Watch In Conversation With Max Levchin - Bloomberg

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00:00Hi everyone I'm Chanel a basic financial correspondent for Bloomberg Television and Bloomberg News. With me I have Max Levchin. He is the CEO of a firm one of the leaders in the buy now pay later space that has simply been exploding and really targeted as a key competitive industry to the biggest banks. Max thank you so much for joining us. You know when we talk about buy now pay later I think we really have to start with the underwriting process. There is this sense that you're able to capture consumers that are left out of the traditional credit industry. Who is being left out and how are you changing that. So that's a great sort of a thing to point out about BPL. I'll give you a five second story. We're just chatting before. So twenty five years ago when I was a lot younger and infinitely less aware of how the world works. I came to the US as an immigrant and I promptly went to a very good school for computer science and had no prior record whatsoever. Not only that I also got a credit card on campus like everybody else did back then and had no idea how it works. And so missing a couple of minimum payments trashes your FICO score and having no credit history basically renders you credit invisible. Now at the same time I was about to graduate with an extremely employable degree. In the early 90s while the web was exploding to anyone in their right mind should have been offering me excellent credit ratings and or at least credit rates. And instead I was declining credit. Day after day after day. And so immigrants especially immigrants with excellent education and earning capacity. Folks that have stumbled in a pass through lack of understanding how the world really works and then taken a decade to correct their FICO score. So in a story like that that's a giant pocket of availability. And then just lots of people in the last 10 years that have actively opted out of credit cards. The millennial and jazzy gyrations both watched 0 8 with horror and basically said OK so borrowing money gets you into trouble. I don't can't understand the fine print. I am just not going to use them. And so the debit movement is very real that a lot of people out there most of them young. That said credit cards are for special emergencies or not at all. And they have neither the credit nor the credit history because they're not using a revolving line to build it up. And so these folks are all what I would say is are generally speaking doing the right thing for themselves financially but are not helping their credit score. And you have to build new models and new ways to underwrite to include them in the system. There's a common misconception about buy now pay later where people think that if they use the product that there's never an interest rate associated with it that they're not subject to fees. You know there's still a need to really read through the fine lines especially as this industry grows. Right. I mean what would you recommend consumers be wary of both. I'll quibble with one thing. Not with a firm. One of our core values of the company is no fine print answer. My point from the previous question. So we've been in business for 10 years. My proudest start is we have never charged a single penny of late fees or any really other kind of fees which is great. That said there's definitely every financial product is something that the consumer has to understand. In the case of no one cloture is still obviously being hashed out. It is so new what affirmatively calls split pay or pain for most often does not have interest associated with with a consumer side of the equation. Most players I believe charged late fees. We do not. Some players charge all kinds of funky fees. That is an allergy inducing behavior from a first point of view. And so we we of course charge none of those. And then there's also pay over time. At least that's what we call it or variety of other monikers. And that's where you can borrow and pay over still fixed term. So there's no revolving over months sometimes even a year and a half etc.. And in those situations in our case roughly half the transactions are interest bearing or in the other half is 0 percent where the merchant basically subsidizes the cost on the consumer side. In all of our cases there are no late fees there is no different interest there's no gimmicks. And that that is a quintessential piece of who we are and how we conduct our business. I don't think that everyone must do the same thing but we certainly believe that our success in our brand is in large part due to this idea of not kicking the consumer on their down and trying to make money instead of the oh your late great. Now you'll pay me more. So what's really the barrier to entry in this industry. As so many more people start to adopt it including some of the biggest card companies and banks in the world. So I think. As an entrepreneur you have to believe the barriers to entry are there to try to jump over. So it's it's always it's always good to have a competitive market. Our advantages in what I think is really the most that would create around our business have been we are a real engineering shop if you look at our partnerships. Anything from Shopify to Wal-Mart to Target to Amazon all these companies are enterprise grade. Demanding if you will from their scalability from the stability of their partners the reliability availability or all those things cannot just happen because you're really good at marketing. You have to build a real engineering team. You have to be really really focused on being there for your partners. And we've really invested it. Obviously my background the DNA of the founding team the DNA of a larger team is really rooted in engineering. That has been a winning feature for us. The other side is where we started. You have to be good at underwriting. We've lived in a decade of very benign credit environment. You can't sort of believe that maybe it's all going to work out. But everyone who's been in financial services long enough knows that it goes up and it goes down. You have to be very rigorous. You have to constantly test your models. You have to understand how to manage risk. We believe we're very good at it. You can look back at our polling numbers. We have managed through the pandemic before after very very well and continue to very much focus on risk management. The part about being consumer friendly is