WEBVTT - Affirm's Max Levchin Breaks Down How Buy Now, Pay Later Really Works 0:00:02.720 --> 0:00:15.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.079 --> 0:00:21.520 Hello and welcome to another episode of The Odd Laws podcast. 0:00:21.600 --> 0:00:22.760 I'm Joe, wasn't Thal. 0:00:23.160 --> 0:00:24.840 And I'm Tracy all the way Tracy. 0:00:24.920 --> 0:00:28.720 It feels like everybody, whether they want to come after 0:00:28.760 --> 0:00:32.159 the banks, right, there is this effort so many of 0:00:32.200 --> 0:00:35.320 our episodes, whether we're talking about crypto, whether we're talking 0:00:35.320 --> 0:00:38.600 about private credit, whether we're talking about payments, it's this goal, 0:00:38.760 --> 0:00:40.920 this dream of like, let's chip away at some of 0:00:40.960 --> 0:00:44.440 these bank businesses or these businesses that were associated with 0:00:44.479 --> 0:00:46.080 some sort of legacy institutions. 0:00:46.280 --> 0:00:46.839 The banks. 0:00:47.080 --> 0:00:49.640 They mostly seem to be doing pretty well still, but 0:00:49.680 --> 0:00:51.479 there's this dream that they can all be sort of 0:00:51.479 --> 0:00:54.520 like disintermediate away, or that each one of these functions 0:00:54.520 --> 0:00:56.480 that they do can be better done somewhere else. 0:00:56.720 --> 0:00:59.400 Yeah, So let's see. I have been in financial journalism 0:00:59.480 --> 0:01:02.080 for all my most twenty years now, which is kind 0:01:02.120 --> 0:01:04.479 of crazy and makes me feel very old. But for 0:01:04.520 --> 0:01:07.920 as long as I can remember, someone has been trying 0:01:08.000 --> 0:01:12.000 to either reinvent bank lending or reinvent the payment space. 0:01:12.640 --> 0:01:15.680 And I guess I can see a few reasons. So like, genuinely, 0:01:15.800 --> 0:01:19.160 some payment architecture is really old fashioned especially in the 0:01:19.240 --> 0:01:21.280 US where you know, sometimes you still have to write 0:01:21.280 --> 0:01:24.560 a check for something. Yeah, blows my mind. The US 0:01:24.600 --> 0:01:27.040 didn't get chips for a really long time, chips and 0:01:27.080 --> 0:01:30.480 credit cards and stuff like that. But also if you 0:01:30.640 --> 0:01:34.080 think about the payment and lending and financial market just 0:01:34.280 --> 0:01:37.640 in general, it's one of the biggest out there, right, 0:01:37.720 --> 0:01:41.320 Like you're talking about all the economic activity basically, and 0:01:41.360 --> 0:01:44.240 so if you can get a tiny slice of that 0:01:44.640 --> 0:01:47.800 through interchange or fees, then you can see how people, 0:01:47.960 --> 0:01:50.240 you know, people are really interested in that space. 0:01:50.680 --> 0:01:52.640 No completely, and we know that there are a lot 0:01:52.640 --> 0:01:54.840 of fintech companies for a long time, I mean some 0:01:54.880 --> 0:01:57.760 of the most you know, the earliest Internet success stories 0:01:57.840 --> 0:02:01.160 period where you know, this is deaf, nothing new, And 0:02:01.200 --> 0:02:03.520 of course one of the first ever was PayPal, which 0:02:03.600 --> 0:02:06.560 recognized that with the Internet was going to come all 0:02:06.640 --> 0:02:10.240 kinds of new opportunities for payments and sort of quasi 0:02:10.320 --> 0:02:13.760 peer to peer, literal peer to peer transactions. 0:02:12.960 --> 0:02:13.440 Et cetera. 0:02:13.680 --> 0:02:16.480 PayPal is still, of course extremely important part of the 0:02:16.600 --> 0:02:20.080 payments infrastructure. But yeah, there's so much going on. But 0:02:20.280 --> 0:02:23.560 to your point, lots of companies have gotten those little 0:02:23.600 --> 0:02:25.680 slices and made incredible fortunes. 