Regional banks watch this with horror and then ask themselves, “All right, so who manufactures loans that yield well, are fairly short term, are liquid and are really well managed in terms of credit?” And there’s not a long list. Affirm is one such company.
SB: When you’re taking credit decisions into account, what type of data are you collecting about consumers that are maybe broader than a traditional credit card company or bank?
ML: When you’re buying something with Affirm, because we’re making a decision about that specific transaction, we can and do leverage information about the transaction itself. We know that slightly different things create slightly different repayment outcomes with consumers. The FICO score speaks to just the person and their overall financial health and their past ability and willingness to repay their bills. It’s very broad and kind of a good foundation. But to approve or decline someone for a specific purchase means you have to understand what the purchase is. And we do that, and I think that’s ultimately the future of underwriting. You need to know more about the circumstances of the purchase in addition to just the person and their financial statement.
SB: Are there things about the person themselves, the borrower, that you have to take into account?
ML: If I understand your personal cash flow, it doesn’t really matter what the credit history says. I can look back at your checking account and say, “Hey, you’re always paying your rent and your bills on time. You’re never overdrawing. You’re really good at handling your medical bills.” That’s a financial picture that is very, very difficult to capture in your credit bureau profile. So there are hidden facets of consumers that we know how to look at, and many traditional scores do not.
SB: The CFPB has raised a lot of concerns about the buy-now, pay-later model. What kind of future regulation do you see?
ML: Regulation, when done right, is a good thing. It creates equilibrium settings in the market, allows for fair competition and protects consumers. So all of that I am generally in favor of. The buy-now, pay-later industry should not be unchecked in its fee schedule setting. We don’t charge any fees at all. So obviously it doesn’t apply to us, but there’s plenty of late-fee harvesting, as they call it, taking place in buy-now, pay-later, and a little bit of a spotlight from the regulators wouldn’t hurt.
SB: Max, you’re leading this hard charge, it seems, to kill the credit card. Where does this come from in you?
ML: I’m definitely not trying to kill the credit card. There are folks for whom credit cards are probably perfect. A lot of them live on the coasts, make six or more figures in salary and really enjoy their airline miles and perks and benefits, etc. And who am I to tell them how to live their life? They obviously are well-to-do enough where they have a lot of free choice. And for them, perks and benefits of credit cards are probably always going to be better than the simplicity and transparency of the Affirm model.
SB: You’re now offering a kind of card, too. How does an Affirm card differ from a credit card?
ML: The credit card is, you swipe it, you revolve, you buy now and you pay for an indeterminate amount of time, possibly forever. Lots of people die with massive credit card debt to their name, and then their descendants have to deal with it. Affirm Card is a fixed-term loan for every transaction. There is no revolving, there is no bucket of debt to fill up and then figure out later. It’s a much simpler, higher control product. We think it’s the best alternative to credit cards.
SB: Merchants subsidize buy-now, pay-later by paying Affirm a fee. Will that be a challenge when they’re facing so many additional costs themselves?
ML: Merchants are customers just as consumers are, and it’s very important for us to create meaningful and lasting value for both sides of the ecosystem. Some merchants subsidize 0% APR loans for consumers, and some don’t have the margin. We also support transactions where consumers pay some interest. There are circumstances where consumers pay us, and merchants pay us really not much more than what they pay for credit card processing. So it’s very affordable for them, and it creates a tremendous boost in their sales.
In some cases, merchants have the margin, and they know that the best price is free. A consumer comes in and says, “Well, I want to pay for this thing over time.” The merchant can say, “Hey, know what? It’s no interest at all, same price.” That’s very compelling, and very few consumers will say no to that.
We sometimes take it one step further where if it’s a reseller and there’s a manufacturer involved, the manufacturer might be willing to pay your interest for you.
SB: What do higher interest rates mean for your customers?
ML: Every bank at this point that issues credit raised their consumer rates. We have had to adjust our consumer rates to some extent as well. The thing that I would like to believe it means for our customers is they will use Affirm a lot more than they use their traditional credit cards. We are a viable replacement for credit cards, and that’s because we give you a sense of control by always disclosing exactly what the cost will be upfront. We don’t charge late fees; we don’t allow it to revolve. We don’t have these ridiculous different interest schemes embedded in our products at all.
SB: Are you saying that higher interest rates mean more people will be using buy-now, pay-later? Why?
ML: Buy-now, pay-later means a lot of things to a lot of different people, so I’ll just speak to Affirm. I do think that higher for longer means people will need and crave certainty and clarity around cost of credit. When you’re borrowing money, and it costs you more money than it did during the zero interest-rate environment, you want to know exactly when you’ll be out of debt. You want to manage your cash flow much more precisely, because every dollar counts and inflation definitely doesn’t help. So credit cards, which are these power tools with the safety off, where you put it on your plastic and then you’re not really sure how you’re getting out of debt, are not great in this kind of environment. I think they’re never great, but in a higher-for-longer environment, they’re definitely not so good for you.
This article was provided by Bloomberg News.