On the 43rd episode of the Loose Threads Podcast, a show about the intersection of consumer, retail and commerce, I talk with Max Levchin, a co-founder of Affirm, a company redefining consumer lending, bringing much-needed transparency to a space that is usually riddled with predatory lenders.

Affirm focuses on point of sale lending, an option available to shoppers who want to finance a big purchase such as a table or a bike. Affirm makes it simple and easy to take out a specific loan for these purchases and pay it back over time. I really enjoyed talking with Max about his journey from PayPal to Affirm, and how building consumer-first experiences is producing promising results in industries that are used to the total opposite.

Check out the full transcript below. 

Richie: [00:00:07] Welcome to the 43rd episode of the Loose Threads Podcast, a show about the rapidly changing consumer economy. This episode is brought to you by Loose Threads Intel, a new company we just launched whose membership empowers brands investors and real estate developers to capitalize on the rapidly changing consumer economy. Learn more at loosethreadsintel.com. We also have a new newsletter called Ripcord which highlights one important development each week and helps you escape the noise. Learn more at loosethreads.com/ripcord. Joining me today is Max Levchin, a co-founder of Affirm, a company redefining consumer lending, bringing much needed transparency to a space that is usually riddled with predatory lenders.

Max: [00:00:48] Even if it takes an incremental amount of work for us or we can’t charge some fees that the industry enjoys charging, we would rather forego all of those benefits in favor of treating the customer better than everyone else.

Richie: [00:01:00] Affirm focuses on point of sale lending, an option available to shoppers who want to finance a big purchase such as a table or a bike. Affirm makes it simple and easy to take out a specific loan for these purchases and pay it back over time. Here’s my talk with Max Levchin.

Richie: [00:01:18] Talk a bit about your background. We can do the briefish version, because yours is probably one of the more impressive ones of anyone I’ve ever talked to. Give us like the three minute background and then we’ll work our way up to Affirm where I would love to spend most of the episode today.

Max: [00:01:31] So I started three companies in college, none of which succeeded. I moved to Silicon Valley in 1998, which was just as the first dot-com wave was starting to crash and burn. I met this guy Peter Theil, co-founded PayPal with him, or the company that became PayPal eventually. The PayPal named came after the merger with X.com, so Peter, Elon and I were the progenitors of that. After PayPal was — we first took it public, then we sold it to eBay or it was acquired by eBay. About a year into being public, I left. I tried my hand at a bunch of other ideas, ultimately ran another company called Slide that I co-founded while also investing and co-founding other projects. That one did ok. It was acquired by Google. I spent a year at Google trying to help them a little bit with their social strategy, but ultimately decided that I had to go back to building my own things. And after that I started a company called Affirm, which is what I spend all my time on now. But in addition to that I also still invest in startups and have a fairly significant role in a women’s health company called Glow.

Richie: [00:02:41] So from my understanding Affirm came out of HVF, right? And so talk a bit about what HVF is and then we can kind of work our way to its creation.

Max: [00:02:49] So HVF is not the first incarnation of this concept. I realized that if I sort of sit around on the couch at home between companies, I am not likely to create anything productive. In fact I’m more likely to frustrate my wife and potentially cause real damage to my family. And so first thing I do when I sort of recover from a project, successful or otherwise, I immediately go out and rent an office. And I also figured out years ago that I really work much better, I’m a lot more creative, a lot more productive, if I’m surrounded by smart people that challenged me debate me, are there to get excited about something, maybe build something really quickly to see what things look like. And so between companies, between projects, I typically build this thing that I’ve sort of taken to calling my lab or my labs, and they always have weird obscure names; the one before HVF was MRL, but this one is HVF. And the explicit purpose for HVF has been to start the next company that I am going to work on, but also start other cool companies. And so Affirm came out of HVF in the process of brainstorming around why lending is broken, how things could be done better there, as well as did Glow, which came out of the conversation around why health insurance is so messed up. There’s another company called Divvy which we just spun out of HVF, which was a result of a long project into understanding why real estate is so unaccessible to young people, etc. So HVF is still going.

[00:04:23] This incarnation of the labs really seems to have hit its stride, so it felt foolish to shut it down after I took off to run Affirm full time, and so I asked a friend of mine, Ben Jun, who I’ve known for a very long time, since before PayPal, to come in and run it as his full time gig, and he’s now off to the races building yet another cool project. But my day and night job is Affirm.

Richie: [00:04:45] Where did Affirm come from, like what were some of the earliest conversations you had about it and how did those progress over time?

