Max Levchin doesn’t think you should be buying a pumpkin spice latte on a credit card and paying it off over the next decade. That could be an elevator pitch for his company, Affirm Holdings Inc., one of the key participants in the world of buy-now, pay- later finance.
The industry promises an alternative to high-interest credit cards, which its leaders generally revile for their tendency to get some customers in debt for, well, forever. In the classic buy-now, pay-later arrangement, a customer instead purchases, say, a $500 TV in four $125 installments. It’s a zero-interest loan, unless they pay late, and then many companies charge penalties. Buy-now, pay-later companies make money by charging fees to merchants, which can be 6% of the purchase price.
Although this approach has been hailed as a revolution in household finance, the Consumer Financial Protection Bureau (CFPB) in 2021 opened an inquiry into the industry and later said it needed more regulation amid complaints that buy-now, pay-later is simply another way to get overextended shopping addicts into more trouble. In a September report, the Federal Reserve Bank of New York found that its customers were more likely to be “financially fragile.”
Levchin, chief executive officer of San Francisco-based Affirm, differentiates his company from others, saying he doesn’t charge late fees. (Affirm instead kicks delinquent customers off the platform.) The company also offers a card that charges interest for those who want to take longer to pay. But rather than an open-ended “revolving” credit card loan, it has a fixed term, with payments set in advance.
It’s a challenging time for the buy-now, pay-later industry, because rising interest rates crimp consumer spending and also raise the cost of the short-term financing that companies need from lenders. In February 2023, Affirm said it was cutting 19% of its staff. Even with the company’s stock price almost quadrupling this year after a jump in revenue, shares have lost three-quarters of their value since their 2021 high.
Levchin, a Ukrainian immigrant who came to the US as a teenager, says his own bad experience with credit cards helped inspire him to look for an alternative. One of the founders of PayPal Holdings Inc. along with Peter Thiel and Elon Musk, Levchin co-founded Affirm in 2012. He spoke with Bloomberg Markets on Oct. 19 about why he sees Affirm succeeding in a high-rate world, how his company evaluates consumers’ creditworthiness and why he’s thrilled Affirm is considered a rival by JPMorgan Chase & Co. CEO Jamie Dimon. This interview has been edited for clarity and length.
SONALI BASAK: What caused the buy-now, pay-later revolution?
MAX LEVCHIN: America runs on credit, and that’s not a bad thing. You can borrow today to go to school and get a better education and have a marketable degree. We buy homes on credit so that we have a nice place to live and build a family and create more opportunities for the American economy to grow from the labor of our children. Credit on the consumer side devolved into what should be known as “buy now and pay forever,” which is lines of credit on a piece of plastic known as credit cards. These are not great products. They’re good for people who are independently wealthy and don’t exactly care how they structure their repayments schedules.
Around 2008, an entire generation of what were then kids—who are now millennials—saw what happened to their parents, who were knee-deep in debt and didn’t know exactly how to get out of it, and realized that there’s got to be a better way.
SB: How do you speak to the financial habits of this country and what might need to change?
ML: We’re doing our part when we speak to the entire American populace—and, by the way, we’re now live in Canada and certainly aren’t planning to stop in just the two North American giants. We have plans for a worldwide version of this company. Our job is to help people make their money go further. And that does mean sometimes telling them, “Hey, this is not a great idea for you to buy this thing. You should think of maybe saving a little bit, making a down payment, etc.”
But we do see our job as much a tool for purchasing as a guide or a co-pilot, if you will, in your financial decisions. Our job is to help you make sound financial decisions every time you’re deciding to buy or not buy, to finance or not finance. It’s a big job, but somebody has to do it, and we think we’re up for it.
SB: About a year ago, when Jamie Dimon was asked about his biggest competitors, he name-checked Affirm.
ML: I find it very flattering that someone at the very top of the most powerful bank in America sees us as an important competitor. I don’t think it’s a statement about us. It’s a statement about the idea that revolving on a cup of coffee is a model that’s probably going to go away over the next few years. So I think that’s good news writ large.
The collapse of Silicon Valley Bank and the turmoil around regional banks showed us that interest-rate risk is just as big of a deal as is credit risk for banks. You can be buying 30-year mortgages and locking yourself into a very low-yielding asset while borrowing from consumers very short term. And that’s what obviously toppled SVB and created troubles elsewhere.