core and true and important. And I think a huge barrier to entry or competitive mode for a firm has been this consumer delight where when the customer calls and says Ham lead by three days what's the late fee. The most delightful thing for all parties to say there is no lazy. Please get current and all is the same. The price does not change over time. As you repeat on firm you realize that it is a better alternative than a credit card. Credit cards will absolutely charge you interest. It'll compound and they'll be a late fee. And none of those things apply to a firm. We don't use compounding interest. Simple. There's point that you made a little earlier too about the credit cycle that we're in. And I'm curious and this doesn't need to be only about a firm. I'm really asking a question about the industry of buy now pay later as we face markets that may not go just one way forever. Do you think that there are some concerns in the broader underwriting process across the industry. Well some people lose money here. In the immortal words of Warren Buffett when the tide goes out you'll know who's swimming without pants on. You know I think it's early not my. Job or ability really to see the underwriting methodology of other players in the space. But I can speak to a firm's. Relatively competently and we've spent an enormous amount of time making sure that we are prepared and that we have both the early warnings and the controls and the systems to manage credit. But I do think that that's when you get tested that that is what ultimately distinguishes those in credit space from those that really shouldn't be in it. What happens when the economy goes down. I certainly believe that the key players will find themselves watching their losses widen and having to deal with that. Max. You know it's funny. I think every time I talk to you I ask you about the secret sauce. What's behind the technology that makes a firm different. I mean and again you know you've been part of the PayPal Mafia. You know how payments work. You've built this system to do it differently. So what inputs of data do you take about your consumers that may be different from how the entire banking industry has done this before. You know as I've said before these conversations if there were just one thing like the one thing you have to know it would be hard to defend. Presumably over time people would would erode that advantage or take that away. There's only a handful in terms of the cut dry answer. What is what is the data. You know it has to be a whole collection of new features that you have to continuously mind for the the feature in the machine learning sense of the word. You have to continuously look for new signal as you try to eke out another little bit of approvals without increasing your losses. And we look forward both on the anti fraud side of things as well as the credit underwriting. Credit is made more complicated of course because there's a significant body of regulatory restrictions on what you can and cannot use. And you have to look for all that extra yield while staying very very straight and clear of any regulatory prohibited methods. That said the one thing that makes a firm very unique. We went through the trouble of building a two sided network. We know the consumer is buying one of the things that's true for pretty much every major scale payment network the issuer in the acquire our different bank. That means that the merchant where you transact is known to the issuer but the merchandise is really not. There is a lot of value in knowing what it is people are buying. If you get to imagine what is your repayment profile your willingness to settle your next bill if there's pressure in personal finance it has to be different between a bicycle they used to get to school or to work vs. something that you've already long consumed. I think those are fundamentally different. Credit card industry traditional banking original lending. Generally speaking does not differentiate for lower ticket items when you're buying a house. The bank very much knows what kind of house you're buying and that underwriting is very precise and the rates are very low. If you're using your credit card all the bank really knows that you're putting it all into a big bucket and it would revolve and they'll make some money. That attention to the exact purchasing SKU level data as the jargon goes is a big part of the original advantage that we've created and something that we can continue to build on. So I want to pivot a little bit here because the payments landscape is evolving so quickly. And I would love to get your thoughts on where crypto currencies start to play into what the future of payments look like to you for sure. And I imagine you saw we announced our entry into the crypto space as well. So here's my take on it for crypto as the idea is for the mathematical structures behind it is beautiful and it's just worth marveling at. And I spend my copious free time reading about the new year is because it is just frankly so cool. The volatility in cryptocurrency prices to me continues to render it a fairly poor instrument for value exchange. I think there's the stable coin genre is very different and very cool and I think U.S. government has something to say hopefully fairly soon about how they think of it. And I think Barth will start making cryptocurrency the media exchange that is worth being really on top of us as a payments provider. That said it's maybe the best possibly the best asset class in terms of performance and appreciation over the last five years probably 10 years. The reason we entered crypto is authentic to a firm's mission. Our job isn't just to be a payment provider for you it's to improve your life through financial products that are transparent and honest and clear. It made a lot of sense for us to say a couple of years ago you should not just spend money you should save it. So we launched a savings account that's been very successful. We're really really proud of what we've done. It pays an excellent rate. We see a lot of savers within the ecosystem now. The next serve chapter there are made a lot of them say all right you know what. You should participate in this crypto economy in a safe reasonable way but you'll get better rates. And so part of our savings account will feature ability to save crypto central. And so in that sense I'm very excited. I really want to see what our consumers choose to do. We're really interested in seeing the behavior