Speaker 6: looks a lot like coding and a lot of tough
Speaker 6: for engineering and so but they're somehow maybe because it's
Speaker 6: a smaller group on average, but they're great adopters of
Speaker 6: these tools. Our legal team use it all the time.
Speaker 6: We have literally hundreds of thousands of very custom contracts.
Speaker 6: Every time a merchant pays your interest for you, they
Speaker 6: signed up for it contractually. That's a custom contract. Imagine
Speaker 6: managing half a.
Speaker 5: Million of these things.
Speaker 6: They're all carefully written and bespoken, so AI can read
Speaker 6: and find errors and corrections, et cetera, et cetera. So
Speaker 6: one of the things that we're responsible for as a
Speaker 6: regulated business is we cannot allow merchants to advertise our
Speaker 6: service incorrectly. We're actually on the hook when a merchant
Speaker 6: says something like hooray a firm interest free for everyone.
Speaker 6: It's not true. Some people will actually pay some interest.
Speaker 5: Sometimes.
Speaker 6: We are responsible for finding that and telling the merchant
Speaker 6: please stop saying things that aren't strictly speaking true. AI
Speaker 6: tools are amazing at reading both loads of advertising copy
Speaker 6: and saying, hey, wait a second, that is inaccurate.
Speaker 5: We got to fire off an email and tell this
Speaker 5: merchant to fix it.
Speaker 6: So you can sort of imagine a flood of ideas
Speaker 6: that we had when the CHGBT moment happened and put
Speaker 6: it to work for the last few years.
Speaker 4: I'm going to end with a sort of theoretical question,
Speaker 4: big picture theoretical question. But if you could design the
Speaker 4: ideal payment system from scratch, complete scratch, you know, using
Speaker 4: today's technolog there's no legacy card networks, maybe not even
Speaker 4: legacy banks. What would it look like and how much
Speaker 4: of a firm's current business model would survive in that environment?
Speaker 6: Oh, I think it would look an awful lot like
Speaker 6: a firm. Affirm is my personal attempt to build a
Speaker 6: system that I can.
Speaker 5: Be proud about.
Speaker 6: One of the core things we tell people who join us.
Speaker 6: One of the reasons we had such a black and
Speaker 6: white no laid fees, no compounding, no deferred interest, none
Speaker 6: of the yuck is because I wanted the smartest people
Speaker 6: that would have otherwise gone to Wall Street and trade
Speaker 6: it in quant fonds to join us and build the
Speaker 6: system that they could be proud about. It's very hard
Speaker 6: to be proud about a thing that makes half its
Speaker 6: money on lead fees, and that's why we don't do it.
Speaker 6: And so what we've built is biased, as I am,
Speaker 6: is pretty darn great. It really is something that I'm
Speaker 6: very proud about. I think the totality of the team
Speaker 6: here takes an enormous amount of pride and how we
Speaker 6: went about building this. It is dependent and intertwined with
Speaker 6: the legacy systems. But even as we go through card
Speaker 6: rails to use another industry jargon, or many other systems
Speaker 6: that have existed, when we tap into capital and markets,
Speaker 6: which has certainly been here long before we came about,
Speaker 6: and everything else in between, we maintain the moral integrity
Speaker 6: of the product, and it's DNA all the way through.
Speaker 6: We might pay late fees if we borrow money to
Speaker 6: a lend, we haven't because obviously we're on a pretty
Speaker 6: tight chip here it will not be passed through.
Speaker 5: We take an incredible.
Speaker 6: Amount of pride in the diligence we exercise within the system,
Speaker 6: all the way down to leaving a penny on the
Speaker 6: table for our partners to keep because we refuse to
Speaker 6: make more money than we said we would. I would
Speaker 6: love to have a blank sheet design, exercise and payments,
Speaker 6: but I think what would emerge is a system that
Speaker 6: looks a lot like a firm, just doesn't have some
Speaker 6: of the nineteen eighties it.