Max: [00:04:51] So Affirm was co-founded by literally a bunch of CTOs. There are three CTOs, myself included, I was a CTO at PayPal obviously, but a CTO of Palantir, a CTO and other data related company, three of us were sort of debating the future of underwriting primarily from the point of view of data. We really were interested in figuring out how will alternative data — which was a talked about thing six or seven years ago when we started this and now of course is very a commonly used topic — the question was, how far will it go? Will it result in meaningful changes? Will the world just operate on Fico Score like it always has? Can something be built that’s significantly better than Fico? Everybody who uses Fico eventually says “Well this is great but I can see a few more things about my customer so I can go farther, lend money to more people, enable more transactions.”

[00:05:47] The question was, “Well could we do something a lot more, a lot bigger, a lot more exciting?” And then at some point the question became “Well who would want this?” You know, this is great and all to talk about how people need to borrow money, but the real question is, “When do we actually need it?” You know at this point Lending Club was a thing and Prosper was a thing, so there’s plenty of fintech innovation going around. So I wanted to see what would be a good place to test this new score that we have, and another one of our – the fourth musketeer, who had a lot of experience in payment processing just like I did, essentially said, “Well, you know what, if you offer someone a loan at the point of sale, there could be a meaningful impact on merchants ability to close transactions, to bring incremental new volume that they wouldn’t otherwise have.”

[00:06:32] There are lots of people out there, there was a big research report that just came out at the time showing how millennials were not interested in credit cards as much as their parents were, how they were opting out of the credit card system, how they are choosing debit cards primarily because those were easier to understand, not necessarily because they didn’t see the benefits of credit cards, but because they saw the opposite of benefits: lack of transparency, inability to estimate cost, lack of conviction that the bank has their best interests in mind, understanding that if you make a small mistake it might cost you a lot more than you originally expected. So all those things combined, you basically had a sort of a thesis around “Maybe we could find merchants that would benefit from the ability to lend instantly to a buyer who would otherwise be a window shopper.” And that’s really the origin of Affirm, we sort of fairly casually waded into that, five years later seems to be doing pretty well.

Richie: [00:07:23] That’s great. So there was a clear non-consumption you were seeing, especially with younger customers, that started to kind of factor in there. So I’m curious what that first year was like, like who was the first merchant? Who said yes to this? How many people said no? What were the early days like?

Max: [00:07:38] So in the early days we barely understood anything about retail so I had to learn. That’s not entirely true, I mean two of the four people worked at PayPal together, one more did his own point of sale startup, so we knew a little bit more about retail than I just claimed. But we certainly didn’t know that much about point of sale retail. We certainly didn’t really understand the finer point of point of sale credit, promotional finance, et cetera. So I had to learn a lot about a lot there.

[00:08:06] So the original merchant, to whom we owe a great debt of gratitude, and I still think Jim McCann every time I see him, was 1-800-FLOWERS. They gave us a shot basically on Jim’s enthusiasm. He heard the concept, which I pitched at him, I’d met him a couple years earlier and said “Hey I have this idea,” and he was incredibly enthusiastic, like “this sounds awesome, let’s try to give it a shot.

[00:08:30] You know, we were fairly careful, we did a little bit of volume, we did a little bit of promotion on their site, and it definitely had a whole bunch of flaws in it. For example, we didn’t really understand where the prospective borrower should really encounter this information to avoid adverse selection, and to also avoid basically showing people that financing is available too late down the line. So we made a lot of user interface mistakes, we made a lot of pretty silly assumptions about human behavior, but what we saw and sort of the early signal was that people were really excited. There are a lot of people that said “I have no idea who you are.” We didn’t advertise the fact that some of the founding team had a big hand at PayPal. We just said “Look, we are Affirm, we’re brand new, give us a try. The only thing we’ll promise is that the price we put on the screen is going to be the only price you pay. We’re not going to charge you late fees, we’re not going to try to trick you into an interest that changes. If we tell you, ‘here’s a principle, here’s the interest,’ 12 months later you will owe zero. If you treat us like responsible adults we will never do anything less than that to you.

[00:09:36] And that sort of user interaction had a very powerful effect on us. We were much more doubtful, concerned with this question: Will people react positively to this notion of “This is honest finance,” or will they just be sort of “Oh yeah, you know, trust me I’ve heard all those stories from other banks before, and you’re not even a bank we don’t know anything about you guys so, yea, forget you.”

