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Affirm CEO Max Levchin and Shopify executive Kaz Nejatian see eye-to-eye on many things. They hate credit card late-payment fees, which Levchin calls "obnoxious," and Nejatian, Shopify's vice president of product and merchant services, says are "icky and terrible."
And they both see "buy now, pay later" plans, which spread out purchases over several payments, as the better system for consumers. On Thursday, Affirm and Shopify, which announced a partnership around BNPL in July, will unveil one of the biggest BNPL rollouts in the U.S.
The BNPL pioneer and the ecommerce software company have spent the last 10 months developing and testing a tool built by Affirm that would let Shopify merchants' customers pay in installments.
By May, some 12,500 merchants had tried it out. On Thursday, the technology will be made available to more than 430,000 U.S. Shopify merchants in the U.S. That's roughly a quarter of the 1.8 million merchants that use Shopify globally.
"Buy now, pay later" isn't without controversy, however. Though Levchin and Nejatian stressed the Affirm-Shopify offering's lack of fees and that specific offering doesn't involve interest charges, other Affirm customers may pay interest, depending on their credit score and whether a merchant is offering a promotion. Customers could use a debit card or pay off their credit card monthly and avoid interest altogether, and miss out on some protections inherent in credit card purchases, Consumer Reports points out.
Merchants generally like "buy now, pay later" because the lower upfront payment encourages shoppers to splurge; the flip side of that, consumer advocates point out, is that they could spend irresponsibly. And stores generally pay more for BNPL transactions than they would in credit-card processing fees, though Merchant Maverick reports Affirm's fees are in the 2% to 3% range, which is comparable to a Visa or Mastercard transaction.
The Shopify deal solves another problem for Affirm: its dependence on Peloton. Levchin is quick to point out that Affirm's non-Peloton sales are growing faster than its Peloton sales, but Shopify's vast merchant base will quickly diversify Affirm's payments business if "buy now, pay later" proves popular with merchants and their customers.
In an interview with Protocol, Levchin and Nejatian talked about how and why they formed the partnership, how the pandemic accelerated their alliance and how they view the growing call in other countries to regulate "buy now, pay later."
This interview has been edited for brevity and clarity.
How did the partnership come about?
Kaz Nejatian: We've been looking at the alternative payments space for some time. We've been tracking the growth of "buy now, pay later" and alternative methods for a really long time. We noticed about a year ago that it had grown, especially among young millennials and folks who are younger. These payments are massively popular as opposed to traditional credit cards because they provide more certainty. They were really worried about debt and managing that. So we started looking at how we could offer this method.
There are quite a few players in this space, but there are very few whose values align with ours. We view ourselves as a software company. We really would like to get out of the business of banks, if only banks could do their goddamn job. So we looked for software-first solutions. We care a great deal about transparency and consumer protection. We don't like hidden fees. We don't like this idea of forcing people [to pay] down debt that they cannot afford or forcing people to pay late fees that are just honestly icky and just terrible for the world. The choice of the partnership was relatively easy. That was Affirm.
Max Levchin: I've known Kaz since before he joined Shopify through the payments-entrepreneurship mafia, if there's such a thing. I've also been friendly with Tobi [Lütke], Shopify's CEO, through the CEO mafia, if there's such a thing, for a number of years. [On] the last trip I took by plane before the lockdowns … I was on the phone with Kaz, talking about what a potential partnership would look like. We'd sort of decided probably about a year ago that this is happening.
We started really working in earnest. The core values are easy to align. There'll be no late fees because we think they're obnoxious and just shouldn't exist. Making money on people when something happens in their life is just the wrong time to stick them with an extra charge on their bill. As we got closer, we started showing it to various small merchants. We spent the month of April just ratcheting up the exposure to the Shopify merchant base.
Most of this was happening as the pandemic was raging. How did that affect the process?
ML: The pandemic, in many ways, was sort of both a test for a lot of us, and a booster and a smack in the face. What happened during the pandemic that people are not really talking about is sort of back to this point about no late fees and transparency. I think a huge number of consumers had this moment of, "Oh my god, the load of paying revolving interest or paying late fees or figuring out how we're going to make my ends meet has gone from the usual headache to, I just lost my job, my head is exploding. What are you talking about, late fees?" The consumer's attention was kind of going like, "You know what, I'm not going to put up with this anymore, this whole idea of it's more than the sticker price because I'll just get hammered with some fee somewhere."
KN: There was a moment where the pandemic hit and everyone said, "That's OK. I will go to my bank for help." And at that very moment when they were needed the most, they pulled back lines of credit, they increased fees. One of the reasons we exist is to arm the rebels at Shopify. The last thing you want to look like is the evil empire. And there is a shady thing about charging late fees and hidden fees is super evil empire-y.
You announced this partnership in July. What was the work like in the months after that?
