Max Levchin isn’t anti-credit, he really wants you to know. He’s anti-credit card. There’s a big difference.
He will talk about credit cards endlessly, and he’ll skillfully bring it all back, every time, to his company Affirm. Its AI-informed loans, he’ll preach, are much better than credit cards. It’s perhaps unsurprising that Levchin would believe in some form of tech to be the solution. He is a part of Silicon Valley lore, a technologist whose career started in the frothy era of overflowing techno-optimism and rocketed along, landing squarely in this new era—where the future feels a little more, you know, inauspicious.
On one end of his story: an immigrant from Soviet Ukraine whose family came to the US in 1991 with little more than $600. On the other end: a 2021 Forbes billionaire. A pivotal moment in his career took place in Levchin’s early twenties, when he convinced investor Peter Thiel to fund his then barely-a-company. It became PayPal. (Yep, Elon was there too.) After eBay snapped up the payments company, Levchin built a cluster of photo-sharing widgets called Slide. Google bought it. Next came the ovulation-tracking app and fertility services company Glow, which, Levchin is fond of pointing out, has helped couples conceive nearly 2 million babies, as though the app itself spawned them.
But even while launching Glow, Levchin kept one foot firmly in fintech. In 2012 he founded Affirm, which ushered in a new kind of consumer lending. Sure, PayPal led the charge in convincing the masses to buy stuff online, but so many people still pay for online purchases with a pre-internet product—old-fashioned credit cards. There are 191 million Americans with credit card accounts. Today, those people collectively owe $925 billion, a figure that took its largest leap in 20 years in the third quarter of this year. Affirm offers a different model: An online shopper is offered a zero-percent, short-term installment plan or loan for their purchase right at the virtual checkout.
Buy now, pay later (BNPL), as that model is called, is having a moment. People are being bombarded with options to finance online purchases through Affirm and competitors such as Klarna, AfterPay, and PayPal, which launched its own BNPL product in 2020. The way these newish financing companies make money: They get paid a processing fee by merchants, who partner with the lenders to encourage sales. They also collect interest or late fees from customers who miss payments, or interest on longer-term loans.
Most of us have to borrow at some point in our lives, and in Levchin’s mind, a society built on BNPL—even if used to finance staples such as food and fuel—is better than one stacked on credit cards. And BNPL services have been built to be appealing and easy to use, so much so that the US Consumer Financial Protection Bureau is studying the potential for consumers to get in too deep. Unsurprisingly, Levchin believes tech can save the day, saying Affirm’s machine learning algorithms will prevent overly risky loans.
While some billionaires are eager to put the world to rights, or launch us into new worlds, Levchin, 47, is the kind of serial entrepreneur who gets obsessive about the thing he’s building right now. Last month he met me at Affirm’s downtown San Francisco office wearing his usual rimless glasses and a short-sleeved Affirm polo shirt. He often steered the conversation to the drawbacks of his sworn enemy (credit cards), but also talked about the ebbs and flows of the wider economy, and how they are increasingly intertwined with the technologies and ideologies of Silicon Valley. The techlash, Levchin reckons, sprang from tech enriching techies but not really making life better for everyone else. Oh, and he eventually shared some thoughts on Elon Musk’s Twitter. The conversation has been edited for clarity and length.
Lauren Goode: The last time that we chatted on the record, Max, was when you launched Glow.
Max Levchin: I remember it was right before we launched Affirm.
And I remember my lede for the story I wrote was something about how you went from payment cycles to ovulation cycles, and I would just like to take this opportunity to apologize for that lede.
It’s a perfectly fine lede.
I think the reason why you agreed to sit down with me this time is because you want to talk about Elon Musk and Twitter.
No. You’ve been misinformed.
You’re not buying Mastodon or any other social network anytime soon?
What—what is Mastodon?
It’s a decentralized social network that some Twitter users are now flocking to. Decentralized social networks are the future, apparently.
I just got done finding out that decentralized currencies are apparently not the future. I’m not ready for more decentralization.
OK, well, we can come back to Twitter later. For now let’s talk about the economy. You’ve been running Affirm for over a decade, but BNPL has surged over the past few years. Why?