0:02:25.919 --> 0:02:28.200 Yeah, we also did an episode on buy Now, Pay 0:02:28.280 --> 0:02:31.520 Later a couple months ago, and there are clearly some 0:02:31.639 --> 0:02:35.240 interesting questions brought up by the expansion of that space, 0:02:35.560 --> 0:02:37.680 and you and I talked about how wherever you go 0:02:37.800 --> 0:02:41.000 on the internet nowadays, you get like, you know, probably 0:02:41.080 --> 0:02:43.360 at least two or three little buttons that offer you 0:02:43.520 --> 0:02:46.960 installment loans on your purchases. And obviously the concern is 0:02:47.240 --> 0:02:49.359 whether or not people are taking out credit that they 0:02:49.400 --> 0:02:52.440 shouldn't necessarily be. There's a big discussion about that, and 0:02:52.520 --> 0:02:55.280 also the transparency of the credit that they're taking. 0:02:55.080 --> 0:02:57.480 Out right, and we'll get into this. There are pros 0:02:57.520 --> 0:03:00.440 and cons. I guess relative to credit cards. Thing with 0:03:00.480 --> 0:03:03.079 credit cards is that there is decades and decades of 0:03:03.160 --> 0:03:05.080 data on them, and we know how they're used, and 0:03:05.120 --> 0:03:07.240 there's really good risk profiling and scores and all this 0:03:07.440 --> 0:03:10.480 credit scoring and all this stuff. BNPL is sort of 0:03:10.480 --> 0:03:13.320 more novel. And so therefore, to what degree do we 0:03:13.400 --> 0:03:16.000 know how as as an asset or as a function 0:03:16.120 --> 0:03:19.240 it performs across different cycles. Do we know the cohort 0:03:19.280 --> 0:03:21.600 of people who use BNPL as well as we know 0:03:22.040 --> 0:03:24.359 the people the types of people who use credit cards 0:03:24.680 --> 0:03:29.480 seems a little bit, at a minimum, a bit more ambiguous. Absolutely, Well, 0:03:29.720 --> 0:03:31.760 we've hinted at what we're going to be talking about. 0:03:31.760 --> 0:03:35.480 I mentioned PayPal, We talked about BNPL. We are going 0:03:35.520 --> 0:03:38.760 to be speaking with one of the original members of 0:03:38.800 --> 0:03:41.200 the PayPal mafia. We're going to be speaking with Max Levchin. 0:03:41.200 --> 0:03:43.839 He is the founder and CEO of a firm one 0:03:43.880 --> 0:03:47.920 of the biggest BNPL companies publicly traded to Max. Thank 0:03:47.960 --> 0:03:49.880 you so much for coming on Odd Lots. 0:03:50.080 --> 0:03:52.720 Thank you for having me. I'm a big fan of 0:03:52.760 --> 0:03:54.960 the show. Thank you a bit of a privilege to 0:03:54.960 --> 0:03:55.280 be here. 0:03:55.400 --> 0:03:57.200 Thank you for saying that on the recording, and so 0:03:57.360 --> 0:03:59.240 we always love hearing it, but we love when we 0:03:59.280 --> 0:04:01.280 love when it's on the public record as part of 0:04:01.320 --> 0:04:03.880 the episode, Thank you so much. Where did you get 0:04:03.880 --> 0:04:08.320 the idea to start affirm but prompted it? 0:04:08.360 --> 0:04:12.400 But a two sided coin, both sides bad of personal 0:04:12.440 --> 0:04:17.479 experience actually tying neatly to the PayPal story. So I 0:04:17.520 --> 0:04:21.919 came to the US at sixteen from Soviet Union, and 0:04:21.960 --> 0:04:24.440 so you can imagine I understood very little about borrowing 0:04:24.480 --> 0:04:27.240 and credit and things like that. And so I got 0:04:27.240 --> 0:04:31.560 my first credit card on campus at college at eighteen, 0:04:32.320 --> 0:04:34.440 didn't fully understand what I was signing up for, certainly 0:04:34.480 --> 0:04:37.320 didn't read the fine print where it said zero percent asterisk, 0:04:37.560 --> 0:04:38.400 don't worry about it. 0:04:38.839 --> 0:04:40.560 Borrowed a bunch of money, financed my. 0:04:40.640 --> 0:04:43.799 First startup from that very same credit card, promptly got 0:04:43.839 --> 0:04:47.200 into more than I could afford to pay for. Startup failed, 0:04:48.720 --> 0:04:52.559 eventually got some nasty calls from collectors, paid it off, 0:04:53.080 --> 0:04:57.480 and four years later or five years later, took this 0:04:57.520 --> 0:05:01.200 little company PayPal