Max Levchin On The Future-Present Of Everywhere POS Lending

When Affirm launched in February 2013, the point-of-sale (POS) financing marketplace in the U.S. was largely an empty greenfield wherein PayPal Co-Founder Max Levchin set up virtual stall.

The motivating idea, Levchin told PYMNTS, was pretty simple: offer an honest, transparent and data driven POS financing product that was accessible for any consumer for whom it is also affordable when paid off in monthly installments. That meant no add-on fees, deferred interest or the other hidden costs of consumer credit that tend to sour consumers on the products — not to mention retailers that offer them.

Since Affirm’s launch, the landscape in the POS space is radically different than it was when Affirm entered. It is, first and foremost, a much bigger and more populated space than it once was. Other startups have come to the field — Afterpay, Uplift and Sezzle for example — but also bigger and more established names in financial services. In the last 12 months alone Square, Mastercard, PayPal and Chase have all rolled out POS installment lending products or enhancements as the market continues to pick up popularity among consumers, particularly younger ones.

Affirm is the same firm it started out as almost seven years ago, noted Levchin, Affirm’s CEO and co-founder, in a recent conversation with Karen Webster.

“We try first and foremost be on the consumer’s side and give them a clear idea of what they can spend,” Levchin said. “What is a safe amount of money for you to spend and borrow.”

But in many ways, Affirm is different. When it came out of beta in 2013, Affirm had one partner, 1800Flowers. Today it is fully integrated with over 3,000 merchants — meaning when customers are finishing off their digital commerce journeys on those sites, they see an option to pay with Affirm, among the other standard buttons on the checkout page.

And it is not a concept Affirm has to sell or even explain to its 3 million or so active users at this point — the Affirm customer gets the product, likes the value proposition and, according to Levchin, mostly has had just a single question in recent memory: “How can I use this in more places?”

As of today (Oct. 8), Levchin told Webster, Affirm can give an entirely new answer to that question because it has launched a new app which will allow Affirm customers to use the service to pay almost anywhere online or (with an assist from Apple Pay and Google Pay) in the real world.

“The idea here is pretty simple: Let’s make it simple for any customer or any merchant to get the benefits of Affirm whether or not a full integration with Affirm has happened or not,” Levchin said.

How it Works

The new app, and the pay anywhere with Affirm feature it now includes, Levchin noted, goes to meeting the most common request the company gets from its customer base — to use the service more often.

“People kept asking us for lists at merchants where Affirm works, or suggesting merchants they would like us to add,” Levchin said. “And what we realized over time is that with a little bit of cleverness, the answer really can be anywhere.”

The basic unit of enabling technology that makes this possible is a virtual card that Affirm can issue for a customer to spend at a non-Affirm integrated merchant against the credit line they’ve been pre-approved for.

To tap into the capability, a customer shopping on a non-Affirm integrated site — upon finding something they would like to purchase using an Affirm installment plan — can now go to the Affirm app and apply to pre-qualify for a line of credit.

Once that is done, usually in fewer than two minutes, the customer can then opt to create a one-time-use virtual card for the amount they want to spend on the non-integrated merchant site, finish the transaction and begin paying off the purchase installment.

Those cards can also be stored in Apple Pay and Google Pay wallets — meaning customers can also use Affirm financing as an option at any store that accepts those two payment options.

“And to make the process easier for customers, so they don’t feel like they have to keep flipping back and forth between apps, we’ve also built in an in-app browser so that the customer can begin the shopping trip from within so we can start building the virtual card in the background and the customer can quickly finish the trip with a single click on the checkout page at the end,” Levchin said.

What Affirm has seen in its own expansion, and in the massive explosion in the market for POS financing products growing up around them, Levchin said, is that there is enormous consumer hunger, particularly among younger consumers, for transparency and control on their credit products. The evolution of the app being announced today, he noted, is just the next natural step in a lending ecosystem that is evolving every day — in ways both encouraging and not.

The Future of POS Lending

The fact that the market is growing, and that Affirm is picking up competitors almost by the day lately, is not in itself a worrying fact for Levchin, so much as a sign of how much potential there is in the market. But, he noted, there are some expansions and entrants that he does view as areas for concern — particularly firms offering installment payments on really low average order values (AOVs) or on staple items like groceries.

“I think when you really unpack the economics of those super-low AOV transactions, you are going to find that the firm is making all their money on late fees, and that is really the business model,” he said.

That is a business model that Affirm specifically founded to reject, Levchin noted, as it is likely to do more harm than good to merchants or customers. But, he said, the field in which POS lending is useful is also wider today than it was when Affirm launched and was largely focused on big-ticket, fairly rare purchases, like furniture or appliances. There are plenty of medium-sized consumer purchases out there — things in the $80 to $250 range — that actually could be candidates for financing, and actually good candidates because they are consistent with the kinds of products consumers are already buying on subscriptions.

“I like to think in terms of subscriptions because that framing makes sense to a lot of young people who have more subscriptions than any generation before them,” Levchin said. “They can look at purchase as ‘I am subscribing to this expensive blazer for six months, and then at the end of the term I will own it.’ I think different merchants have different AOVs, and the number is going to vary. But I think that subscribing to an expensive blazer can make sense in a way that subscribing to a cup of coffee is going to be kind of silly.”

And, Levchin noted as his conversation with Webster drew to a close, Affirm customers generally aren’t frivolous or silly consumers. The appeal of the service for them primarily is that they want to budget, they want to be ahead of their finances, and they want to see how every purchase fits into their overall spending plan in a month. The more places they can do that, the happier then tend to be, which is why Affirm is announcing this big update and upgrade to their lending platform.

“The first question for us is: Are we helping customers and merchants or are we hurting?” Levchin said. “We think with the huge amount of acceleration in the space and people seeing how attractive this model is, we are going to be helping by expanding the places and categories of shopping where this tool can be used.”