[00:10:03] And either because people have been wronged enough times, and in the age of Twitter every wrong is very public, or because we did a good job explaining what our true cost will be, because there isn’t anything to hide, we actually got a really good uptake very early. And so we ultimately are able to say to other merchants, “Hey look, here’s what it looks like when it’s implemented; it’s super unobtrusive, it sits in your checkout flow as an option, and when we need to make an underwriting decision we ask for just a couple of pieces of information, we don’t ask for even the full social security number, we just need the last four digits to confirm. We will make an underwriting decision instantly. And we absorb all the risk. When the consumer we approve cannot pay, chooses not to pay, or does something that ultimately disables their ability to pay, we will stand behind the transaction, we’ll settle with you instantaneously, and then the rest is on us.” And that sort of kicked us off in our first year of lending operations and it’s been growing since.

Richie: [00:11:07] Was it a result that the lack of transparency and just like, the trust debt, in a way, was so bad in this space, that even as a totally unknown party, you could come in and offer something better and people took to it pretty quickly?

Max: [00:11:19] It’s hard to tell exactly what is the negative space that we filled. But I think there’s definitely part of that. I think, one of the sort of very early realizations we had was that people are very used to evaluating things based on APRs. And there’s plenty of law and regs that say you need to disclose your APR, and of course we did and we do.

[00:11:40] But right after we launched I was flying to New York to talk to some potential backers for our warehouse facilities. In the retail world it means something else entirely but in debt if you have a warehouse facility that’s a way to borrow money against the loans that you’ve generated. And so we’re flying to a financial partner to talk about our borrowing ability with them, and I told our CFO, “Hey we have six hours from San Francisco to New York, so, wind-in-our-face kind of flight. I don’t really know how to calculate the true cost of a loan if I know the APR.

[00:12:12] Should be pretty simple right? If it’s a $1000 loan, it’s a 16% APR, and it’s nine months loan. So it’s not a year, I know it’s not really $160. What is it? And so, wi-fi enabled flight, we found a calculator online, we sort of figured out what that number was, which I don’t remember any more, by sort of substituting these numbers, and ok, here’s the number. Well, now that we have these remaining five and a half hours, can we work it out on a piece of paper or an Excel or anything like it? Can we get to the same number. How do I know that’s the right number? I just used some online tool to tell me what it is. I don’t know how to calculate this thing exactly. I kind of know what it means but I don’t know precisely what it is.

[00:12:51] And we proceeded to do it for the next five hours until landing and we never got it right. I guess at some point we sort of kept on researching, kept on reading up and eventually we got it within like 90 cents. But we’re still 90 cents off it. Which goes to show that, if two people that are in this lending business, one of which has done a lot of financial math at Paypal, and the other has done it in a PE firm, ultimately ended up giving up. 90 cents is a lot a lot of money in the context of a thousand dollar bill, but it’s frustrating to not be able to even understand where exactly the money goes. How do you think most consumers feel when they’re presented with a credit card statement saying “Your APR is 13.99% and starting next year it’s going to change to 14.99% with a minimum payment of so-and-so and an annual fee of X and a late fee of Y and a penalty APR of Z? They sort of immediately just shut down and say “You know what, I have no idea what this thing is.”

[00:13:44] And so part of what we did, we said well, you know what, what if we told you here’s the APR — and we eventually figured out exactly how to calculate this stuff and build systems that could do it for us very very precisely down to a fraction of a penny, of course, because that’s part of being compliant with all the regs. But in addition to sort of being perfectly compliant, why don’t we also just express our prices in dollars? What if we told someone here’s your principle, here’s your interest, here’s the APR, and here it what it actually means: by the end of the loan period you will have paid back this many dollars plus this many dollars, and that’s it.

[00:14:19] And within that lies a very powerful set of assumptions. One is, you can’t extend people past the point of their term. Even if they’re late a little bit, even if there’s some sort of irregularity with their payment schedule, you commit that you’re not going to change the true total price. And that requires a lot of financial assumptions and changing of the math that goes into it. And we were from the very beginning extremely uncompromising in our point of view that the end user has to have an amazing experience. They have to walk away thinking — whether they got rejected or approved for a loan — the most difficult thing to do in lending is you have give someone a very robust reason why they can’t borrow money. And it is required by the regulators that you disclose, as much as you possibly can, why they can’t borrow according to your underwriting models. But what isn’t required, although perhaps it should be, or it’s a good idea anyway, you also have to treat them like a human being. When you are rejecting someone or when you’re approving someone, they need to know exactly what they will owe or why they couldn’t borrow, etc etc.