Public was basically an penalty wealthy overnight 0:05:01.560 --> 0:05:04.000 went to buy a fancy car that you know, as I. 0:05:03.920 --> 0:05:06.560 Originally deserved it the right page of twenty three I. 0:05:06.520 --> 0:05:09.120 Wanted to show off to my then girlfriend now wife 0:05:09.440 --> 0:05:12.960 and was declined for credit. And not only did I 0:05:12.960 --> 0:05:16.440 feel completely screwed by the moment where I found out 0:05:16.480 --> 0:05:18.440 that you're supposed to make the minimum payment and by 0:05:18.480 --> 0:05:22.560 the way, interest a cruise into principle, and this seemingly 0:05:22.839 --> 0:05:25.160 low APR is actually not what it seems to be 0:05:25.160 --> 0:05:28.120 because I missed some date of the specific amount that 0:05:28.160 --> 0:05:31.159 I was supposed to pay. It bit me again five 0:05:31.240 --> 0:05:33.120 years later it was like, oh, by the way, wreck 0:05:33.160 --> 0:05:36.599 your credit rating too, so you can't get alone for anything, 0:05:37.040 --> 0:05:39.360 even as you're sort of proudly sticking a finger at 0:05:39.400 --> 0:05:42.560 the article and newspaper saying, you know, the company public 0:05:42.920 --> 0:05:46.359 youngests whatever. And so that was the thing that stayed 0:05:46.400 --> 0:05:49.560 with me for years. My friends would prank me at restaurants. 0:05:49.560 --> 0:05:52.159 They would ask the wait staff to tell me that 0:05:52.200 --> 0:05:53.720 my credit card was declined, which by then was a 0:05:53.720 --> 0:05:54.440 different credit card. 0:05:54.480 --> 0:05:57.960 But when I would turn deep purple and basically be like, 0:05:58.000 --> 0:06:00.920 oh my god, like it happened again, Like what? And 0:06:01.040 --> 0:06:03.279 you know, eventually I knew the joke. But I was 0:06:03.320 --> 0:06:04.040 in my mid. 0:06:03.960 --> 0:06:06.320 Thirties when I realized that that's now more likely a 0:06:06.400 --> 0:06:08.240 joke than that credit score. 0:06:08.120 --> 0:06:09.240 Bite from eighteen. 0:06:09.800 --> 0:06:12.240 So in my late thirties, I sat down with a 0:06:12.279 --> 0:06:14.960 friend from high school, college and PayPal. You know, I 0:06:14.960 --> 0:06:17.200 have many of these friends who's I met when I 0:06:17.279 --> 0:06:19.919 was just getting my feet wet in America, and ultimately, 0:06:20.160 --> 0:06:23.040 you know, we built this amazing company together. And asked 0:06:23.120 --> 0:06:27.000 him the obvious question, twenty years too late, why didn't 0:06:27.040 --> 0:06:30.880 we try to fix that yuck that comes with having 0:06:30.880 --> 0:06:33.359 credit cards as a young person, And he said, you know, 0:06:33.400 --> 0:06:36.480 I don't know, but we built so much great AI 0:06:36.800 --> 0:06:39.680 at PayPal, fighting fraud and doing all these really interesting things. 0:06:40.120 --> 0:06:43.680 Surely we could do a better job scoring credit for 0:06:43.760 --> 0:06:46.680 young people like you were at eighteen and then twenty three. 0:06:47.520 --> 0:06:50.240 Then what currently happens? And that was sort of the 0:06:50.240 --> 0:06:51.960 seminal moment, and a couple of years later. 0:06:51.839 --> 0:06:52.479 We started a firm. 0:06:53.120 --> 0:06:55.919 So I have a bunch of questions already. Firstly, what 0:06:56.040 --> 0:06:57.680 kind of car was it? Did you get it? 0:06:57.680 --> 0:07:00.200 In the end, I had to pay cash for right, 0:07:00.360 --> 0:07:03.159 I actually wired money, and it would begin like an 0:07:03.800 --> 0:07:06.160 eight am visit to a dealership, ended up like it's 0:07:06.200 --> 0:07:08.600 five pm. You're wired, hasn't cleared yet, you can't drive 0:07:08.600 --> 0:07:12.239 off the slot and drama at the time. 0:07:12.320 --> 0:07:13.000 Don't judge me. 0:07:13.240 --> 0:07:17.080 It was a black hardtop Mercedes convertible. 