CEO of lending startup Affirm, Max Levchin, speaks to Andy Serwer of Yahoo Finance on Affirm's strategy to offer lending opportunities that better align with the needs of typically underpresented consumer demographics, such as young adults and immigrants.

United States


00:00:01CB insights presents a conversation with fintech animator Max live Jan founder and CEO of a firm and member of the PayPal mafia the interviewer is Yahoo finance's handy Sir were for more information about CB insight is it C. B. I. dot B. C. hello thank you thank you
00:00:31maybe some fans are just some consider people appreciate I'm Andy Serwer the interim chief the Yahoo finance and this is Max Levchin who %HESITATION is the founder and chief executive of a firm but that's not all %HESITATION in case you know no Max %HESITATION he really is one
00:00:48of the leading lights of Silicon Valley and arguably of American business writ large he has dug many take that I'm gonna keep television go I'll take it starting to find no maximum he really has done a lot of amazing the cool things and I'm may be known best
00:01:06as %HESITATION a found a member of the PayPal mafia on which was one of the founders of PayPal but %HESITATION even in that group you're one of the original gangsters I think it's safe to say you and Peter when Peter's lawyer ID was zero right exactly %HESITATION in
00:01:20one of my favorite pictures %HESITATION at fortune magazine where I was for a number of years is a picture that we in commission of that group as %HESITATION really the essentially the cast of the sopranos so if you are Google PayPal mafia and hit images you see it
00:01:36was one of my favorite photographs and history of Silicon Valley %HESITATION there's there's Peter there's Reid Hoffman there's Keith were boy and %HESITATION the whole group of them dressed up and it's like right out of an HBO set so %HESITATION it's super shot on location in the toaster
00:01:51cafe in North Beach the traditional Italian neighborhood of San Francisco so it's totally legit budget %HESITATION so also %HESITATION accented slide which was sold to Google he was %HESITATION an important investor in Evernote and yelp %HESITATION he founded a company called glow which is an app %HESITATION for
00:02:12fertility infertility %HESITATION he's been politically active particularly around the issue of immigration Max's an immigrant himself from Ukraine %HESITATION he has the lead chin prize %HESITATION which means we can talk about he's dabbled in movies and Max's even served on the board of Yahoo and god bless you
00:02:32for that Max really and truly bottom of my heart but let's %HESITATION we want to talk about %HESITATION fintech of course today a little bit and %HESITATION firm of course is squarely in the middle of that and I I guess you know for the most part %HESITATION we'd
00:02:49we'd sort of like to just get a grounding in understanding of what a firm is and what what a firm does someone else you just tell us a little bit about the company %HESITATION three eight thirty fifty second serve a build up to what it is and how
00:03:03it came to be so at PayPal we innovate it's on the consumer facing side of payments with a little bit of middleware thrown in V. thing that's always eluded us and I'm stuck in my head was how broken the underlying credit granting infrastructure was if you look at
00:03:21sort of what people really does this as well credit cards or find a siege works let's make it really accessible and let's make sure that what let's make some money out of a basically and %HESITATION underneath it is this whole morass known as the fight the beast underwriting
00:03:37which treats me like a bass and right focused on a writing in the sort of a conundrum between nation in acquiring banks and all the things that we know and don't necessarily love about car Kerr networks two biggest problems with that then really came to a head a
00:03:50few years ago is that people don't really get well represented by attrition underwriting models especially for young or if they're immigrants or if they had a bomb in their life financially speaking and Deborah Kerr for just about every family American alright so after %HESITATION eight you had this
00:04:07influx of young people especially that came up during the post crisis here socially saying don't trust credit cards they didn't bail out to my parents little known fact credit card industry made a lot of money during the %HESITATION eight or nine twenty ten while the aggressive financial industry
00:04:23was really crumbling and I have a reason not to trust them my parents are still in debt and they can calculate what the true cost of their high APR credit card really is I don't want one and so as I sort of kept on stewing on this notion
00:04:39of at PayPal we never really talked at the crate underwriting world now is the time to do it because there's so many people that are disenchanted so pulling in a thread we started trying to build their own credit score that we better representative of younger consumers immigrants like
00:04:55myself %HESITATION people that have had their run ins with the occasionally late payments and things like that in the final whole idea as what if we build a financial institution that he's always aligned with its customers best interest in other words it does not make money when its
00:05:15customers are **** up second sounds like a very simple concept but if you look slightly more carefully and the revenue models of traditional cartomizers regional lenders forty percent of the profits typically come from late fees especially if you're going at a lower income demo %HESITATION where the demo