[00:15:26] And so we always took the position that even if it takes an incremental amount of work for us, or we wind up making less money, or we can’t charge some fees that the industry enjoys charging, we would rather forego all of those benefits in favor of treating the customer better than everyone else. Snd so we have incredibly high NPS score of 82 largely based on this uncompromising point of view that if we can’t explain it, if we can’t show it in one or two lines of very large text, we would rather not venture there. And so, that was probably over time the biggest thing. But I think initially it was partially the fact that the industry has just perjured itself enough times to be seen as generally a bunch of liars, and having someone who says “I’ll stand by these numbers no matter what” was very powerful. But the other thing that’s very hard to underestimate is 1-800-FLOWERS and the subsequent merchants said “You should give these guys a try. They’re real. We endorse them. They are our friends.” On the other hand we always made a very strong statement that we want our name in the transaction. We don’t white label, we have no plans so white label, in part because we learned very early, the merchant is not a lender. They don’t want to be a lender. They don’t want to deal with, and rightly so, they should not deal with customers calling and saying “Hey I can’t make my payment today, can I please do it next week?” or something along those lines. But also customers don’t necessarily want to pay back a lender whose name they don’t remember.

[00:16:54] And so we’ve always insisted that the interaction with the consumer is truthful where it’s merchant X and Affirm are offering this loan and you will have to pay money back to Affirm. So a combination of those things and probably a million other ones ultimately resulted in us taking off.

Richie: [00:17:10] One of the decisions I’m curious about how you landed on, “We’re going to do the POS side” versus, I guess, the general card side, right? Because the card side is the macro, which is you have interest on your general statements and all that. I assume there is something playing into the transparency thing, which is you want to do it almost on a transaction level, and what was some of the thinking that went into that and how has that kind of proved out?

Max: [00:17:32] The industry of point of sale lending started out many years ago at this point, lending money in the way car loans are made. The modern way of doing point of sale lending until Affirm came along is “Let us give you a card,” and it sometimes can be a card that’s only useful in the store where the card is issued, so it’s called a private label card, or it can be a co-brand where it’s a store card but it also works as Visa, MasterCard and there are banks that will provide partnerships to enable those. In either direction, we ran into — fairly early — into a strong set of evidence that young people were essentially saying “I certainly don’t want a card that only works in one store. Today I’m going to be shopping here, tomorrow there, this just isn’t worth my time. The credit look up, the embarrassment of applying and potentially getting declined, but most importantly, I don’t know if I’m going to come back.” And of course the merchant typically sees these cards as a great loyalty device and sometimes they are, but for a lot of young people it’s become a nuisance as much as an invitation to come back.

[00:18:38] And the co-brand which carries a Visa, Mastercard, Amex, Discover logo on it, sometimes is the most wonderful thing where the consumer says, “I have been thinking of getting a new credit card and this particular store, this particular merchant online is just somewhere I shop all the time, it’d be great to have a deeper relationship, I would like to collect my rewards and my points and cash them in,” and so it’s a perfectly sensible model. However, if you already have all the cards you’re going to need in this part of your life, those folks basically say “Well I would finance this item but I’m not going to put on my credit card for whatever reason. Maybe I’m too close to maxing out my limit. Maybe I know that I’m revolving and I don’t want a revolving anymore. Maybe my credit card is for emergency purposes only,” which is kind of how a lot of young people see credit cards, they don’t like to carry a balance but they understand that sometimes you must, and so having a card handy is good, using it a lot is not. Debit cards is really what sort of lunches and dinners go on too.

[00:19:36] But occasionally borrowing in a return loan format and so on a loan is really really handy. And as we started testing this notion of honest finance, showing people exactly what they’ll pay, not changing the price, not charging any kind of unexpected fees or any fees at all, we realized that the term loan really lends itself beautifully to that because you can say it starts and stops, it’s only for this purchase, there’s no line or card or or anything afterwards and when you’re done you’re done. And if you don’t like the experience, even though we hope you would come back, there’s no obligation. You don’t have to cut up your card and make sure you don’t owe any more money. By the time you’re done there’s nothing left.