0:07:18.160 --> 0:07:19.080 No judgment at all. 0:07:19.280 --> 0:07:20.360 I'm judging a little bit. 0:07:21.760 --> 0:07:22.640 I was really young. 0:07:22.720 --> 0:07:24.440 I was very much trying to impress the girl who 0:07:24.480 --> 0:07:25.440 is now my wife and the mother. 0:07:25.960 --> 0:07:27.920 It clearly works. 0:07:28.200 --> 0:07:29.360 Okay, another question, So. 0:07:29.320 --> 0:07:31.880 You know, I just I love those those Mercedes. I 0:07:31.880 --> 0:07:33.480 think that's there's one of the if I have some 0:07:33.560 --> 0:07:36.640 rough conception, no judgment, I think those are great design cars. 0:07:36.680 --> 0:07:38.080 Anyway, Should we just talk about cars? 0:07:38.160 --> 0:07:38.360 Yeah? 0:07:38.360 --> 0:07:38.720 We could? 0:07:38.800 --> 0:07:43.160 Okay, Well, you mentioned the underwriting process. And this, in 0:07:43.240 --> 0:07:46.280 my mind, is supposed to be what makes the buy now, 0:07:46.320 --> 0:07:51.000 pay later BNPL model different. Right, Like the underwriting process 0:07:51.680 --> 0:07:56.080 is more technologically driven, perhaps more nuanced. Talk to us 0:07:56.120 --> 0:07:59.360 about what you do differently versus you know, a credit 0:07:59.400 --> 0:08:01.600 card company or a bank or someone like that. 0:08:02.120 --> 0:08:04.360 Sure, and you're pulling in a thread that's gonna take 0:08:04.360 --> 0:08:07.000 a long time to Onwinyl, try to be fiffy, but 0:08:07.280 --> 0:08:10.360 this is where the rage kicks in. So one of 0:08:10.360 --> 0:08:13.880 the things that happens with credit cards, at the very core, 0:08:15.920 --> 0:08:19.120 they tell you a bunch of things they don't actually want. 0:08:19.000 --> 0:08:19.480 You to do. 0:08:20.040 --> 0:08:23.560 So credit card business model is a crull of interest 0:08:23.680 --> 0:08:26.720 into principle. So this exponential function of your signing up 0:08:26.760 --> 0:08:30.120 for apr X but you don't actually know what's gonna 0:08:30.120 --> 0:08:33.000 cost you, is all the fact that as you make 0:08:33.040 --> 0:08:35.720 the minimum payments or whatever the payments you're making, whatever 0:08:35.760 --> 0:08:38.160 you're haven't paid off, the interest that you've recrued folds 0:08:38.240 --> 0:08:40.760 right into the principle, and it compounds and compounds and compounds, 0:08:41.160 --> 0:08:43.520 and so the longer you take to pay it back, 0:08:43.760 --> 0:08:46.319 the more it will cost. Which seems obvious, but it's 0:08:46.320 --> 0:08:51.360 impossible for most merimortals to predict, and they love it 0:08:51.360 --> 0:08:54.240 when you're late because they are late fees which are fixed, 0:08:54.280 --> 0:08:57.920 and so the less you spend, the higher the percentage 0:08:57.960 --> 0:09:00.239 the late feed represents. So it's this sort of amazing 0:09:00.240 --> 0:09:02.120 business model, which is why you know one of your 0:09:02.120 --> 0:09:04.840 recent episodes puzzled over how are these rates so high? 0:09:05.280 --> 0:09:07.400 The rates themselves are actually not the problem. The problem 0:09:07.440 --> 0:09:08.240 is the structure. 0:09:08.480 --> 0:09:11.600 As you fold interest into principle and pay and pay 0:09:11.640 --> 0:09:12.320 and pay late. 0:09:12.160 --> 0:09:14.520 Fees, it can be extraordinarily expensive. 0:09:14.520 --> 0:09:17.880 And so from the very beginning of affirm we ask 0:09:17.960 --> 0:09:22.320 the question, how can we make a product where you 0:09:22.520 --> 0:09:27.520 don't have this weird misalignment of interests where the lender 0:09:27.600 --> 0:09:30.000 tells you please pay your bills on time, but when 0:09:30.000 --> 0:09:32.439 they're saying soda vocea is, but not too on time, 0:09:32.880 --> 0:09:35.800 and ideally take as long as possible because that's when 0:09:35.800 --> 0:09:36.720 we make the most money. 0:09:37.040 --> 0:09:39.400 So the obvious answer is, of course obvious. 