The most important thing is the thing that led to the inception of this company. A bunch of people maybe slightly younger than me decided en masse, around 2010, that credit cards aren’t good for them.
The full arc of the story is, a bunch of people go bankrupt during 2008 and 2009 and it’s a really jarring thing that people experienced. You then go into a neither-borrow-nor-lend Puritan ethic, Benjamin Franklin–style, pretty quickly. Lots of people who were growing up at that time, basically the millennial generation, woke up and said, “This is pretty crazy. Borrowing sucks.” A full generation of people moved away from credit cards, to debit cards or cash.
The thesis for Affirm was this idea that people need to borrow, and they hate borrowing the way their parents did. We offer consumers this magical mix where you can borrow money but not feel like it’s an accelerating snowball.
But what happened to BNPL over the past few years?
I think the pandemic really pushed people into accelerating buying things that are considered essential purchases. Millennials and now Gen Z, generally speaking, don’t love credit cards. But when you were pushed into a lockdown you suddenly needed an office and a restaurant and a gym, all within your home—things you would have to borrow for. Most people just don’t have enough to buy a $2,000 workout bike.
A Peloton.
Right. And the US government printed a boatload of money for people, but it wasn’t quite enough. The stimulus checks came not in one chunk, but over time, and even then, if you’re trying to set up a nice office at home and your employer is only helping so much, you still need to borrow money. We were an “overnight success” in the pandemic in the sense that even though we were growing already, we got to the kind of scale where people noticed.
You just adjusted your financial guidance for 2023. How dire are things?
They’re not.
You’re following in line with a lot of the other tech firms and freezing hiring, right?
No, we reduced the hiring plan by a fair bit.
OK, but—
It is absolutely true that US ecommerce is slowing down. The good news is that we are still just under two percent of US ecommerce—we have lots of room to grow into the numbers that we need to get profitable.
The reason to control costs is that it’s easier to stay focused. We’ve been disciplined enough where I don’t believe we need to reduce headcount. But if you have this massive surface of opportunities and you’re thinking, “Well, I want to launch in every country and I have these other five crazy things that I’m going to try,” the market gives you a lot of credit for it. Then, of course, you want to hire lots of people. But that means the overall progress of the company is slower.
Then if you say, “You know what, we want to get profitable, and everything else comes later,” you want fewer people. You actually don’t want lots of different projects going on.
I can’t help but think you’re subtweeting a company like Meta right now. It lost $9 billion in three quarters on the vision of the metaverse while also laying off a lot of staff.
I almost went there. Meta is very, very profitable. They don’t actually have to lay people off. We’ll see what happens at Alphabet, but they’re exceedingly profitable. And yet, a lot of these companies are saying, hang on a second, time for a hiring freeze or to lay people off.
For profitable companies it’s not about saving money real quick. They have shareholders pressuring them to keep a bottom line on a percentage basis, but fundamentally they’re not fighting for their life. They’re just trying to get focused.
In our case, we were disciplined before the current interesting times began. We did not massively overhire. We did not have an enormous number of people working on interesting new projects that suddenly became not important. But I do still think it helps you focus to say, “We’re going to do more with less.” We decided to slow down hiring by a couple hundred heads—I think that’s the total number we took out of next year’s budget. We’re an almost 3,000-person company. These are people who could have been here working on interesting new things, and they will be, but probably a year later than I’d want. But that’s not a hiring freeze.
OK, I’ll be sure to reflect that on the record.
I sent a lengthier note to employees explaining how we’re thinking about the current times and said, you know, I looked at the idea of a hiring freeze as a possibility, and it just doesn’t make sense. There’s so much stuff that we really have to deliver.
What are those things specifically?
The Debit+ debit card team still needs bodies to go build stuff, and it’s one of the coolest things we’ve done in years.
I’m fascinated by our obsession, particularly in the US, with physical payment cards still. [An Affirm public relations executive hands me a plastic Affirm debit card, which links to a person’s existing bank account and lets them convert eligible in-store purchases into BNPL purchases.]
This is a play for people’s loyalty, right? It’s not just offering a card, you’re trying to get them into your ecosystem of services. Because then they’re in your app, they’re paying in the app. And they’re seeing all the other merchants in your app …
For us the reason for cards is simple. It’s just really, really hard to use Affirm offline if you don’t have a physical card. So, here’s my app. My available amount to spend right now is $1,187.