[00:20:19] We initially didn’t expect it to be quite as powerful but over time it became a huge differentiator where people would say I would not have borrowed money had it been offered to me a form of a line or a card, but the fact that this really just covers this purchase, I don’t have — this is a great quote from one of our earliest customers saying — I ask this person in the survey conducted over the phone, “Why did you choose Affirm versus a point of sale offered card?” And the woman said “If I get a new credit card it lurks in my wallet and it encourages me to spend. And I don’t want that at all. I just wanted to finance this piece of furniture and be done with it.” And so that’s a part of this honest finance of true transparency. Simple to understand lending doesn’t mean that point of sale issued cards are inherently terrible, in fact some of them are wonderful products. but I think there’s a lot of room for — this is as simple as buying a car, when you’re done you’re done.

Richie: [00:21:19] So I want to talk I guess about the brand building piece a bit and the white label part. Talk a bit about the journey of realizing the power and the need to kind of build a brand for that trust point and then also the decision that you wouldn’t white label because I would assume you’ve encountered merchants who are adamant that “We don’t want this thing on our site, you know, we want to retain our brand.” And how have you kept the position or strengthen it based off of all the evidence you have?

Max: [00:21:43] So a lot of our customers are small and medium merchants. We now have a bunch of very large ones as well, and so those conversations, there are certainly a lot more relevant, because they invested a tremendous amount of time and effort into their brand and they don’t take it lightly. But for a lot of the smaller folks, the brand, as we grew, became as much of an endorsement from them to us as the other way around. Typically they would hear about us from their friends and startup ecosystem and say “Hey these Affirm guys, they’re amazing, they added 30% more sales to my bottom line. You’ve got to give them a try.

[00:22:17] And a lot of the retailers of the new retail industry are very very tightly connected. Every time I talked to one they already know the five other ones that we were speaking with or were trying to convince and very often asked for references or very often say “Can I introduce you to the CEO of this merchant, because I think they’ll give you a sense for just how helpful we can be.” And so for a lot of the smallest guys, an endorsement of another merchant goes a very very long way. But the addition of Affirm, especially as more and more people have realized that our and NPS is bar none and our treatment of their customers is at least as good as their own, sort of became a self-reinforcing thing where we said, well we want to say we have in-store financing and we are very comfortable with the idea of a firm’s logo, it’s not that — we don’t try to take over their logo, we were very polite in our affirmation of ourselves on their side or in their app.

[00:23:14] But it is very important that our logo is seen. The other side of it is actually regulatory and legal. Most merchants of scale understand that if we are completely white labeled, the disclosures of who is actually doing business and who is behind these loans and who do you complain to and who do you take up your disputes has to be stated somewhere. And so from, here’s the name of a company you can contact them and they welcome your contact, that’s what they’re set up for. It’s very different from having a page full of very very small print that says “what you may have heard of as merchant XYZ financing is actually not, instead there’s this other company, you can click on this link and go to their site.

Richie: [00:23:56] Right, and mail a P.O. box.

Max: [00:23:58] And that certainly doesn’t inspire trust. And so we’ve always taken the position of, we need to make sure that your customers understand, you ship them the goods, we take care of the loan, we paid for the goods and then you will have to pay it back over time. Our name doesn’t have to be in glowing letters in giant print. But it’s important that it is there. In part because when the first e-mail from us comes in saying “hey you know you’re five days away from your first date” we don’t want people marking it as spam and saying “oh wait a second I have no idea who you are.” And then of course the merchant doesn’t want it to say merchant X lending because that’s just not true and typically is illegal.

Richie: [00:24:38] So I’m curious to talk a bit about the online vs. in store piece, in terms of, I’ve seen the logos all over the place online. How much of the vision is online versus offline and where is it evolving today?

Max: [00:24:52] So we started online only and we had a very strong point of view that online is where the future is. And then I looked it up one day and realized that off line is not quite dead, despite the significant press insinuation to that effect, and it’s still 90% the size of online. And so we had certainly realized we had to provide a omni-channel, as they call it, solution, online/offline phone non-sort of a fully operated embedded retail locations, so there all these different form factors were sales happen. And if we were to offer a solution to quote unquote large merchants, folks that have started off line and then expanded online, and that have done so successfully in both places, we had to have an offering that cuts always, not just online.

[00:25:40] And so we had built out, one by one, all those offerings for every different channel and there’s a lot of things that’s really just ripe for improvement there. As you started looking at other channels you realize that attribution and cross-channel sales and being able to track a customer that says “Hey I look at this online but then I walked into a store and then I didn’t walk out with the thing that I wanted to get, I went back online” goes a really really long way where anything from sales associate comp, to attribution of marketing dollar spent is just profoundly, I wouldn’t call it JV but it’s certainly not pro-sports.