0:09:39.920 --> 0:09:43.200 Make a plan that you commit as a lender that 0:09:43.280 --> 0:09:45.720 you'll never change, and don't charge. 0:09:45.520 --> 0:09:46.959 Late fees, and that's it. 0:09:47.280 --> 0:09:49.720 If you agree to those design principles, you are not 0:09:49.840 --> 0:09:52.560 going to make more money if someone is late and 0:09:52.600 --> 0:09:55.040 you're not going to make more money. If they take 0:09:55.120 --> 0:09:57.800 longer to pay you back, obviously you'll make less money. 0:09:57.840 --> 0:10:00.760 Because getting money to lend isn't free either. We have 0:10:00.840 --> 0:10:03.840 to pay for our source of capital as everybody else does, 0:10:04.240 --> 0:10:06.960 which means that it immediately rotates you sort of one 0:10:07.000 --> 0:10:08.800 hundred and eighty degrees where you say I only want 0:10:08.840 --> 0:10:11.560 to lend money when I have a lot of conviction 0:10:11.640 --> 0:10:13.480 the person is going to pay me back on time, 0:10:13.720 --> 0:10:16.880 because if they don't, I am just going to lose money. 0:10:17.120 --> 0:10:19.520 And so we put those two principles down in the ground, 0:10:19.840 --> 0:10:22.120 very very early on. It's literally written down to the 0:10:22.120 --> 0:10:25.120 foundation of the company. We will not misalign ourselves with 0:10:25.280 --> 0:10:28.320 our borrowers. From that came a lot of things like, hey, 0:10:28.440 --> 0:10:30.120 we need to understand your cash flow. 0:10:30.280 --> 0:10:32.160 We don't really care what your credit rating is. 0:10:32.200 --> 0:10:34.199 Maybe you gained it, maybe it's an accurate, maybe your 0:10:34.400 --> 0:10:36.440 eighteen year old immigrants does not matter. 0:10:36.520 --> 0:10:38.760 We need to understand what your actual capability is. 0:10:39.200 --> 0:10:41.240 We have to have the right to tell you you 0:10:41.280 --> 0:10:44.240 are over extending yourself, not just once every few years 0:10:44.280 --> 0:10:46.880 when you renew your credit card agreement, but for every transaction. 0:10:46.920 --> 0:10:49.360 You have to be able to underwrite and decide yes 0:10:49.480 --> 0:10:52.200 or no for every single moment that you create these 0:10:52.200 --> 0:10:55.559 payment plans, because that allows us to not lose money 0:10:55.600 --> 0:10:57.440 because we are aligned with you. When you pay us 0:10:57.440 --> 0:11:00.199 back on time, we'll make some money. If you do own, 0:11:00.400 --> 0:11:02.160 we're just going to be a warse off. And so 0:11:02.520 --> 0:11:05.719 that is the foundation of Affirm's take on bnpl Many 0:11:05.760 --> 0:11:08.560 people have come along since and sort of change the 0:11:08.559 --> 0:11:10.439 model a little bit. They introduce laid fees, all kinds 0:11:10.440 --> 0:11:13.400 of other fees we never have and never will. But 0:11:13.559 --> 0:11:16.240 even with those modifications, the model is still better than 0:11:16.240 --> 0:11:19.880 credit cards because of this individual underwriting moment and in 0:11:19.920 --> 0:11:21.280 our case, no fees of any kind. 0:11:21.800 --> 0:11:24.040 Just to be clear, So let's say I wind up 0:11:24.120 --> 0:11:26.440 at some website and maybe I want to buy like 0:11:26.800 --> 0:11:28.720 some Nikes or something like that, and I see the 0:11:28.760 --> 0:11:31.400 Affirm option. How do you know how good of a 0:11:31.400 --> 0:11:32.600 credit I am in that moment? 0:11:33.720 --> 0:11:37.960 So it's not an effort free thing for you to 0:11:38.080 --> 0:11:39.720 use a firm. You'll have to click on a firm 0:11:40.200 --> 0:11:42.360 and we will ask you, if we've never seen you before, 0:11:42.400 --> 0:11:45.000 we'll ask you to provide some information for us. That 0:11:45.160 --> 0:11:48.320 information will allow us to tap into the standard set 0:11:48.320 --> 0:11:49.920 of records that the credit bureaus. 