00:05:32for sure it's hard to clean that you're you know selling good deeds by the pound if you are charging people late fees and making almost half a profit on it all the while telling them please be on time your sensually saying please be on time but not so
00:05:47one time that I don't make half my profits and so we serve unpacked the whole model over the years and said well what if we build one where we didn't make money late fees where we didn't do it Regis things like deferred interest in all sorts of other
00:06:00tricks industry have come up with and let's hear it exactly to what people need and what people really need is not credit or credit cards are lined the great most people go through life thinking about that only after becomes a problem they want to buy things the kind
00:06:14of want to get stuff at the store be a bicycle or couch and we parted with a whole bunch of retailers were up to about fifteen hundred retailers now and going very very quickly where we offer would offer a simple clean be free fairly priced loan specific to
00:06:33the bicycle or couch whatever they're buying and would miss the offer that as an alternative to a credit card transaction in for people like my mom who's had a credit card for a long time never been late and has a fantastic credit record if you said exactly same
00:06:46job for thirty years looks at it and says why would I want to low interest loan or whatever but I have a credit card I paid off within a month if you dial that out to somebody my younger brothers age he is a %HESITATION I don't have a
00:06:58credit card I want a credit card I don't be in debt this is an installment product allows me to pay it off over months so that's where we began in pulling on that thread of let's build an honest financial institution turns out just about every financial product out
00:07:12there needs the makeover or in my opinion the gutting and rebuilding in this very simple image of let's do things that are good for consumers and let's not make money when it's bad for them and that that's the genesis of firm were up to million millions of people
00:07:29in billions and billions of loan so if it's taken off quite wildly but it still sticks to pretty simple rubric of let's do the right thing that's interesting and I was thinking about what you were saying how banks make money off of late fees and they also penalize
00:07:44your institutions penalize you with prepayment fees if you prepay actually penalized for good behavior right many really really missing so you guys just make money you don't have any fees you just make money off the spreads was your cost of capital and then the difference between what you
00:08:00make off of your customers in your cost of capital is your business model okay I would just say the prepayment fees another thing we do not do right you do not have prepayment fees go over we take the interest out if you prepay so if the if you've
00:08:14been told there's going to be twenty dollars on this loan of two hundred dollars and you paid it off a lot sooner than the time line will produce the interest portion of way okay and it's an app of course right in unison applets embedded to all kinds of
00:08:27%HESITATION you'll find it on websites to find it inside apps you find it odd mobile websites on behalf of our traffic six our traffic is on the phone which is kind of representative of how younger consumers shop %HESITATION you can find us at Expedia and you can find
00:08:41us on the %HESITATION small brand of my favorite one is probably %HESITATION many of the different coffee equipment providers that to help finance fancies awesome machines things out on a travel was a big it's a big market for in other words yes that's a place we typically the
00:08:58only route to finance something would be a credit card and if you're taking a trip to Mexico or see relatives importer Rico that you could buy the trip and use installments the referral and it it really helps people in multi dimensional ways for example it allows them to
00:09:14book travel earlier without having to save up and then get a lot of people go through this I'm going to go on vacation interline this is January I'm gonna start putting it aside this my fund me while the price of tickets going on because airlines and vacation writers
00:09:30of various kinds Roger the tickets up as the demand gets hotter and so if you buy your tickets in January you really would prefer to not just dropping down into your credit card in store revolving in paying six extra interest but you also don't wanna wait even if
00:09:43you're good at saving because by the time you're in July ready to buy your tickets they may have had a fifty to a hundred percent price so that's one the other one people really appreciate the transparency that the thing that I didn't anticipate that will resolve look will
00:09:55be honest will be clear and people will team that has a nice feature they would think about is the number one primary component off of the value but turns out people see this our customer see it as a guardrail to be good financial behavior generator which is sort
00:10:14of makes sense now I did not say that inside the man's gives you access to the investors operators corporate leaders and topics that are shaping the future the data we mine enables us to see critical trend merging opportunities and inspire conversation join our community of innovators and discover
00:10:34how to capitalize on change visit CB I got BC flash T. bands today to learn more series E. funding at this point you've got a lot of %HESITATION venture money we've we've been we've been very lucky with our venture backers but probably spent twenty years in Silicon Valley
00:10:52people people tend to trust you with mark yeah we we raised a quite a lot of %HESITATION equity funding to grow we have to we have to have a lot of very smart people doing a lot of reason with more things and you said you have millions of