Oh, you went to [Bay Area restaurant redacted for privacy reasons] last night. They have a nice patio.
It’s my standard. Nobody knows who I am. Nobody pitches me there.
Unlike [restaurant redacted] across the street?
Yeah. My wife loves it there. We have our date nights there as often as not. But it’s definitely the place where people are like, “Hey, man!” and I’m like, “I’m on a date.” So I had dinner last night, and I can turn it into a payment plan if I want to with this debit card.
Affirm and other BNPL services have come under fire from the US Consumer Financial Protection Bureau because of what is seen as potential for reckless borrowing.
That’s why underwriting matters [assessing a person’s ability to pay before making a loan, which Levchin has said involves analyzing data from credit reports and merchants]. There are three ways to lose money: People lie to themselves, people lie to you, and bad things happen to good people. People lying to us or lying to a lender is fraud. I think the majority of the industry has gotten good at spotting it. It’s people lying to themselves that’s very difficult. Because someone says, “I’d like to borrow some money, and I’m sure I will win the lottery. I will absolutely pay you back.” And then they don’t, and they’re overextended.
If you underwrite, you can say. “The probability of a lottery win for you is infinitesimal and you’re currently overextended. Please pay your bills and then we’ll have an adult conversation.” That’s what underwriting basically is, despite that it’s generally done by computers.
The bad-things-happening-to-good-people cases are unavoidable, no matter how good we are at spotting that someone is borrowing $1,000 and their monthly take-home is $500. People who go from “I’m fine and everything’s OK” to “Oh crap, I got laid off and I can’t pay my bills” are typically great customers. They really do face hardship in very unexpected ways, and that’s not the moment for us to be like, “Oh cool, you lost your job? Let’s get some late fees going here.”
What’s your current default rate?
Three percent is a good approximation. We have a monthly installment product and a pay-in-four, our traditional BNPL, which have slightly different loss rates. But the headline number is 3 percent.
And what does the current economic environment mean for your bottom line? You have this combination of incredibly high interest rates, inflation, and consumer spending going down.
The way to think about it is, we have different measures of bottom line. Our bottom line on a percentage basis does not change. We had a gross merchandise volume last quarter of $4.4 billion, and 4.2 percent of that was revenue less transaction costs—that’s what we get to keep. We told Wall Street when we went public that we expect that to remain between 3 and 4 percent. If you look at other payment companies, they don’t tend to have that level of profitability on a per-transaction basis. To manage that number, we charge consumers a fair price and we charge merchants a fair price.
Since I’ve used Affirm before, I get your marketing emails, and one recently said something like, “Hosting for the holidays? What to do when giving thanks finds you less than thankful.” The subtext was, “You’re broke and you’re supposed to be hosting.” What does it mean when we become a society that has people using BNPL for gas, or for food? I’m wondering what this means if people have to turn to BNPL services just to survive.
Generally speaking, so long as they’re doing this by replacing credit cards with BNPL, I think that’s very good for society. If you have a bunch of people who say, “I really need to feed my family of six this Thanksgiving and I can borrow money or not feed them,” most people are going to use a credit card. That is basically a road to hell where you’ll just have a balance forever and ever. And then you’re super in debt and your credit card rates are going up because the Fed is raising the federal funds rate.
BNPL is a better product that does not get people into trouble, so long as the people doing the lending do their job. In an ideal world, you should be using Affirm to buy groceries. At the very least, you can be sure that you’re not going to pay late fees. More importantly, you won’t have your interest compounded.
People are going to borrow; it’s not a bad thing. I borrowed money to go to college. We came to the US with $634 to our name for five people. And I wouldn’t be here today or for all the previous adventures if I did not have a good computer science degree from a good school. That was all funded by all kinds of loans. And I paid them off eventually, but the only alternative was to not go to school.
But it’s not just about BNPL. Trust is eroding in a lot of our traditional institutions, and there’s been a “techlash” over the past several years. Why would people trust a BNPL service? Is this some version of the way venture capitalists have basically been funding our lifestyles through nonprofitable companies like Uber or Lyft or DoorDash?