0:11:49.600 --> 0:11:50.559 Aggregated about you. 0:11:51.160 --> 0:11:53.200 If there's enough data there for us to use our 0:11:53.200 --> 0:11:56.040 custom credit score, we'll render a decision based on that. 0:11:56.120 --> 0:11:59.199 If there's not, we'll actually say, hey, we don't fully 0:11:59.280 --> 0:12:02.640 understand your personal financial situation. We would like to have 0:12:02.720 --> 0:12:05.720 a peek at your bank account cash flow and decide 0:12:06.600 --> 0:12:09.360 how your cass and flows relative to your ability to 0:12:09.400 --> 0:12:12.040 pay us back. All of this is made possible with 0:12:12.080 --> 0:12:15.160 really good news technology, So this takes seconds, even though 0:12:15.280 --> 0:12:17.319 it probably takes about as long to do as it takes. 0:12:17.120 --> 0:12:17.719 To describe it. 0:12:17.840 --> 0:12:20.360 But we'll look through your personal financial state of right 0:12:20.400 --> 0:12:22.640 now and make a decision not just whether it's he 0:12:22.679 --> 0:12:24.400 yes or no, but also how much of a risk 0:12:24.559 --> 0:12:27.760 you have of that financial situation changing and that price 0:12:27.800 --> 0:12:28.240 is the credit? 0:12:28.920 --> 0:12:32.800 Do you use any creative data points you mentioned checking 0:12:32.840 --> 0:12:36.040 against the type of item that people are buying, So 0:12:36.600 --> 0:12:38.840 that's one thing I imagine could be interesting, like if 0:12:38.880 --> 0:12:42.360 people are buying groceries on installment, does that mean they're 0:12:42.400 --> 0:12:44.640 more of a credit risk than someone who's I don't know, 0:12:44.720 --> 0:12:47.880 buying a computer or a big ticket item. And then 0:12:48.040 --> 0:12:50.040 the other thing I'm very curious about, and I think 0:12:50.040 --> 0:12:52.840 I've told this story before on add lots. But I 0:12:52.880 --> 0:12:57.360 remember going to see a startup that eventually failed, and 0:12:57.400 --> 0:12:59.480 they were in the peer to peer lending space, and 0:12:59.480 --> 0:13:01.360 they describe some of the stuff they were doing with 0:13:01.440 --> 0:13:05.760 underwriting where they were like trying to measure people's impulsiveness 0:13:05.840 --> 0:13:09.400 by how quickly they moved a slideer for a loan 0:13:09.679 --> 0:13:12.760 and stuff like that, which freaked me out a little 0:13:12.800 --> 0:13:13.360 at the time. 0:13:14.440 --> 0:13:15.560 It would freak me out too. 0:13:15.600 --> 0:13:20.400 So, no, we do not do telemetry as a variable 0:13:20.480 --> 0:13:25.040 into underwriting. So before I get into what we do use, 0:13:25.880 --> 0:13:30.319 it bears mentioning that the variable to use in underwriting 0:13:30.559 --> 0:13:35.360 is a very very highly regulated domain of lending and underwriting. 0:13:35.400 --> 0:13:37.840 There's lots and lots of laws going back quite far. 0:13:37.840 --> 0:13:40.640 Things like Fair Credit Act and any other sort of 0:13:41.320 --> 0:13:44.920 subsequent additions to both federal and state level law that 0:13:45.000 --> 0:13:46.880 prohibits you from using kind of the obvious things you 0:13:46.920 --> 0:13:50.000 wouldn't want people to use, like your race or your gender, 0:13:50.160 --> 0:13:53.440 or your age or your creed cannot be a factor. 0:13:53.520 --> 0:13:55.520 It's actually a federal offense to do that. And so 0:13:55.559 --> 0:13:57.080 we don't do any of those things. We go as 0:13:57.080 --> 0:13:58.920 far as to say if it correlates to some of 0:13:58.960 --> 0:14:00.880 those things, we also could use it, and that too 0:14:00.960 --> 0:14:02.400 is a subsequent law as well. 0:14:02.440 --> 0:14:04.560 So so first of all, we're very very. 0:14:04.520 --> 0:14:08.440 Thoughtful about making sure we don't step into a prohibited territory. 0:14:08.520 --> 0:14:11.160 It's called prohibited basis as the fancy term in the industry. 