00:11:05customers what are your other metrics in terms of %HESITATION you know the amount of loans at standing or how else you judging the business growth was the most important metric for me is the net promoter score of our borrowers the net promoter score basically the customer satisfaction score
00:11:23so if you look at the customer satisfaction score of a credit card issuing bank if it's greater than zero they're doing something right normally remote and it's it's certain optically hard to imagine right if you're borrowing money and then you're slapped with insufficient funds for try to pay
00:11:40your bill and he reminded late and then you get hit with a late fee and you got a different credit card which was zero percent today but then you missed a payment of twenty nine ninety nine going back in time from when you got the credit card it's
00:11:50easy to not recommend this product to your friends with the promoter score is people little recommended product minus people that won't that group is typically larger right %HESITATION once you go up the ladder of good financial providers you might break into teens and twenties are just eighty three
00:12:09the only one I know that's higher it's Tesla and that's a religious cult and so %HESITATION I I think it sounds like you may be getting there too I mean if that's at some point they become religious cults of people %HESITATION then we're we're very very rational and
00:12:21so we don't think we're gonna we're gonna quite get there but %HESITATION I I I think he wants the meeting things and I love test love so I I'm not not going to do whatever I do think that %HESITATION getting in the eighties as a financial services provider
00:12:34is unique I I don't know anyone else anywhere near us as far as the scale goes we try not to serve brag too much is we're still very early still still very young %HESITATION we have single digit millions of customers that Sir how we try to %HESITATION it's
00:12:47it's a nice number of single it and know the customers soon maybe to change but %HESITATION that's where we are today but I would rather have more satisfied customers and customers I will aggressively recommend a product to others instead of other financial products than have a gigantic pool
00:13:04that just does not like it very much are Max let me push back against the very existence of your company though %HESITATION I'm ready okay ready for this %HESITATION and you know I guess you could argue that the last thing that this country needs is another source of
00:13:20credit for consumers and that you know there's myriad credit card companies we're always hearing about too much debt in the system sure you know you're not going to penalize people but this is just another way to borrow more money in by you know expensive furniture taken frivolous trips
00:13:39and %HESITATION you can get in trouble this way anyway and by the way I've been rejected by twenty five credit card companies %HESITATION good deal good were firm they'll never figured out %HESITATION and you're just putting tons more leverage in the system it's all gonna come crashing down
00:13:53is going to be your fault no %HESITATION so I'll I'll actually piling from yourself and then I'll answer so %HESITATION so all those things probably %HESITATION probably true but you know what in the world are you doing letting kids play with money and they you know if they
00:14:13have the credit rating they should sleep away and you know get some credit cards first and really build up their credit score in the traditional way by so I actually profoundly disagree with the notion of debt is bad and it I mean your your men of words will
00:14:35appreciate this perhaps credit is always a good thing debts always a bad thing they're the same actual thing V. and deserve the local digression but all of this is if integrity conference I think people hopefully will will appreciate it problem with credit cards and payday lending is actually
00:14:54saying problem you're allowed to refinance your own debt more or less in perpetuity at a rate that's high enough where over time it starts really causing it to hemorrhage cash or what this is the way to solve this problem at both levels the payday lending which is a
00:15:10necessary evil and that credit cards which is a luxury for some and a way to survive for others is to create what we would certainly double eighty non judgmental yet highly prescriptive framework under right by the way one one of the things that actually I forgot to pilot
00:15:29to myself a little bit more the other thing is what you're charging he thinks of people who are just writing the system paying late because the hand there's no penalty maybe not paying at all everybody else that price must be spread across the rest so why why do
00:15:43we do that let's try to be believed he slapped her breasts to the no so I think all of that is the false wrote the right road is to give people tools that allow them to say here's how I deal with my financial problems while not doing things
00:16:01like all gosh well yeah you're probably a bad risk but I'll give you credit anyway we can't do that because we make the money only please we make the money in excess of interest we don't have the for going to any of the tricks that industry's figured out
00:16:13the only we we get paid is if you pay us back on time as a result our incentives are profoundly line if you can't afford to buy the fancy trip we will have to tell the you cannot we can kind of go like well you know I'll squinting
00:16:27until recently feed in it for me I just say no and so as a result we can judge with a trip or something you need want or R. frivolously buying in with the many many many stories where we look at all the transactions anonymously of course but we
