The conversation about credit in the U.S. has become one of extremes.
There is a growing chorus of voices that eschew credit as a “dangerous trap” that lures consumers into spending more than they can afford, in part, they say, because credit products are designed to make repayment expensive and therefore difficult. Avoiding that trap, they advocate, means consumers should avoid credit entirely — limiting purchases to only what they can afford to pay in full with funds on hand.
This “neither a borrower or a lender be” point of view is great advice if a consumer can swing it, Affirm Founder and CEO Max Levchin told Karen Webster in a recent interview with PYMNTS.
Of course, the reality is that most people can’t.
“Cash [as a way to pay for things] is just fine as long as one has enough of it,” Levchin told Webster, “But for most consumers, credit is a way to smooth out a lot of pedestrian expenses that can spring up and create cash flow issues for them.”
That’s what credit products can do at their best.
Yet, it’s true, Levchin said, that a consumer who uses revolving loans indiscriminately and only pays minimums will never get out of debt. And that some of the backlash against credit as a category stems from what he called the “inaccurate notion” that the only way to do credit profitably is to get a customer into trouble.
It’s why Levchin says it’s time to change the conversation about credit in this country. Instead of one about whether credit is bad or good and whether consumers should or shouldn’t use it, the conversation should shift to one about choice — the choice between using credit products that help consumers take control of their financial lives versus using those that can cause consumers to feel out of control.
Making The Credit Conversation About Choice
Levchin said that core principal, giving consumers choice and control, was at the heart of the Affirm value proposition when it first launched in 2012. Presenting consumers with an option to purchase a product paid for in monthly installments with terms that were transparently presented to them at the point of purchase was “not a thing five or six years ago,” he said.
Six years, a few million customers, a few billion dollars in loan volume and a new logo later, Levchin said that Affirm is closing the books on 2018 “clearly validating” that this type of credit is actually desired.
“Many, many, many Americans are deciding this is a better alternative for them than [using] a credit card,” he said, because they say they feel more in control when they use it — and in a way they didn’t necessarily feel when using a credit card to make similar purchases.
The transparency of terms, amounts and fees is what Levchin said Affirm users say they value most. At the end of the installment period, a consumer knows they have paid for that product — something that isn’t always that obvious to them when making payments toward an outstanding credit card balance.
Knowing how much, and over what period of time their purchase will be repaid in full also gives consumers a very clear picture of the cash flow implications of making that purchase. The consumer’s ability to repay is a key input to how Affirm makes those product-by-product underwriting decisions.
As such, sometimes, Levchin said, Affirm may tell consumers what they may not want to hear. When a purchase is more than a consumer can afford to repay, Affirm will instead show that consumer the spending limit that can be approved, putting the final decision to buy in the consumer’s hands, Levchin said. Sometimes that may mean that consumer walks away from that purchase or instead buys something at a different price point — but it always means giving consumers a more realistic framework for knowing how much they can afford to spend.
It’s that relationship of trust between Affirm and the consumer that Levchin said motivated the team to launch Shop With Affirm this fall — a retail discovery tool to help Affirm customers find retailers that accept Affirm, as well as those that have created unique offers for Affirm customers.
Levchin told Webster that Affirm wasn’t quite ready to release Shop With Affirm metrics just yet — but that early results have been “staggering” so far. Consumers like the shopping experience with Affirm, he said, and they trust Affirm as a “Good Housekeeping Seal of Approval” for retailers that offer it as a credit option, too.
Widening The Scope
Although Levchin emphasized that Shop With Affirm is in its early days, the dynamic between Affirm and the consumers who use it has also inspired the team to expand the scope of products and purchases eligible for using it into more of the everyday purchases consumers make. Levchin said that the firm now receives a growing number of consumer requests to “be more of a participant in their financial lives,” by expanding the range of retailers where they can pay with Affirm.
Levchin said that move will require a slightly different paradigm and user experience from that which Affirm users have today, where most of the purchases are bigger ticket, one-off goods. It’s a paradigm that treats every product purchase as a separate loan, and an individual credit decision.
“We’ve trained our users to consider every transaction as to whether it is something they are comfortable with — and we don’t want to lose that part of our offering,” Levchin explained. “But we want to give our users the same transparent credit option they can confidently use when making more of an everyday purchase instead of just being the credit product that they use when buying a mattress every seven years.”
As we turn the page on 2019, Levchin said he hopes it will bring a more balanced view of the role of credit in our world. Credit products, Levchin noted, can and certainly do go wrong, but they aren’t the root of all evil. When used responsibly, they can expand customers’ economic horizons and greatly improve their quality of life .
The trick, he said, is designing the experience to be transparent, comprehensible and honest — one that trusts the consumer to be their own best advocate once they have all the information and tools they need to make those credit decisions.
“There are lots of ways to abuse any financial product,” Levchin said. “We see it as our responsibility to deliver products that don’t just say ‘hey here’s a tool, do what you will with it,’ but one that actually come with batteries included and an instruction manual that explains the best way to use it.”