0:14:11.679 --> 0:14:14.160 What we can use and what we do use. As 0:14:14.160 --> 0:14:18.280 you mentioned, merchants share with us what's being purchased. Despite 0:14:18.320 --> 0:14:21.400 the burrito gate that sometimes comes back in the press, 0:14:21.640 --> 0:14:25.120 people don't actually use a firm to finance Mexican food 0:14:25.200 --> 0:14:29.200 or other cuisines. They do sometimes use a firm for groceries, 0:14:29.200 --> 0:14:32.360 but it mostly is, or almost entirely really is for 0:14:32.520 --> 0:14:34.920 things like I'm throwing a giant party and I need 0:14:34.960 --> 0:14:38.080 several hundred dollars worth of food stuffs, and that's a 0:14:38.080 --> 0:14:40.080 lot to pay down with my debit cards, so I'm 0:14:40.080 --> 0:14:42.560 going to use a firm instead. So the average sized 0:14:42.680 --> 0:14:45.120 transactions for us is roughly three hundred dollars. So it 0:14:45.520 --> 0:14:47.200 gives you a sentence for what people use a firm for. 0:14:48.400 --> 0:14:53.560 So that's just you know, apper pos where it's being used. 0:14:53.680 --> 0:14:58.120 What we gleaned from the information about what's being purchased. 0:14:59.440 --> 0:15:02.440 One good mental model, which this is like an approximation, 0:15:02.480 --> 0:15:05.120 but a decent one. If the useful life of the 0:15:05.280 --> 0:15:09.480 item is meaningfully shorter than the time it takes you 0:15:09.560 --> 0:15:13.920 to pay it back, you may find yourself questioning the 0:15:14.000 --> 0:15:17.240 quality of the item long afterwards disappeared. And so a 0:15:17.440 --> 0:15:20.560 natural question we should be asking is what do we 0:15:20.640 --> 0:15:24.320 understand about this item, but also maybe the item's history 0:15:24.400 --> 0:15:28.520 of quality before we say, oh yeah, sure by this 0:15:28.560 --> 0:15:30.840 thing that's going to be out in six months and 0:15:30.880 --> 0:15:34.080 pay for it over two years. So maybe the most 0:15:34.160 --> 0:15:36.280 useful thing I can say about actually what variables, what 0:15:36.360 --> 0:15:39.720 new variables w we've introduced into our underwriting, vast, fast, 0:15:39.760 --> 0:15:41.640 vast majority of them, In fact, all of them actually 0:15:41.800 --> 0:15:45.920 influence a decision we make by one or two percent 0:15:46.040 --> 0:15:49.480 at most. Anytime someone tells you I found this magic 0:15:49.560 --> 0:15:52.600 variable and if I just look at that, it's like 0:15:52.760 --> 0:15:56.240 thirty percent better underwriting or five percent better in defaults, 0:15:56.280 --> 0:15:58.720 they are lying, probably to themselves more than to you, 0:15:58.760 --> 0:16:03.480 but they're definitely lying. Anything like that just immediately becomes 0:16:03.520 --> 0:16:07.360 brittle as the macroeconomic reality changes, as people suddenly don't 0:16:07.400 --> 0:16:09.400 care about the item or whatever it is that they 0:16:09.400 --> 0:16:11.560 found that's this magic bullet of like suddenly I know 0:16:11.560 --> 0:16:12.360 who's a good risk. 0:16:13.480 --> 0:16:15.640 It just disappears. And so you actually. 0:16:15.280 --> 0:16:18.960 Want lots and lots of subtle factors that are also 0:16:19.000 --> 0:16:22.640 compliant with all the various regulations, helping you shape a 0:16:22.760 --> 0:16:26.240 score that will tell you how likely this person is 0:16:26.280 --> 0:16:26.800 to pay back. 0:16:27.320 --> 0:16:28.000 That's what we use. 0:16:43.840 --> 0:16:45.960 Let's go back to the just the core of the 0:16:46.000 --> 0:16:49.880 business model. So let's imagine there is a shirt that 0:16:49.960 --> 0:16:53.720 costs one hundred dollars and I have an opportunity to Okay, 0:16:53.760 --> 0:16:55.880 I'm gonna buy it with a firm, so to be 0:16:55.920 --> 0:16:59.120 four payments of twenty five dollars and there's no interest, 0:16:59.160 --> 0:17:01.600 and so for me, that is almost a free lunch 0:17:01.680 --> 0:17:04.000 because the time value of money, et cetera. All Right, 0:17:04.040 --> 0:17:05.959 I'm spreading this out over four payments. 