As we learned last week, purchase financing for Walmart customers is changing. In fact, the change has already begun and will continue to roll out over the next several weeks. Going forward on both Walmart's website and at nearly all of Walmart’s physical locations nationwide, customers will be given the option to finance their purchases of over $150 (and capped at $2,000) via Walmart’s newest partner — point-of-sale (POS) lending company Affirm.
Affirm Founder and CEO Max Levchin told Karen Webster in a conversation shortly after the news was announced that it is undeniably a big stage upon which to step. With a 140 million weekly shoppers, a physical location within 15 minutes of 95 percent of the U.S. population and a toehold with nearly every imaginable demographic segment, Walmart is — more or less — the definition of scale in U.S. retail.
“It is an enormous opportunity, simply because of [its] reach. It is not lost on [users] that this is a great platform to do good, and not necessarily just through lending,” he said.
Today, he noted, working with Walmart offers Affirm access to an incredibly broad and diverse pool of consumers who want a different type of credit product — a product he believes can make life better for customers, and provide a better financial partnership for Walmart, by offering credit and financial management tools that are “self-supporting and intuitive.”
Opening The Door To More Purchases
Everyone, more or less, shops at Walmart. There is really no way to get to 140 million weekly shoppers, or to be the top grocery seller in the country, without touching a staggering percentage of the adult shopping population in the U.S. People may have certain demographic assumptions about those who shop at Walmart, but, at the end of the day, the numbers don’t lie — and the numbers are pretty much everyone.
That is a characteristic both Walmart and Affirm share, Levchin told Webster — though, admittedly, at a much different scale. The assumption, even when Levchin founded Affirm, was that it would be a credit product of interest to mostly subprime or near-prime customers on the road to recovery from a bad credit encounter.
What he said Affirm found was that it, like Walmart, could service everyone.
Affirm, Levchin said, has millennial “future super-primes” who aren’t interested in mainstream credit offerings, but the company also has consumers who are recovering from a financial shock, and tend to be excluded by most traditional underwriting models. Affirm sees customers who are both sound credit risks and mainstream credit users, who prefer to not eat up too much of their credit lines with big-ticket purchases if there is a fair, alternative credit product available to them. There are customers it chooses to not finance, he noted, and Affirm won’t extend credit if it deems that a customer can’t afford it. Yet, when it comes to the demographic face of its borrowers, it could be almost anyone.
“Every time we think we have identified all our consumer groups, we do a survey and discover a new one,” Levchin said.
One such group, he explained, was discovered in its pilot with Walmart. Levchin recounted the story of a Walmart customer who was having a Super Bowl Party and needed a new flat screen TV six hours before kickoff. Under other circumstances, he might have been a good candidate for a co-branded loyalty card, but there is a such a thing as the wrong time to ask someone to go through that process — when their top priority is to close the distance between having a television in the shopping cart and buying snacks in the grocery aisle with enough time left to set things up before kickoff.
“In that case, the buyer wants to finance the purchase, but not waste time doing it. The ability to instantly finance the TV and get them on their way, [as it] turns out, is very popular and very powerful,” he explained.
Ultimately results in a sale, which is what Walmart wants. In the bigger picture, Webster noted, that is something Walmart also really needs, given its ongoing struggle with Amazon for its share of the consumer’s whole paycheck. Walmart holds a commanding control of food via grocery. However, Amazon has made huge inroads in the big-ticket segments of great appeal to Walmart: home furnishings, sporting goods, apparel, toys and electronics — all things that are well within the scope of the Affirm program.
Once the consumer is in the store or on the Walmart website, Affirm can be used to purchase just about anything, except for grocery items, tobacco, alcohol, ammunition, firearms, pharmacy, personal care and money services. Giving the consumer, who is either unwilling or unable to use a credit card, a POS credit option, Levchin said, is “certainly part of what appealed to Walmart about the Affirm partnership,” because it becomes that much more likely for the customer to make a purchase — a purchase they can afford to buy and repay.
The Power Of The Default Option
Apart from merely expanding the number of people who can use Affirm as a credit alternative, the Walmart partnership gives Affirm the opportunity to help consumers better manage their relationships with credit.
That’s not in the same way that billions of dollars and lots of buzz have tried and failed to do in the past, with “financial therapy” sessions delivered via a series of videos about how to build a better budget and save — all things that consumers know they need to do but rarely stick with. Instead, it's done in a way that uses technology to create a much more powerful motivator, based on a piece of advice that Levchin remembers getting from PayPal Co-founder Peter Thiel, back in the early days of PayPal.
“Peter told me the most powerful thing to [change human behavior] is the default. You want to modify someone’s behavior, change the default behavior, and you will be shocked how many people will adopt it. It can be bad behavior, it can be good behavior,” he said.
Today, he noted, many consumers default to the bad behavior of paying the minimum balance on their credit cards because that is the default option. The questions (and challenges) for Affirm going forward — the questions Levchin said he thinks about for a financial management tool — are about how to use the service to flip the switch on those default settings, so consumers are able to better manage their financial lives using default options that align behavior with building sound financial management habits.
“Just changing those default settings is really the most powerful tool we have as builders of systems and services,” Levchin said, adding that the real opportunity is to build tools that are powerful enough to be “self-helping.”
Correctly Assessing Risk
Preparing to go live with a retailer the size and scale of Walmart required a bit of fine-tuning, Levchin said, specifically around Affirm's fraud prevention models. What didn’t change — nor was the company asked to change — was the model Affirm uses to determine creditworthiness. Affirm’s “secret sauce” as a lender, he noted, is that it uses its own credit-ranking criteria to assess credit worthiness, which means it can, at times, find ways to quickly and safely extend a credit offering to subprime or near-prime consumers.
However, he explained, soundly managing risk remains key in those calculations. Affirm rejects customers it sees as too much of a risk, who will more likely than not hurt their financial lives with another loan, as opposed to improving them. That, he noted, isn’t every lender. Some see a subprime case with a bad record around credit as an excellent way to make money through fees, late charges and “all of the really bad stuff we see when consumers are being taken advantage of,” he said.
Affirm was founded to avoid models that make money off a customer’s failure, which means its challenge is to find customers who will succeed if given the right loans. For bright-line cases (the clearly worthy or the clearly not), there is nothing controversial in that approach. However, it is the middle cases (the small, sub-segment of bubble cases) with which the controversy lies — the consumers who could be safely underwritten today and would likely pay things back, but who could become a much bigger risk should the economy turn down, or should a job be lost. Those consumers are the risk challenges, he noted, which Affirm’s model is tuned to assess and take some, but not all, of the time.
It's a model that Levchin is confident will stand the test of time. The reality is that good economies don’t last forever, and not all the new digital lenders in the market now will survive when the economy takes a turn.
“We fully expect to be tested; that is a predictable thing that is going to happen,” Levchin said. “There will also be plenty of players that will be found to wear no pants when the tide goes down. We welcome the challenge, but the challenges aren’t unfounded. There are plenty of platforms [that] you can see the problem from afar, and wonder what are they thinking.”
Something Levchin affirms he and his team have built and refined its lending platform to withstand.