Shortly after Affirm went public last year, CEO Max Levchin told Protocol that he saw “an ocean of opportunities” for the “buy now, pay later” pioneer. Wall Street agreed.
Affirm’s stock soared in its trading debut as the company blazed a trail for a fast-growing alternative to the credit cards that Levchin says consumers are increasingly rejecting.
But the picture has changed dramatically since then.
Rising prices and interest rates, along with waves of layoffs, highlight fears of another recession. There’s also growing scrutiny of “buy now, pay later” companies as critics say they’ve led to a steady rise of bad consumer debt.
Wall Street itself has soured on Affirm, whose stock has plunged more than 70% this year.
Levchin isn’t too worried.
“Buy now, pay later” is still growing, highlighted by the rollout of Apple Pay Later, he argued. In many cases, he said pay-later has become an even more attractive payment system at a time when consumers are grappling with more uncertainty.
“When people feel like their spending power has been reduced by inflation or just an overall sense of insecurity, they look to borrowing as a way of providing themselves with a little bit more cash-flow flexibility,” he said. “As long as we're able to lend to them responsibly, I would argue we are in a better position from the demand point of view.”
In an interview with Protocol, Levchin talked about how he views the shifting economic situation and its impact on “buy now, pay later” and Affirm.
This interview was edited for brevity and clarity.
The economic situation has changed since the last time we talked. The view is that “buy now, pay later” is good when people actually have money and are spending. That’s less of the case now with inflation, rising interest rates and layoffs.
There’s a countervailing reality that when people feel like their spending power has been reduced by inflation or just an overall sense of insecurity, they look to borrowing as a way of providing themselves with a little bit more cash-flow flexibility. So as long as we're able to lend to them responsibly, I would argue we are in a better position from the demand point of view.
We've seen this during early 2020. The pandemic just hit. People were sort of trying to figure out how much toilet paper [they] needed. We weren't exactly financing toilet paper, but people needed pretty urgently needed to set up their home offices. They needed to figure out how to handle things like homeschooling and home working. So there's a lot of purchasing that had to take place.
But people are also contending with the idea like, “What if I lose my job? What if my employer asks me to take a pay cut or furloughs me?” So the demand for our service went up massively at the time and sort of stayed very, very strong over the first half of the pandemic.
It was, “Hey, I need more financial flexibility. To borrow safely is a really good idea right now.” We've seen, generally speaking, some increase in demand already, although it's not clear to me the recession is here yet. Obviously, everybody's preparing for one.
On the demand side, I think things are probably increasing, if anything. In terms of the economic viability of borrowing, that's sort of our specialty, if you will.
We underwrite every transaction. We are very much on the record that because of the way we do it, we don't charge late fees. We don't have deferred interest, all the usual tricks the industry does to make a little bit more money.
We stood by all of those ideas when we founded the company and certainly have no plans of changing that. Which means that, if consumers become less likely to repay or [are] unable to repay, we have other ways of making things affordable: for example, asking for a somewhat larger down payment or finding different terms for folks to spread their loans over.
But ultimately, as this economic situation worsens, I'm sure we'll see an increase in demand, and an offsetting [of] the number of people who we unfortunately have to tell, “Hey, we don't make money when you are delinquent. So we really should not be lending money to you.” We think of ourselves as a much better alternative to credit cards who are designed to get your last pennies in the form of late fees.
In terms of inflation, things are more expensive, so people are borrowing more money. As much as I dislike inflation writ large, I think it is a tailwind for Affirm, not a headwind. And the rising interest rates, generally speaking, a majority of our loan volume is funded by what's called fixed-rate arrangements. A vast majority of our funding supply is locked in. We have a very, very diversified base of that funding. We securitize, we do forward flow, we have warehouse lines, so we feel very well prepared.
Over time, I'm sure rates will have progressive impact on us. But we see the same thing the market sees in terms of the rate curve and we price that into everything we plan, as many years out as the curve can see.
Just to clarify, you're still seeing growing demand year-over-year.
Last quarter, we grew on the order of 100% year-on-year. It's definitely very, very significant demand even as recently as the quarter we commented on in May. From where we sit, we do not see consumers throwing up their hands and saying, “We're not going to shop anymore.” So the retail apocalypse rumors, I think, are greatly exaggerated.
I have heard of plenty of layoffs at retailers and things like that. But generally speaking, no, we're not yet seeing an economic downturn.
That will be puzzling for a lot of people who think that this is a time when people are pulling back in terms of spending.
I have to be careful what I actually say, because our quarter ends in three or four days. So I know exactly what things are right now. But I also know that I'm not allowed to tell you anything that's too fresh off the presses because it is not yet reported. Here's a really important thing that will explain why I might have a skewed opinion.
You're right that it stands to reason that people should be thinking, “Hey, what if I lose my job? Maybe I should think twice about buying this thing that I thought I might need but now I don't necessarily think I do.” If you open the New York Times or Wall Street Journal, in huge print it tells you things are getting worse. Maybe you should put that dollar back in your wallet.
That said, no, we're not seeing any of these apocalyptic promises. Maybe our consumers are just sort of Goldilocks special. But no, actually we serve the entirety of America at this point. We have 60% of ecommerce that we touch. I think that generally speaking, we see everyone.
It is probably the case that at some point in the future — and I'm not an economist so I can’t prognosticate — but if you believe recession is coming, at some point you will see contraction of demand. You may see a consumer slowdown. If we were growing with the ecommerce industry kind of ebbing and flowing as it goes, you could say, “Oh, at some point, you'll see it too.”