0:17:06.040 --> 0:17:08.000 You're gonna work that hundred extra and. 0:17:08.000 --> 0:17:10.680 I'm gonna that extra, that extra seventy five dollars after 0:17:10.720 --> 0:17:11.880 the first payment, I'm gonna know. 0:17:12.000 --> 0:17:13.680 As you should. Yeah, great way, okay. 0:17:14.240 --> 0:17:16.920 So I'm gonna make that first payment and i'm gonna 0:17:17.040 --> 0:17:19.120 then that seventy five dollars. I'm gonna put that into 0:17:19.119 --> 0:17:22.159 an index fund. Okay, And so you make money because 0:17:22.240 --> 0:17:25.800 the retailer is paying you a cut because that you've 0:17:25.800 --> 0:17:28.800 brought someone into the door. So talk about how is 0:17:28.800 --> 0:17:32.119 that cut determined, how much are they paying you for that, 0:17:32.200 --> 0:17:36.800 and how competitive is it against other potential BNPL companies 0:17:36.880 --> 0:17:39.639 or perhaps new entrants that haven't come into the market yet. 0:17:40.080 --> 0:17:42.000 Talk to us about how that price is for him. 0:17:42.160 --> 0:17:44.159 This is my question too, because when you go to 0:17:44.280 --> 0:17:47.760 check out, you see buttons, and the buttons I presume 0:17:48.080 --> 0:17:51.199 don't mean that much to people. You just click one 0:17:51.280 --> 0:17:54.040 of them. So how do you differentiate yourself? 0:17:54.359 --> 0:17:59.639 So we've been around for nearly fifteen years, and the 0:17:59.680 --> 0:18:02.720 way differentiated ourselves by the way we basically don't advertise. 0:18:02.760 --> 0:18:05.760 When you see us a checkout, that's when you learn 0:18:05.760 --> 0:18:07.640 about AFFIRM at some point, and then you come back 0:18:07.640 --> 0:18:08.240 to use again. 0:18:08.280 --> 0:18:10.080 And we have incredible retention rates. 0:18:10.119 --> 0:18:12.320 People who have used a firm a couple of times 0:18:12.760 --> 0:18:16.880 basically with ninety percent probability we'll come back to use 0:18:16.920 --> 0:18:19.520 a firm again, not necessarily the next week. In fact, 0:18:19.520 --> 0:18:22.840 we average something like five plus transactions per year, but 0:18:23.320 --> 0:18:26.159 when it matters to them, they will use AFFIRM. And 0:18:26.200 --> 0:18:29.479 the way we differentiated ourselves is we were there for 0:18:29.520 --> 0:18:31.800 them when they needed us and if they ever stumbled. 0:18:31.800 --> 0:18:33.919 Our best customers are the ones that email us or 0:18:33.920 --> 0:18:36.280 call us and say, hey, I was late to pay 0:18:36.280 --> 0:18:38.800 my bill, something happened. What's the layed fee? And we 0:18:38.840 --> 0:18:41.160 tell them there isn't one. That's the moment when they 0:18:41.240 --> 0:18:43.719 grasp how we're different from the rest of the industry, 0:18:43.760 --> 0:18:46.359 and that that's probably why they come back to us 0:18:46.400 --> 0:18:48.919 as often as much as they do. Something like ninety 0:18:48.960 --> 0:18:51.919 five percent of our transactions come from repeat customers. So 0:18:52.040 --> 0:18:53.639 just to give you a sense for the loyalty that 0:18:53.640 --> 0:18:57.120 we've engendered in our user base without ever making promises, 0:18:57.320 --> 0:18:59.200 you know, on broadcast media. 0:18:59.000 --> 0:18:59.400 If you will. 0:19:00.080 --> 0:19:03.720 So that's why they come back to the business model points. 0:19:03.720 --> 0:19:08.480 So first of all, probably worth expanding the aperture a 0:19:08.520 --> 0:19:10.840 little bit. So we offer both interest free and not 0:19:10.960 --> 0:19:14.800 interest free loans. The pain four that Joe described is 0:19:14.840 --> 0:19:16.760 exactly as it sounds. So in our case, there are 0:19:16.760 --> 0:19:18.680 no fees of any kinds. So if you see hundred 0:19:18.680 --> 0:19:20.760