[00:26:15] And so opening our eyes to that has both allowed us to go to larger merchants but also create an opportunity to say well there are more things we can do. We aren’t just a lender for these folks, we are also a partner in more ways than one. So it’s been a very gratifying journey to start branching out. Having said that, we’re probably in the act one of 10 or 15 of our multi-channel omni channel strategy. We’re still a doing majority of our business online though our online business is growing very very rapidly. We never disclose any of our numbers but this week was a nice milestone so I’m tracking it enough to be aware of weekly milestones, or actually this was a monthly milestone, so weekly milestones used to matter, and daily milestones mattered, at this point we’re seeing enough traction that we’re celebrating once a month seems like a good idea.

Richie: [00:27:04] I think that’s a nice segue into talking about some of the results in the kind of lucidity of why you’re working on. Ben came and said hi before and he was like you should just ask about the degree to which like, I see you tweeting almost every week now the results coming from surveys and lifts and conversion rates and all of these things. Did you think it was going to be conclusive as it actually is? And then talk about how it is.

Max: [00:27:25] So I didn’t initially. I didn’t really know what to expect in terms of conversion. One of our theories has always been there are people that say “I need a new credit card” and the fact that we don’t offer one isn’t going to be helpful to the merchant and isn’t going to be helpful the consumer and we can stand by and jump up and down and say “We have a product that is more transparent, more convenient” and the consumer will still say “No, I actually want a credit card.” On the other side will be lots of people who will say “I do not want a credit card.” And the question is “What is the breakdown between those two groups, when your real plan here is to actually purchase a table or a bicycle or something?”

[00:28:00] So when we started we didn’t really have a particularly well-formed set of assumptions around incremental sales, improve conversion rates, things like that. And then I saw the Millennial Disruption Index study, but it had a pretty staggering number in it, it said 62% of millennials do not want or do not have a credit card. I still don’t understand exactly whether that’s true or just bizarrely true but it was a study that surveyed more than 10,000 people. So it was certainly statistically significant and what would wind up transpiring of course is that typically for a mid-sized merchant we can bring anywhere from 10 to 50% more incremental sales. Combining it with some of the cool promotional tools that we’ve built over the years, we at times can account for half the sales, basically double a merchant sales net of any credit card related promos, et cetera.

[00:28:56] And so it had a sort of amazing impact. And at this point we’re sophisticated enough to know that different merchants, different industries, different price, points different timing of these promos, how do you explain this to the customer, where and when in their buying journey do you actually do this makes a big difference. And so you can move from two and a half percent to 10% incremental sales just by optimizing where it’s placed and how you talk about it. But the fact that our score, so the original idea behind the company, is better and is getting better every day.

[00:29:28] But also the fact that we do appeal to folks that have no patience for complicated APRs and calculating compounding interest on amortization schedules that they couldn’t be bothered to read through and fully understand, that appeal combined with better underwriting, much younger looking tech, much smoother process, much faster underwriting time, does seem to have a massive impact. So people that are hovering over an item saying “You know I’d get it but it’s probably going to wind up revolving and I just don’t know it’s going to cost me” versus “I know exactly what is going to cost me for the next 12 months” makes makes a huge difference.

[00:30:09] So 20, 30% incremental sales in different categories is not at all unusual. And we’re running more and more studies. Early on was very difficult to get anyone to sort of publicly say “Hey this was like a 20% lift,” in part because we became kind of everybody’s secret weapon. And so folks were cautious to tell their competition that Affirm exists and we had to get through that. And we tried to be very very respectful of merchant that are all kind of competing brothers and sisters where they have a cool thing they’re trying to bring to market and we have to be very very careful with their data with what we know about them what we know about the industry. But at a certain scale you become an enabler and the tide that lifts all the boats, as opposed to a competitive advantage from one industry participant to another. And so once we cleared that scale I think it became a lot easier to get confirmation and public confirmation, shareable confirmation of pretty amazing results that we’ve been able to bring.

Richie: [00:31:09] So I’m curious kind of on that note to talk a bit about the business model piece because you’re having a fundamental impact on people’s businesses. Talk a bit about just how Affirm makes money today and kind of how you either went as far as you did or limited it to kind of where it is today, given how it all shakes out.