Yes, we mimic the ecommerce patterns, but we're also still very rapidly growing within each one of our partners, big and little, because there's a secular trend of people shifting out of credit cards into “buy now, pay later.” So we're growing with the overall demand, but we're also growing at the expense of credit cards, and other forms of payment.
Fundamentally, by the way, credit cards and “buy now, pay later” and everybody else, we all compete with cash. We're displacing cash transactions, but we're also displacing other forms of credit transactions, because “buy now, pay later” is just a better way to go.
There's lots and lots of young people who have wised up to the idea that paying late fees sucks and revolving is really complicated. They're shifting to “buy now, pay later.” Apple entering the space is actually a good sign that they see it as a general enough demand that they feel like they need to provide it inside their wallet.
So the reason we're seeing demand is perhaps because more people are saying, “I'm gonna put my credit card back in my wallet and use ‘buy now, pay later,’” versus saying, “Well, I thought I might shop. But no, I'm not going to buy at all.” That's kind of a good secular explanation.
There's also a bunch of rotation. For example, it is absolutely true that we're seeing and continue to see a slowdown in certain categories. People have absolutely outfitted their home gyms to whatever level they wanted. At this point, they have alternatives — namely, the gym they can go back to and work out in a communal setting. We are absolutely seeing some slowing down in things like connected fitness, certainly plenty of slowing down taking place in homewares. On the flip side, there's just an unbelievable amount of demand for travel and experiences. So we see ticketing and travel growing north of 100% year-on-year.
It's particularly easy to imagine because it's coming from a late pandemic base. In 2021, people were getting out and traveling to concerts. But we're still forced to wear masks. It wasn't really great to get on a plane and fly for six hours cross-country breathing into a paper bag.
These days, a lot of those restrictions are gone. People are very actively stepping up. The airports are overloaded. They're not prepared for this level of demand. So there’s definitely some rotation. Some industries are slowing down and some industries are booming.
How are rising interest rates and rising prices affecting consumer behavior and Affirm's business?
Rising prices are generally a boon for lenders because people look at something and say, “My salary hasn't caught up to inflation, yet I still need to buy the thing that I need to buy. I'm gonna have to spread the payment for this. Instead of buying it with cash, I'm gonna buy it over three months or six months.” So rising prices have a natural tailwind for all lenders, Affirm included.
Interest rates rising have two impacts on us: one positive, one negative. Obviously, our cost of capital goes up just like it does for everybody else. It doesn't impact us today, and doesn't impact us in a really big way at all for quite some time because of the types of deals we've struck in the capital markets, how sophisticated we've been about it, how good we've been in terms of the yield that we've given our partners. So generally speaking, we feel very sanguine there, and have a well-prepared program to make sure we handle the change in interest rates just fine.
The tailwind that you see is actually really interesting. About half of our volume is 0% transactions, where the consumer pays no interest at all because the manufacturer or the retailer basically subsidizes the transaction. The consumer just does not see any interest or late fees. So it's the same as cash, but you pay over time.
It's a wonderful way of buying things, and you see those today all over the place. At Walmart, we have partnered with Samsung so a lot of the TVs are on these multiyear, 0% transactions. We expect demand for our 0% deals to go up even higher.
How did you prepare for the potential impact of rising interest rates on your costs?
We have these really broad, diverse partnerships, from insurance companies to pension funds to banks to all sorts of folks that are in the business of money. From Day Zero, we've come to them and said, “We're going to be the kind of partner that doesn't squeeze you for every last penny. We're actually going to make sure that these partnerships are good for both sides. We're going to make sure that the way we run our business is that we underwrite really carefully. We never stick you with a bunch of loans that you don't love the yield from.”
We've been doing this for 10 years. We will always make very good economic decisions for ourselves, but also be a great economic partner to our capital providers. So in many ways, they know what to expect from us and we know what to expect from them, even as the rates go to 2%, 3% or whatever we expect.
Obviously, if you see the world going to super-crazy-high interest rates, sort of a 1982 style, ask me again how I feel about it. But we're pretty far from that.
What do you think of Apple Pay Later? Is it something you worry about?
Apple is a partner of ours. We have had a great relationship there for a long time, and continue to have one. We continue to see good business together. The thing that I was worried about — but was very pleasantly surprised, very positively surprised — was that they also chose to do no late fees.
There's kind of a crusade in the banking world against insufficient-funds fees. It's great for consumers that there's a sort of elimination of this, from my point of view, totally predatory fee.
Late fees are a little bit less controversial. But again, from Affirm’s point of view, they're just as bad. It's literally, “Hey, something happened. You're behind. Maybe you lost your job. Maybe you had some medical emergency in the family. Whatever it is, we're gonna make some money on you.” I just think it's fundamentally anti-consumer. The fact that somebody as big and influential as Apple raised their hand and said, “We're going to do no late fees,” is really good for the industry.
I think they're also doing a wonderful job educating the customer that this thing exists. And I think that's pretty, pretty powerful.
How critical is it from your experience to have a merchant agreement in place for Affirm?
That's certainly how we build our network. The merchant agreement is sort of a proxy for merchant integration, right? And integration is really important, really powerful because you just have a lot more visibility into what the merchants are trying to accomplish, sometimes what the manufacturer is trying to accomplish.
You can tailor deals specific to the consumer preferences, consumer needs and merchants’ ability to subsidize certain transactions. You can help them give consumers 0% transactions instead of merchants doing a blind discounting.
So I think it's very, very powerful. That's been the strength of our business in 10 years to build out that network and really complex partnerships with the likes of Amazon, Walmart and Shopify, Target and so on.