You can’t build trust from getting on a street corner and saying, “Please trust me!” You have to do it over a decade. Part of why people hadn’t heard of Affirm is that not enough people trusted us. During the pandemic we forgave a bunch of loans and helped people reschedule when they needed it. And so I think our relationships with both the consumer and the merchant are pretty strong. We’re currently at about a million reviews in the Apple App Store, and the current majority are five-star reviews.
I agree with you that there’s a boatload of people who are very skeptical about the tech world in general. The reason why I keep on saying, in earnings calls and even this conversation, that we make 3 to 4 percent for every dollar that we help transact, is to make the point that we’re not subsidizing. This isn’t a transfer of venture capital into the hands of unsuspecting consumers who are somehow supposed to make us whole eventually. We insist on running a unit economic profitable company. Like, the question to ask Uber is, do you make money on every ride? If you don’t, you are funding people’s need to travel with someone else’s money.
Back when we chatted about Glow it was a very different environment for tech and tech news. There was a kind of optimism around technology. What part of the backlash to that do you think has teeth, and what parts of it you think are without merit?
[Long pause.] It’s an interesting and probably long conversation. I think that the fundamental breakdown can be summarized as: Ten years ago, tech was seen as a solution to income inequality, and today it is largely seen as another example of income inequality getting wider, because of the behavior of some of these tech firms.
Because of the digital divide they’ve created? Because of algorithms treating people differently? Because of data-gathering practices?
It’s a combination of everything. But 10 years ago, I think even trillion-dollar companies were perceived as going to elevate a whole generation of people, and make everything cheaper and more efficient and easier. Then 10 years later, the US as a country is less productive. All of this tech was supposed to make us more productive, but it didn’t. So we’re earning, on an inflation-adjusted basis, a lot less. And yet you have people running around with incredible net worths and valuations of companies that are still very, very, very high.
I think, in a world where everyone’s going to win, you could be OK with somebody winning really huge because you’re thinking, “I’m also going to win, it’s going to be OK.” But 10 years later, well, some people won huge and maybe you’re thinking, “I think I lost. That sucks. I think it’s these companies’ faults.” That’s an unpolished version of the answer.
You’re so steeped in economic trends that I think it would make sense that you’d put it in that context, in economic framing. But—
Well, people fundamentally care about their personal economics. More than even they would like to admit to themselves.
I think that’s true. But when you look at something like the strong reaction to Elon Musk taking over Twitter, how much of that is because society has been conditioned at this point to say, “This can’t be good, this billionaire is now taking over a platform.” And how much of that is actually, “We need to admit that social media has come to a place of chaos, and how do we manage that?”
There’s a bunch going on there and I don’t know if I’ve fully thought it through. I think what’s happening at Twitter is Elon is sort of making sense of it. He’s probably saying, “What are we really working on? Do we have enough earning capacity? Do we have enough advertisers or whatever it is we need to make money?” That’s probably his point of view on a daily basis. I haven’t talked to him about it, but—
Do you talk to him?
Yeah.
How regularly?
Regularly-ish? It’s not a secret. I saw him at the PayPal 25th reunion party a couple of—it feels like weeks, but it was two months ago. Our friendship is on a texting basis. We talk about sci-fi and things. We’re both avid science fiction readers.
But yeah, I don’t know if I have a well-formed opinion. I really don’t see Twitter—and this doesn’t mean it’s an accurate statement—as a source of truth or news or too much useful public debate. I think of it as a torrent of interesting thoughts and opinions, but that’s a personal choice.
We’re all living within our own filter bubbles.
Yeah. I quit Facebook long, long ago and have not missed it, not for any other reason than that the signal-to-noise ratio is de minimis. On Twitter, I can choose who I see, so I limited my subscriptions [follows] to a small number. I sometimes see things I like, but mostly I just scan for Affirm mentions.
My primary use of Twitter is people complaining to me about some problem and I try to handle it for them. I love customer service work because you get to find out what people are like. People who talk to me on Twitter or email, they’re full-on normal. They’re in places where people need to decide between a couch and a baby carriage, and that’s a bad choice to have to make. And they get angry when they feel we should have taken better care of them. Talking to them gives you a really good idea of what life is like in most places unlike Silicon Valley.