Max: [00:31:26] So like any other provider payment type, we wind up costing the merchant something and costing the consumer something. The good news about being a super transparent company, what we do is we generally treat those two numbers as a somewhat porous concept. In other words, the merchant can say “Look, my margin doesn’t allow me to pay a whole lot to our financing partner, I think it has to be priced into the consumer interests.” And so at times we can ask the merchant if they want to contribute to the overall available pool of risk based price and some merchants are delighted to do it. Others are unable to. The more interesting application of the same idea where you think of merchant pricing as well as consumer pricing is kind of on the same continuum. So you actually go the other way. So you know what, if the merchant has enormous amount of margin and some merchants have built really great businesses with very very significant gross margins, they can buy down the interest from the consumer and offer all the way down to a true zero percent loan where you could go to market with a promo that says “Buy this table buy this stuff…”

Richie: [00:32:38] Is Peloton doing that?

Max: [00:32:39] Peloton certainly does that. And it really does depend on merchant to merchant, category to category and fundamentally gross margin, but what happens there is the merchant effectively prepays the interest for the consumer and it winds up being a true zero percent. You’re effectively getting paid to borrow money. You will pay exactly what the sticker says over exactly as many months as the loan that you choose to take out and not a penny more.

Richie: [00:33:06] Right. Which seems like a very interesting marketing lever for some of these companies.

Max: [00:33:09] What would it fundamentally means is you don’t have to discount. The typical scourge of every retailer under the sun is the wait for discounted price. When you are buying something, especially in apparel, you’re kind of wondering, “If I wait a day or two or ten, will this go into a sale bin or even more, you know, clearance bin or close out bin or whatever the next price reduction will be?” There’s some messaging that the industry has has decided on and where basically you never pay full price.

[00:33:44] And it’s terrible because it conditions everybody to artificially raise their prices and conditions consumers to artificially wait extra long. So these kind of games that, as a participant, I think are not healthy and fundamentally I think need to end. And fundamentally the money, quote unquote, that’s being used to pay for this discounting, comes out of the gross margin. That’s where the merchants says “Well, this thing is not actually worth what my gross margin allows me to claim but I’ll take it out of my gross margin and price it down, price it down some more, and during the clearance sale we’ll finally move it.” With the Affirm’s zero percent promo, what you can do is say “Well if you have the gross margin, you don’t need to discount the price.” The price can remain the same, should remain the same.

[00:34:26] I think it’s important to say “Well if this thing is worth a thousand dollars, it’s always going to be worth a thousand dollars.” As a consumer I feel better about something that was priced fairly and isn’t going to change. But you can use the gross margin dollars to basically pay down the interest to reduce the cost to the customer and tell them you can pay this off in 18 months or 12 months and it’ll remain exactly the same price. And it’s certainly not for everybody but for the merchants that have chosen to do this with us, they typically see really incredibly results. They see up to half their volume, more than half their volume at times, go through the zero percent loans. They’re a really wonderful way of not discounting and offering an incentive to purchase.

Richie: [00:35:09] So we spent some time talking about the first few years in the company. What’s happened since then? I guess the last two to three years. Where is the business today versus then?

Max: [00:35:18] So early in the year we announced we did a million loans since inception, so that’s kind of a nice point in time to take stock. We are still growing very very quickly. Although, as a lender it’s really important to grow responsibly and to make sure that you don’t overextend yourself. It’s very easy to be a high growth lender if you’re not afraid to run out of money or if you plan to run out of money which we don’t. So you have to be very cautious and have to be sort of very smart about balancing expansion of the business with making sure that you’re correctly managing your risk and reserve enough capital if risk worsens.

[00:35:52] But we’ve been growing better than steadily since the day we started lending. We started a company with four people. We’re now up to 254 people or so and growing. Not growing our headcount as quickly as we’re growing our volume, which is a sign of productivity but still growing very quickly. All kinds of new concepts — we’re still very focused on making sure the customer experience is profoundly good. Still not charging any hidden fees, not charging any fees, not charging any differed interest. Still trying to prove to the industry that you can build a great consumer experience, high quality product, and not need to sell your soul to the evil god of deferred interest. And so things are moving quickly. And there’s a million problems, a million daily challenges. But in general I have a big smile when I walk into the office everyday.

Richie: [00:36:42] What’s been the cheapest and most expensive lesson you’ve learned building this company?

Max: [00:36:47] I don’t know if it’s the cheapest or the most expensive but really early on we had a mistake in the code somewhere that treated what the coder thought were cents, as dollars. And so for a brief while we were a hundred times off on financial math which actually resulted in real money being moved around and irrecoverably lost. Not a whole lot of money at all, but as far as the value in learning and money that I’ll never see again, sort of the terror that places into your heart and the level of QA you went to immediately enact, it’s great lesson that sticks with you pretty well.