00:16:44have to look at them for fraud into prisons buying a suit and you know they they really shouldn't in any contact like %HESITATION it's for an interview job interview I I I I feel like a jerk for questioning the validity of the purchase so putting away the question
00:16:59of how do you judge someone's purchase because you can't write one of our guys in the office William one of the better the firm six years and by slaughter wrote a lot of what wrote wrote man's a climber lost my me that's his application I can a judge
00:17:15has ruled I'm just like you isn't allowed to judge my obsessions coffee equipment so putting that aside if you can't afford the rope or I can afford the equipment cannot under the transaction and you have the analytics of course that help you predict that you plenty years of
00:17:31fighting fraud in underwriting credits at some when you learn a few tricks but yes that that is the cornerstone of our company is we will do our best to offer you a financial advice that is truly sound base and analytics in our understanding of a personal cash loan
00:17:45will ask more questions if we can get it right but if the answer is you shouldn't borrow money we will tell you we can't lend it to I think the more people see the world back wait at someone will have to tip and you can frame it as
00:18:00a while you know who are you to tell me what to do we do have a lot of the a lot of analytics and a lot of people just refused to think about money the best medicine is to say here's what your money looks like done by the
00:18:10stripper get a cheaper one done by this nice bicycle installment but for a lot have your bicycle bicycles are sold by the weight in the opposite direction right that's a bit of a long story but %HESITATION no I think we're the only ones doing it right that assistance
00:18:28is just gonna ask essentially a follow up to that last statement which is what's the barrier to entry what's to prevent even Wells Fargo from doing what you're doing for Wells Fargo was very intimately is not from what I recall in the point of sale credit card assurans
00:18:44business okay but there are several banks whose names I will not order because I think they're in politely speaking amoral business and rationally speaking immoral one with the get people these free loans are free cards zero percent and don't remind them and when they miss a payment they
00:19:02rate goes to thirty percent a PR and it compounds from the time of card issuance not from the purchased or not from the moment right now it's a retroactive interest recapture which is exactly what pushed people into permanent state of debt those guys cannot enter business because their
00:19:20addicted to fee income if you make half for money on season the other half on these nasty deferred interest programs if anything the clock is ticking louder and louder twenty years ago you could do this because the consumer that's up on me and I missed a payment now
00:19:35%HESITATION twice as much I must be the only idiot welcome to the world of Twitter and Facebook anybody who complains I must be the only idiot here is a lot of people saying wait I I got slammed the same damn thing running about thirty percent of the people
00:19:48they offer these cards get hit with this flip up as they call it an industry that's socks and people are beginning to allow the problem with that for their partners that help distribute these cards in their brand on the front of the card your department store card screw
00:20:04you and is zero percent loan but not really it's the department store it's eating the brand damage and so the eighty three and PS a server glamour metric as it might sound actually very important that's the brand that we are helping build for our merchant partners so it's
00:20:17it's essential and that is that the courtship of business the C. B. insights machine intelligence platform synthesizes analyzes and visualize as millions of documents to deliver fact based insight illegal smart companies to predict trends C. competitor strategies explore new markets and reveal opportunities to capitalize on change visit
00:20:39CBI dot BC today to learn more well let me ask you a question Max what's in your wallet do you have any credit cards your credit cards %HESITATION I do %HESITATION like most people on these guys incidentally our customer base imagine a map of the United States the
00:20:57coastal lines push that in about fifty miles everyone else that's our customer base people noticed yeah because if you know I I don't know anything about your financial %HESITATION financial reality and you probably know a thing about mine but %HESITATION both of us I suspect live on coastal
00:21:13cities and we use our credit cards as a way to tally up our bodies and pay them off of the of the month that's what most people who live in extremely well developed highly economically lucrative economic alarm about labor departments to soak in LA very few people involved
00:21:29unless they're in the service to service industry and those people are being pushed out by being a quality by the minute once you have been pushed out near on in the East Bay work for me to be on two on the other side of the country revolve in
00:21:43your vault because it's the best choice would you really want is to pay things over time and so my wallet is actually fairly boring I have a credit card that was issued to me by the %HESITATION it's a company a firm for my corporate purchases and one for
00:21:56my personal ones and the balance of the other every month zero %HESITATION come morning but %HESITATION I think what's fascinating is the credit state of everyone of our customers entered examining that is an astrological finance I guess so most of your customers are in the middle of America
