Twenty years ago, Max Levchin wanted to buy a car. When the immigrant co-founder of PayPal was turned down for credit, he turned to co-founder and investor Peter Thiel to co-sign. This experience left him with a bad taste of the credit scoring system, Levchin said at last week's CB Insights Future of Fintech conference.
"There are 11 million credit invisible people in the US and 40 million people that have substantive errors on their credit reports," he said.
The idea for Affirm germinated for years. When he started building Affirm in 2012, Levchin was sure that with so many young people opting out of credit cards that he wanted to build a better credit product than a credit card. On the merchant side, he also witnessed that many sellers had the opportunity to move more merchandise if they could offer financing to their customers.
"It wasn't about providing a better scoring mechanism," he said. "We needed to build better payments."
The Walmart deal
Affirm inked a deal with Walmart earlier this year that would offer its point of sales financing widely to Walmart customers. That deal is now 'live pretty much everywhere', Levchin told Tearsheet. "It's rapidly increasing in volume and after a gradual rollout, we're scaling up."
Levchin explained that before Affirm, the credit application process within retail environments was hard on the consumer.
"Our product is designed to be self contained," he said. "Before, when a consumer applied for a credit card, they were taken out of the general retail flow and disgorged to a credit approval/decline decision."
Now, when a consumer finds an item to buy, he can apply for credit over his phone anywhere in the store. So, when he gets to the register, he's already approved, can check out quickly, and get on his way.
Levchin said that Walmart envisioned its deal with Affirm as a way to create flexible access to higher ticket items in the store. And if credit was the mitigating factor, Walmart wanted to make sure it partnered with a financial firm that appreciated its attention to customers. "Walmart doesn't get enough credit for its focus on the customer," he said.
According to Levchin, the company is seeing a lot of demand coming from end customers who want financing options at their favorite stores. This excitement has lead some consumers to build their own catalogs of items available at retailers that work with Affirm.
Consumers can access brands that work with Affirm via the company's consumer app. As more brands and consumers use its service, Affirm finds itself sitting in between customers and products. Via its consumer app, Affirm now makes gentle purchase suggestions to customers.
"There's no harm in telling people who just bought a mattress where they can buy bedding," Levchin said. "We see ourselves as a marketing amplifier."
Maturation via securitization
As Affirm grows and issues more loans, Levchin is thinking seriously about future cost of capital and how he will fund loans.
"As you scale, you produce loans on your balance sheet and you need to keep borrowing money," he said. "We need to find efficiency and the only real option is to fully scale. For that, you need infrastructure."
Affirm is in the process of hiring a specialized team to focus on securitization, though those job listings are no longer posted on Affirm's website.