“Finance is pretty broken.”
So started Affirm’s Co-Founder and CEO Max Levchin’s remarks at his firm’s first-ever AFFIRMation conference for its retail partners in San Francisco yesterday. Levchin, by his own description, has spent his career in financial services and founding companies — “some of which succeeded, some didn’t.” His best-known effort — and a very clear entry into the “win” column — is, of course, as part of the founding team at PayPal.
But at Affirm, Levchin’s goal seems more ambitious than even the notion of creating an entirely new online payment network nearly two decades ago: He’s on a mission to fix a system that he believes doesn’t really serve anyone’s long-term interest nearly as well as it could or should. When it comes to the extension of credit, Levchin says that customers often lose out, retailers end up with angry customers who frequently feel ripped off and FI’s alienate their customer base.
“Six years ago we thought there has to be a better way. And that is where Affirm came from,” Levchin told the assembled, noting that a fairer, more accessible, simpler and genuinely helpful financial system built around tools that intend to help customers isn’t just a morally good thing — it’s also the smart evolutionary path for commerce.
Broken by the Numbers
“Sixty percent of Americans fear credit cards,” Levchin noted. “For people who live on the coasts, a credit card is an API access to money. I swipe it or dip the chip and pay it off at the end of the month, enjoy my rewards and that’s it.”
No drama, no fuss, but also not the experience that he says the majority of consumers living in the U.S. have — who, he says, are “actually terrified of swiping their card.”
And the numbers, he noted, unfurl pretty convincingly from there. If one looks at the NPS scores — the ranking of how likely consumers are to recommend a product or services on a scale of -100 to 100 — popular consumer brands like Starbucks and Amazon have rankings in the 70s and 80s. Financial brands, on the other hand, have scores calculated in negative numbers.
“[Most consumers] think getting involved with using a card will cost them a lot more than they bargain for. A third fear they will overspend. And they are right; that’s what happens, and the industry does very little to help them create necessary guardrails.”
In fact, Levchin noted, the industry doesn’t want to create guardrails, because a lot of players have literally built products that bet against the consumer.
A lot of “0 percent offers” that “throw in a discount for good measure,” Levchin explained, are premised on the idea that about 25 percent of consumers are going to mess up and forget to make a payment on time or even miss one completely. When they do, they pay a big price. Deferred interest — the “dirty little secret” of consumer credit that bears a retailer’s logo and accompanies those too good to be true offers — means that even one day late on a payment 59 months into a 60-month loan, means interest gets calculated back to day one. Those consumers pay dearly and foot the bill, so to speak, for all of those who take the offer and manage to pay on time over the term of the loan.
“[This practice] ends up costing someone in that situation $5,000 when they thought that they were getting a deal at 0 percent for 5 years on a $3,000 washer and dryer,” Levchin explained. “The plan is designed to trip up 25 percent of consumers.”
Bad Long-Term Thinking
Apart from being “morally wrong” — the practice is not illegal, although it’s been challenged many times — Levchin noted that “ripping off” consumers in this way just puts a bad taste in their mouth, which is bad for business. The retailer who fronted the “0 percent credit” offer to the customer looking to buy an expensive washer and dryer is forever associated with the high fees that customers went on to pay if things didn’t work out. The customer’s credit score is potentially damaged — now in over the heads more so than they expected — and they’re less likely to use credit products in the future and shop at or recommend that retailer to their friends.
“People care less about price of credit,” Levchin said, “and more about the certainty of what they are going to pay when they use it.”
Levchin also noted that Affirm’s team of data scientists have developed a very efficient risk management engine that lends to people who can actually pay, including those who are good risks but who have been locked out of the credit markets by relying on outdated scoring models. And in cases where things don’t work out, rather than turning accounts over to collection, they work with the customer to get things back on track — directly — no collection agencies, no late fees, no deferred interest.
“We actually get on the phone and talk to people,” Levchin said.
Levchin hopes that Affirm and its “honest finance” promise helps retailers offer their customers, particularly millennials — half of whom don’t carry a credit card — a retail experience that brings customers in and then keeps them coming back. He said that it’s something he’s proud to say is working: Last quarter, on the occasion of its one millionth consumer installment loan, Affirm reported a 75 percent increase in purchase value on purchases made using Affirm, a 20 percent lift in POS conversion and a repeat rate of 25 percent of borrowers returning.
And Affirm’s net promotor score: It’s 82, slightly trailing Starbuck’s 85, but not by much.
“Starbucks sells a legal drug. I may not ever be able to compete with that,” Levchin joked.
Levchin also used its first-ever partner conference as the occasion to announce its Honest Finance campaign. Affirm is looking to retailers across the country to join in pledging to abandon “predatory consumer credit practices” and has also challenged the nation’s financial institutions to do the same.
Because, Levchin said, treating consumers like human beings is the right thing to do.