and the needs when there is a payments medium. I think stable coins is kind of the work where it's going to have to go before before I'm completely convinced. So interesting because just a few weeks ago really you had Jamie Diamond the CEO of the biggest bank in America saying you know saying a firm is one of the big competitors here and saying that the entry away from just buy now pay later into more debit and banking products creates a new form of competition. He said that during his earnings call with investors and analysts. I'm wondering how you answer that. And you had mentioned crypto as part of this savings product here. How does that start to make you more competitive when it comes to the big banks. So Jamie Diamond mentioning a firm the competition is incredible flattery and I'm so blown away that we've made it to that next rung. I mean he's an extraordinarily successful leader in our space. And I certainly look up to him. I'm sort of blown away. I don't realize actually name checked so. That's crazy cool. That said I think. Finance is as a rapidly evolving space. We tried to build products that improve consumer lives and there's more to it than just payments. So we are of course launching all kinds of new things like this debit plus card that we announced. As you know it's it's something that we're very excited about to bring to market crypto is I would argue a feature at least in our case a feature of preserving money saving money for consumers. It's a little bit less clear to me what other players are doing. I think traditional. Financial services players at large banks do have some thinking to do. I think that they have gotten very very comfortable making a lot of money on things like late fees and revolving interest and by not being later. Some call it a revolution. I would call it the unbundling of the credit card. I think what's really going on is the credit card for the new generation just doesn't work. It has to be more transparent. More transparent means every purchase is visible. Every purchase has a. And indeed if it's paid over time I think it's a different product. We think that's what David Plus looks like. But I think a lot of traditional financial service providers have to ask themselves the hard question of am I willing to reinvent my credit card portfolio. Or is that just too much to ask. Because that's where a majority of the profits come from. I'm wondering because this could be true for humans for people you and me but it could also be true for smaller businesses. And you work with Spotify. I shop of Shopify on site. You can call ISE but by Shopify you work with Amazon. I'm wondering what the opportunity is for smaller firms to start standing out and using financial products like you're offering to those already fairly healthy. Growth and competition in the small business version of Buy Now Pay later. I'm not sure they're using the same branding but there's lots of companies that are now entering that space or providing more transparent finance and for small businesses and even larger businesses. And it's very exciting. I'm really actively watching what's going on there. We have our own little initiative in providing capital to two merchants as well. And we partner with Shopify. As you correctly point out on that. And so there's definitely something to be said for it. Nothing to announce quite yet from us but it's a really interesting space. I think there's a fairly blurry line between consumers that are trying to control their finances not pay. Extraordinary. He's not pay late fees not Peter for interests. And those same people that just happen to run a small business or own a small business and they look at their consumers and saying that's really great. Why can't I have it for my small business too. So I think that demand is natural. The market is pulling for new solutions. Think about small businesses that also creators you know this whole concept of the creator economy. I mean is this a place where a firm can make a bigger splash. Absolutely. I think the creator economy movement in general is very exciting. Shopify certainly seems to be taking some very active strides towards that. And as a partner we will be right there with them. I think ultimately. A lot of the creator economy is all about simplicity the experience feeling that you are in control that you are emotionally bonding with the item that you're purchasing. And I think that that's very very connected to what we offer. And one of the things that we stand for in the consumer's mind is you won't regret this. This will not make you feel like you got yourself into debt. You can't get out of it. So very clear very transparent. And so we are a natural conversion. And you know sales lift a product if you will for it for the creators as well as more traditional merchants. Max before I let you go what's the single biggest innovation that will change the future of finance in the next year or so. Is it like two pages to say David plus I have not been excited or about this product like this ever in my life but it feels very obnoxious to point a finger at our own our own work. I'm very bullish on that because I think that that that should be on the record. I think. I think. My guess is there will be. Some really thought. I hope there's a really thoughtful play from the US government around digitising the dollar. I think that's not an industry innovation. I think if there is a soon to launch because I think other economies are doing this then US dollar as the reserve currency of the world will continue to thrive. I think the ability to have much better. Clarity and accountability around the usage of money depends on not happening and if it happens it'll just create a giant field of new opportunities. Anything from much lower cost to move money. Much better way of tax enforcement etc cetera. I'm very much holding my breath for that. That's something that the Treasury Tundra has to decide to do. So it's less an industry thing. But I'm very very curious and hopefully excited about what's happening there. Yeah we're looking forward to keeping an eye on it and hopefully touching base with you again soon. That's Max Levchin and he's the CEO of a firm. I'm Charlie Bassett. Thank you so much for joining us.

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In Conversation With Max Levchin

The Affirm co-founder and CEO, Max Levchin talked to Bloomberg’s Sonali Basak about the future of payments, buy now pay later, and the crypto economy.