When I meet serial entrepreneur and PayPal co-founder Max Levchin in New York, he's just coming off rounds of meetings with unspecified people on Wall Street who he says will be useful to his latest financial services venture, Affirm.
He's seated in the restaurant of a fancy boutique hotel in SoHo, wearing a leprechaun green T-shirt that says "Affirm," I suppose in case I don't get what our get-together is about. He's also being half-heartedly attended to by a surly and bored young hostess who, it's apparent, would rather be doing something else.
"You wouldn't expect service in New York to be so bad," Levchin observes mildly, when she disappears.
The young woman, in her mid to late twenties, is also Levchin's target market: the Millennial generation. Everybody loves to hate them for their purported self-importance and sense of entitlement, but now that the Baby Boomers are quickly moving into senescence, and taking their cultural relevance with them, the consumer mantle will be shifting to this next "bulge bracket" of consumers.
"They witnessed the financial collapse in 2008 with a front row seat, but they were still dependents, and they saw how their parents mortgages seized up, or they had to refinance in a horrible way, or they had to move out of their family house or apartment," Levchin says.
Perhaps that explains the hostess' sour mood. Or not. Either way, millennials will be responsible for one third of all retail purchases by 2020, Levchin says. That's a pretty staggering number when you think about it. But for right now, millennials have much more immediate concerns, such as how they can afford $2,000 to purchase a mattress and other apartment furniture, when they finally move out of their parents' homes.
That's where Levchin and Affirm come in. Affirm hopes to be an alternative financial institution that will regularly extend credit to this age group and others to ease their cash flow issues without getting them into debt. Eventually it will be available at bricks-and-mortar locations during the check out process, but for now it's online-only, including for mobile purchases. Levchin says he hopes to trade on millennials' mistrust of big financial institutions, as well as their tendency to use debit over credit, as sixty percent of them do.
How It Works
All people need to sign up for the service is a telephone number, their date of birth, and the last four digits of their social security number. Affirm doesn't rely on the traditional FICO score, as banks do. Instead it looks at nontraditional data such as shopping history and other consumer data publically available, which Levchin also did not specify. (History of rent and car payments, which some other non-traditional consumer finance operations use for scoring, could potentially be two options, although Levchin did not confirm either.)
Credit decisions are then made on the fly, within seconds, for the purchase. And rather than revolving a balance on a credit card, payments are structured either as a single payment a few weeks later, or as an installment loan, with an interest rate clearly stated, as well as the ultimate cost of the loan. The loan must be paid off in about three to four months, Levchin says.
In practice, consumers also need a bank account or some other means of paying Affirm back. Affirm lets them do that by going directly to the Affirm website, or by scheduling a payment online, or through a debit card transfer, or even through a paper check.
Merchants will get paid for their goods and services immediately. And they'll benefit from a lower transaction fee than they pay to their merchant banks for credit cards, Levchin says.
At the Helm
As I sit there, sipping stupidly at the froth on my iced cappuccino, I should probably be more intimidated by Levchin than I am, but he has a disconcertingly charming math-genius habit of ducking his head when he's speaking to you, and addressing you through the interstices of his interlocked fingers.
And I figure if anyone could invent a new way for people to pay for things in this increasingly tech connected and mobile world, it would be Levchin, the former chief technology officer of PayPal, which first allowed people to pay for things online in the 1990s, before it was easy for merchants to accept credit cards.
In addition to co-founding PayPal, Levchin has had a string of business successes. There's the media-sharing service Slide, purchased by Google for $182 million in 2010, online review site Yelp, and his latest, the fertility app Glow, which recently received $6 million in financing from Andreessen Horowitz, among others.
As proof that the investment world is keen on Affirm, it quietly closed a $45 million round from Khosla Ventures and Lightspeed Venture Partners in June. (Before that, Levchin financed the business and its lending himself, he says.)
So far, Levchin has only tested Affirm with a handful of merchants, such as 1800Flowers.com and Beautylish.com, an online retail site for beauty products. And Levchin simply doesn’t talk specifics when it comes to the number of consumers who have taken out Affirm loans.
But Beautylish's chief executive and founder Nils Johnson is certainly enamored with the product, even if its promised merchant savings haven't exactly panned out.
Johnson, whose San Francisco-based company has 20 employees, has processed "thousands of transactions" through Affirm in the six months since it has piloted the service, he says. While Johnson says the fees he pays to accept Affirm are about equivalent to what he pays his merchant processor for credit cards, he says the average size of an Affirm sale is about 20 percent higher than on credit cards. And that boosts his net margins, he says.
What's more, he's building the trust of his clients. "Customers love this," Johnson says, adding the service is somewhat like the old days when people would walk to the corner store for bread and milk and put things on a tab. In short, it creates repeat business, such as from the many freelance makeup artists who need hundreds of dollars worth of product at once, but may not get paid for their gigs for three months.
People who cover the payments world, such as Brian Riley, senior research director
at consultancy CEB TowerGroup, are somewhat dubious about Affirm's prospects. He sees potential hitches in the requirement for customers to be approved for each transaction. Credit cards also act as a natural filter for risk, typically because issuing banks apply the age-old FICO score to the customer before they're approved for a card, he says.
And there's also competition, such as BillMeLater, PayPal's own extended payment service for consumers. This doesn't concern Levchin, who's convinced it's time for a big consumer lending disruption.
"The core of the risk pricing decision is how much access you have to data, and how quickly you can get it, and price this into a rate," Levchin says. "The goal is to reinvent consumer banking, and I think consumer lending is the first step."
Easy, Breezy. Now if only that hostess was around to bring the check.