KN: My biggest regret here is we took a really long time, making sure this was perfect, could stand load and would convert well.
Were there things that didn't work out that you decided to change or tweak or maybe take out?
ML: One of the things of having an engineering-driven company is engineers like to tinker. It's both good and bad. They want to tinker until it's excellent. At any given time, Kaz would text me, "Hey, the conversion rate on this merchant for this flow has moved a percent. Did you guys change something? Do we need to look at it?" That's obsession. Both sides welcome that level of attention to customer outcomes. Ultimately, every point of conversion is sales for some little company somewhere that's selling leopard print jumpsuits or something. So obsessing over percentage points of conversion for each individual tiny little store is part of the DNA, part of the process.
Can you give me an example of something that didn't work?
ML: Once you're optimizing at that level, you're literally playing with things like, OK, we changed the font size. Did it push some button below the fold or not on this particular iPhone model? And if the answer is yes, some conversion is going to drop. You look at button placement, button sizing, button color. These are painfully boring, but they move the needle. If you have a few billions of dollars of volume going through your hands, half a point here or there makes a huge difference.
KN: My mom is a Shopify merchant, so I hear from her frequently about what works and what doesn't work. It's not any one thing. It's thousands of really, really small things that make that difference. There's a merchant called Ondo. They sell really awesome no-show socks. I'm a big fan of these things. They weren't really sure people who buy no-show socks are the primary audience for "buy now, pay later" solutions. In three or four weeks, they doubled their average order value. For merchants like my mom, these small changes make a difference.
What does your mom sell?
KN: She sells home decor.
ML: I didn't know this about Kaz. We've spent a lot of time looking at each other through screens, and I'm still finding things out about him. I know some things about his mom, but not this one.
You've tested it with about 12,500 merchants. What's going to happen on Thursday when this becomes available to other merchants?
ML: The final stages of testing have gone really well. As of [Thursday], it will be really, really easy to turn us on. For some folks, it will be a default. Obviously, it's always the merchants' choice.
I'm sure we'll have fun quote-unquote "fire drills" where we have to fix something in real time. During the earlier testing, one of the best moments for the two companies was when we're going through [a test with] a tiny, tiny merchant base. It was live and real and Black Friday was on. That was a fun fire drill, and it was nervy. Black Friday is always a high-energy moment both in good and bad ways. We're about to have 1,000x Black Friday.
Max, when you went public, one of the data points that became highlighted was the fact that you're reliant on Peloton for your business. How do you expect this to change that picture?
ML: We certainly didn't use the word "reliant." Any partnership between two very successful companies inevitably creates a relationship that is hopefully both mutually positive, but also co-dependent. And it's not a bad thing. I said it before — and it sounds a little obnoxious — but I made it in a positive way. I never want to apologize for the fact that Peloton and Affirm partnered and both companies grew like crazy. That said, Peloton is growing within Affirm extremely quickly. But Peloton excluded, Affirm is growing even faster. If you look at our last publicly reported quarter, the totality of the business including Peloton grew at [around] 83%. If you took Peloton out, the business grew 100%. So our growth pace elsewhere is actually even faster. Peloton is a fantastic partner. It's an unbelievable growth machine, and we're very happy with it.
Shopify is a very, very different kind of partnership. It's a massive platform with literally hundreds of thousands of merchants that are eligible for this product. We hope every one of them takes it up and experiences the kind of growth that Peloton has seen.
As a high-growth company, we're excited to partner with anyone who's got these rocket engines that we can partner with and strap on to and keep going. But in no way should we be seen as apologizing for partnering with high-growth companies.
What is your reaction to the push to regulate BNPL in the U.K. based on worries that the payments system could be harmful to some consumers?
ML: We've engaged with our regulators since literally the inception of the company. The financial industry is regulated as tightly as it does, in part, because it's people's money on the line and in part because of a history of bad behavior where people kind of say, "You know what, I don't really know what's gonna happen to you, Mr. or Ms. Consumer. I'm just gonna make some money here. I can just close my eyes and not worry about you."
Our point of view as a company from the very inception was that's exactly what we fight against. We want to build a product where I'm proud to stand in front of my customers and say, "Hey, it's been billions and billions of dollars of volume, and zero dollars and zero cents of any kind of fees." That's a powerful statement to make, not just to the customer, but also to the regulators.
If the regulators would like to spend more cycles understanding who's good and who's bad in this space, and what the norms should be, what behaviors should be normalized and what behaviors should be outlawed, I certainly welcome these. I think it wouldn't be the worst thing for the industry.
KN: I think Max is absolutely right. Banks have a history of acting terribly, and they're currently acting terribly. I welcome the world in which people who behave badly can stop behaving badly.
ML: Whether they like it or not.
Benjamin Pimentel ( @benpimentel) covers fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at firstname.lastname@example.org or via Signal at (510)731-8429.