[00:37:29] So I don’t know if that’s the least expensive or the most expensive. I hope it remains the least expensive lesson of its kind. But it was early enough or was ultimately not nearly as much as I would imagine that something like this would be today. One of the reasons for our success one of the reasons for our growth, from the very beginning, because so many CTOs, so many engineers were involved in building this thing out, when knew we needed to bring on great designers and excellent salespeople and smart support groups to make sure that our merchants were successful. But the engineering team was built from some very, very good early folks and at this point we kept the quality up very very high. As a result we were able to build all of our software from scratch.

[00:38:12] And so unlike almost any other lender out there, we’ve built every single system here ourselves. That does place a lot of pressure on the engineers and people who verify the systems function correctly to make sure we don’t screw something up inadvertently. But it does give you a lot of flexibility. So we’re able to go to merchants or to our financial partners and say “what can we do that really fits your business? What can we build that really plays well with what you’re trying to do?” And we typically can do it very quickly and so it’s a competitive advantage. Ability to modify, reinvent, fine tune and sometimes rewrite our entire systems has been pretty powerful.

Richie: [00:38:51] When you look at the general retail landscape now as you’ve built up this expertise, where is your level of optimism about where stuff is headed?

Max: [00:39:01] In general I think lots of people are very prone to doom prognosticating and fear mongering and I think that’s just, you know, I don’t mean to sound Pollyannaish but I think it’s just hard to see the world in which new things don’t get invented — for a static scenario of human creativity and all the things that threaten us in retail or everywhere else. It’s very easy to be despondent because we sort of look around and say “Well things aren’t changing for the better and all these things are changing for the worse, we’re all going to go off a cliff and Amazon is going to take over every opportunity and we’re just going to maybe have enough money to eat and feed ourselves.

[00:39:37] And that’s just not true. Every time there is a sense of fear or desperation or Amazon does something that disrupts a market, that typically creates an opportunity for someone else. And you have to be flexible, you have to be ingenious, sometimes you have to completely reinvent business models, but people have. And every time these disruptions happen they also end up generating winners. I am certainly not one to advise retailers. I think that’s going to be your job soon. But I think one of the key things that really emerged from sort of the onslaught of — in the U.S., Amazon, internationally there are couple of other giant e-tailers — I think really personalized, really custom experiences centered around the product and around the design that comes with it, is really powerful.

[00:40:30] I think if you’re Amazon and you have several million SKUs at to this point I think, it’s just really really tough to make a very special experience around a very special product. And it certainly becomes harder to scale a business like that. And if you’re selling commodities maybe you should be worried because selling commodities at scale is more and more expensive as Amazon makes it cheaper and cheaper for themselves and everyone else. It’s very interesting to sell commodities. I think what’s really interesting is to create these really amazing beautiful products that come with experiences, that come with innovative business models that require subscriptions, that require some sort of recurrent relationship with the customer.

[00:41:12] Those businesses are going to thrive. I think for every everyone that’s crushed by the onslaught of commoditizers, there will be two more that come with something that is just too hard to do right if you have several million SKUs to take care of.

Richie: [00:41:28] Lastly, where’s the name from?

Max: [00:41:30] It’s kind of a cool story. So there’s a naming company called Master-McNeil. As far as I know there’s no McNeil. There’s a very nice lady named SB Master, who is the one half of Master McNeil, but I think she may be the only half because McNeil doesn’t exist. And I met her years ago when we were struggling to name PayPal and she did the PayPal naming exercise and it was this kind of a mythical experience where hundreds of names were flashed in front of us and at some point someone said “Oh PayPal, that sounds silly.” And one of our early board members said “That’s the greatest name ever, we should go with that right now.” The rest is history for PayPal obviously. But ever since then every project I have, I always look up SB Master and ask her to name it for me. And she’s always been a good luck charm. So I’m always happy to give her the naming right for my next project.

Richie: [00:42:25] Awesome. Thanks so much for talking.

Max: [00:42:26] Thank you.

Richie: [00:42:34] Thanks for listening to the Loose Threads Podcast. Sign up for Ripcord at loosethreads.com and feel free to leave review on iTunes. We always appreciate it. Thanks to George Drake Jr. for editing this episode. I really enjoyed talking with Max about his journey from PayPal to Affirm and how building consumer first experiences is producing promising results in industries that are used to the total opposite. We have a great roster of upcoming guests including Dan Widmaier of Bolt Threads, David Barton of David Kind and Ariel Kaye of Parachute Home. Thanks for listening and talk to you soon.