00:22:15M. middle by way of not in New York San Francisco LA Seattle Boston and how does your firm relate to our pertain to or not %HESITATION say payments in China the queue are systems that we chat have I mean could I think that's actually so we do in
00:22:35an interesting way so if you look at we pay and such and financial and other payment systems that are kind of spring up in Asia drilling fracking this whole notion off the party networks bank bank consumer dark system that the hawk invented for a BankAmericard the kind of
00:22:53like this whole thing makes no sense at all what we need is one buyer one seller connective tissue and let's make that easy so you can scan QR codes I can put your code on your phone that that's how it works in a lot of those parts they
00:23:07never had the shackles of the traditional four party system so they're going very very quickly markets the question I would throw that everyone here myself included what happens when they come here yeah that that's a that's a very very well in question and %HESITATION I think there's this
00:23:26sort of %HESITATION no jingoistic slash nationalistic maybe Patrick arctic answer well we want to like Chinese payment systems just wait until they say Hey you know what will make it ten percent cheaper for everybody right and someone may be one of the up and coming players may start
00:23:42waving the National Security flag that that that was my jingoistic %HESITATION right exactly right I'm I I think you said recently Max's the first or a real thin tech companies yet to actually to the for doesn't even exist yet when he be but that I think you have
00:24:02to innovate and the level of the room financial infrastructure as opposed to the outer points of it's the the credit card industry call the self the rails for reason they're not the importance the just get things from point a to point B. their their be light infrastructure so
00:24:20if you ask things like how does credit really change really really change like how do you include another fifty million people in this country that should have access to credit how to include a couple hundred million people worldwide that's innovation that we're in an arc in my humble
00:24:37opinion that's were trying to do there questions when does a bank account really look like you spend any time with people to DO depository banking they'll tell you it's impossible to run a bank account in less than a dollar per month that it's just a you can't really
00:24:53and how does anyone of Chinese companies does it on a substantially substantially smaller number and so button that's already happening at that situation but in the US I think the sort of %HESITATION things that have always been this way have still are still being this way and I
00:25:08think that that's what the opportunities really are what is your take it a firm in terms of protecting your customers data and and privacy and security I mean how do you have any new ways of thinking about that I would say one of we take it extraordinary service
00:25:26like one of those things where the downside cost is absolute wall the upside incremental spend is around off so long as you're willing to do it and continue investing so we continue investing we continue building out the abilities of the team in auditing and pen testing and all
00:25:42the stuff they have to do I think we like to believe that for clever and we're doing a lot of the right things maybe more there are things that other people in a market do but I I don't think you can ever do too much I think the
00:25:56the the real problem in the customer security and privacy is more about especially in the privacy of your data side of the conversation it's all about how many hurdles can you put the consumer through before they say this is to secure for me I'm struck by bicycle in
00:26:12so that's the that that that's the real tension and I think our innovation there's actually been pretty good if you look at to serve how exactly from works about as good as a two factor authentication yeah it feels very smooth with the consumer E. would probably say it's
00:26:27a lot easier than shopping with a credit card especially if you've heard it before and yet innovative after off can I get rid of my credit cards and just live my life on a firm %HESITATION some of our customers have said that that's what they would like to
00:26:39do or maybe already getting close to doing we cover pretty much every spectrum of the purchase there are many things the car cars are incredibly useful for that we don't do today there's a piece of plastic with a firm on it in as futuristic as it might sound
00:26:58actually the that's not necessarily the right answer because the plastic interface in this country especially is the lingua franca when you walk up to it unless you're one of these places that haven't given up to to sort of cool let's be like the Chinese companies and flash me
00:27:15a cure code or in a little bit of a story there with things like apple pay and you will pay so you know the NFC but so awkward the the real sort of interface that works is Japan or swipe and go and our to finally dropping signature requirements
00:27:31which is god bless me over twenty years too late but you can finally just wiping out which is which is I think the right interface so you can quite do everything yet but I think the opportunity to everything is there well that's a come one one step at
00:27:48a time I got a lot of a lot of features to launch in our current business are maybe we'll let you get back to it %HESITATION we are out of time a lot more to talk about %HESITATION but we'll have to wait for another day to do that
00:27:58please join me in thanking backslash

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