Speaker 2: Max Levchin, founder and CEO of a firm, So great
Speaker 2: chatting with you, very illuminating, helpful conversation, and I appreciate
Speaker 2: you coming on odlots.
Speaker 5: Thank you so much, and again I am a fan
Speaker 5: of the show and.
Speaker 6: I love being able to see myself inside of a
Speaker 6: thing that I actually listened with.
Speaker 3: Very kind of you to say thank you so much.
Speaker 3: That was great, Trucy. I thought that was great.
Speaker 2: I thought that was really interesting and just sort of
Speaker 2: understanding the real nuts and bolts about how the money
Speaker 2: has made and what's different about BNPL companies from the
Speaker 2: credit card companies, to my mind, very helpful conversation.
Speaker 1: Yeah.
Speaker 4: Absolutely, I thought it was really interesting, the discussion about
Speaker 4: why other BNPL companies don't want to report to the
Speaker 4: credit bureaus and things like that. I wonder if that'll
Speaker 4: change anytime soon. Maybe politicians will start getting interested in it,
Speaker 4: regulators as the space expands.
Speaker 2: The thought that I had listening to Max was he
Speaker 2: mentioned the sort of the regressiveness of the points system. Right,
Speaker 2: So there's people like us who rarely roll their credit
Speaker 2: card debt but get frequent fire miles or other rewards,
Speaker 2: et cetera. But that's paid for by the people that roll. Now,
Speaker 2: if a firm is targeting, they're not they're clearly targeting
Speaker 2: people who are not thinking about points, right, they're thinking
Speaker 2: about people who really do need to extend their payments
Speaker 2: or implicitly roll and say we have a better option.
Speaker 3: So it's sort of cleaving off, if you know, if this.
Speaker 2: Grows, the firm is still just a twenty two billion
Speaker 2: dollar company by market cap, but this grows, You've got
Speaker 2: to wonder, like, if the maximum version where you've cleaved
Speaker 2: off a significant number of people who roll, what happens
Speaker 2: to the points ecosystem for the people like us?
Speaker 5: Now?
Speaker 2: Granted I don't think like, oh what about the poor
Speaker 2: frequent flyer and all the great rewards are getting?
Speaker 4: But is just someone think about the point?
Speaker 2: Well, someone please think about the points accumulators who never
Speaker 2: go into debt or who never like roll their debt.
Speaker 2: But it is interesting to think about if you could
Speaker 2: like cleave off that, then a big part of the
Speaker 2: business model of credit card the legacy card companies could
Speaker 2: potentially be unstable, and part of the appeal of going
Speaker 2: to any credit card that offers a lot of rewards
Speaker 2: could decline if revolvers moved to this alternate payments model.
Speaker 4: Yeah, it's a really good point on points.
Speaker 5: Thank you.
Speaker 4: That one was a little obvious I'm sorry, No.
Speaker 3: It's good. I like that one. It was straightforward. I
Speaker 3: actually got this one.
Speaker 2: Okay, Actually, you know what, I really also appreciated that
Speaker 2: Max had substantive answers for things that they're doing with
Speaker 2: AI that aren't just code generation, even if it sounds
Speaker 2: like the Finance Department is probably still using it for
Speaker 2: code generation, Like that makes a lot of sense, like
Speaker 2: being able to proactively scan websites to say who is
Speaker 2: claiming something that's not true about affirm et cetera.
Speaker 3: So maybe there are productive uses of all this technology.
Speaker 4: Or sending out millions and millions contracts automatically totally all right,
Speaker 4: shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 4: This has been another episode of the All Thoughts podcast.
Speaker 4: I'm Tracy Alloway. You can find me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our guest Max Levchin, He's at m Levchin. Follow
Speaker 2: our producers Kerman Rodriguez at Kerman Erman, dash Ol Bennett
Speaker 2: at Dashbot, and Kelbrooks at Kelbrooks. And from our odd
Speaker 2: Laws content. Go to Bloomberg dot com slash odd Lots.
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