How Affirm Is Responding to Higher Interest Rates

Affirm founder and CEO Max Levchin—who is also a co-founder of
PayPal
—answered these questions and more in an interview with Barron’s Andy Serwer. Below, an edited transcript of their conversation.

Why don’t we start by talking about Affirm’s business, for those who don’t know much about it. 

We are available on
Amazon
(AMZN) and at
Walmart
(WMT) and every little store you never heard of that calls
Shopify
their merchant platform home. We are visible at almost 65% of all e-commerce checkouts. So, the number of you who actually have no idea what this thing is is diminishing rapidly. 

It’s a payment product, a way to check out that you can think of as an alternative to a credit card. If you are looking at a purchase that you’d rather pay for over time instead of a single payment, you can click on the Affirm logo and we will instantly give you a handful of choices: You can pay for it over a few weeks or a few months. It’s always fixed-term. Affirm actually will tell you exactly what the payment plan has to be. You’ll be done paying off the couch or the bicycle or whatever it is you just purchased in a very specific number of months. There are no late fees. There’s no compounding, there’s no revolving. You know what you’re going to pay and that number is fixed.

Do shoppers pay interest on those payments? How does Affirm make money?

Sometimes, but not always. In many cases the merchant chooses to tell you: No interest—same sticker price, you just pay over time through Affirm. [In that case, the merchant] will pick up the interest, effectively. In some cases, the merchant says, if you want the service you should pay for it—and typically both the merchant and the consumer contribute. In all cases, if there is interest involved, it’s disclosed upfront as a dollar number in addition to the rate. If you choose to prepay that number will go down. So it is designed with the financially responsible consumer in mind. Where they benefit, we benefit.

Affirm makes money by sometimes charging merchants, sometimes charging consumers. The business model is, on the income side, consumer interest payments and merchant discount rates, which is just a fancy word for merchant fee. On the cost side, in addition to all the fixed operating costs, you have the cost of capital, most importantly. We’re not a bank which means that we borrow so that we can lend money. Cost of capital is a very relevant topic given inflation and the Federal Reserve’s response to it. But in addition to that, we take the full risk. So if something happens and you can’t pay us back, we will eat the loss. 

What’s in it for Amazon or your other partners?

Merchants are smart. They know there are consumers that will come through and say, well, I don’t really want to borrow money to do this. I’m going to wait, maybe I’ll save, maybe I’ll not buy today. What we do is make the decision easier, say there’s a different way to borrow. One that’s safer, one that gives you more confidence, where you know exactly when you’re going to be out of debt. Last year, a little bit over 20 billion dollars worth of merchandise was sold using Affirm. So the trend is on the rise.

On the consumer end of things—what happens if you default and don’t make a payment?

We’ll send you several politely worded reminders to make sure that you haven’t just forgotten. The vast majority of consumers that are late are not trying to run away with the money, and fortunately, the vast majority are not in the category of people where something awful happened and they can no longer make their payments. The vast majority are just forgetful, they decided not to set up the automatic payment, they thought they could sort of keep up on their own. We’re very good at reminding them and we’ve been able to figure out a way to do this without slapping them with the unpleasant reminder with a fee attached to it. 

Higher interest rates mean higher costs of money and higher costs for you. How are you managing that? 

The good news is that it’s fairly easy in the sense that we’re very upfront with our consumers and our merchants about exactly what our costs look like and what is happening in the economy. We have gone to our merchant partners and told them, hey, our costs are increasing, we think you should help us with that. And many of them were very understanding, in part because we’ve been a good partner and in part because they still need to sell things. And so if our cost of operating is going up, just like their other vendors’ costs are going up, they have to adjust. And in some cases, where the consumer does pay interest, we’ve increased proportionately the cost to the consumer. 

The weighted average life of an Affirm loan is four and a half months. It’s quite short, we’ll go as far as three-ish years and as short as six weeks. We can manage through a higher cost of capital by shortening the average duration a little bit. By making fewer 18-month-long loans, and a little bit more, six-week-long loans to just allow us to recycle the money quicker and therefore lower the effective cost. 

Affirm is directly trying to disrupt the Big Three credit card companies, right?

The other thing about payments that I love is that it’s all confusing that way. There’s never a monopoly in payment, there’s never pure competition in payments. There’s never pure partnerships in payments. You always have to figure out in this particular domain, are we friends? Or are we competitors? 

We are a network, so theoretically, if you’re not pulling out your
Amex
card and you’re using Affirm, that’s a competitive relationship. Where Affirm is not yet integrated, we just launched an Affirm card that’s powered by us and
Visa
(V). And so, the transactions where we cannot deliver the last mile to the consumer, it’s our responsibility to make sure Affirm works everywhere that is covered by Visa. In that sense, we are great partners and have done lots of business together for quite some time and expect to do more. At the limit of, well, I have a Visa card and an Affirm card, which one will I go with? In this case, Visa actually wins in both cases because both cards have a Visa logo, except this one has economics that go to us and we think is a better product.

What about AI?

I’m excited about AI, but I think I’m excited about things that are to come as opposed to what we have seen. [Today] we use it for a bunch of really neat applications in antifraud, we are starting to look at the applicability of large language models in things like customer service. We have to be very careful. There’s lots of regulation, you can’t tell someone, I’m an AI model, here’s my advice for you financially, but there’s lots of opportunities to do things. Like let me help you navigate a frequently asked questions a little bit better. So lots of fun things happening for us in AI. 

Why should investors own or buy Affirm stock? What is the future of the company?

I think it’s very dangerous to say here’s one thing, you should own the stock because of this. If you’re choosing this one reason to hang your hat on and then it’s no longer accurate, should you sell the stock? The good financial advice assesses where we are today and where we can go. We just rolled out this card. We are in 65% of e-commerce. The card works both online and offline.

Already in the card usage, the most popular store people are spending money at is grocery stores. Affirm as a way to pay for things that’s better than credit cards for everyday purchases. Today’s average [use of Affirm] on an annual basis is four transactions. Now it’s doubled in the last couple of years but it’s still tiny relative to what we think it should be—part of that is that you couldn’t use Affirm offline. Now you can.

I’m an Affirm shareholder by way of having never sold a single share that I got as a founder because I think we just expanded our total addressable market to the tune of four, five X, and we’ll continue trying to find new ways to do that again.

Write to Stevie Rosignol-Cortez at [email protected]