Max Levchin may look as though he could still be a student in the computer science school of the University of Illinois at Urbana–Champaign. However, the co-founder of PayPal has evolved since his early days into a kind of disruptor adult who balances boldness with a thorough understanding of business realities. In recent years, those attributes have been on full display as Levchin has steered Affirm into the start-up big leagues, building considerable traction with merchants and consumers alike. But Levchin seems to appreciate that despite Affirm’s momentum thus far, the linear, engineering-centric mindset that contributed to his other successes including Yelp and Slide won’t be sufficient for his latest challenge. Instead, the former CTO has transformed into a highly effective salesperson who is able to articulate a new model for borrowing money that cuts through the siren calls of credit card rewards programs and flashy ad campaigns. Recently, The FR’s Gregg Schoenberg spent some time with Levchin to hear his mission-fueled pitch in person. Along the way, he couldn’t resist the opportunity of being with one of Silicon Valley’s most respected entrepreneurs to broach other topics too, ranging from Bitcoin to Amazon to politics.

The Financial Revolutionist: Max, it’s good to speak again. To kick things off, I’ll note that unlike many fintech start-ups that can raise a round or two but then encounter scaling challenges, Affirm has raised $500 million of capital and has originated over a billion of loans. Your fintech and tech experience are unrivaled, too. So from my vantage point, when Jamie Dimon famously warned about Silicon Valley a few years ago, he was talking about you. With that in mind, I’d like to first discuss your combativeness towards the credit card industry, which, as you know, is a cherished business for several large banks.

Max Levchin: (Laughs) All right.

FR:    Has your posture towards the credit card industry ever made it difficult to secure funding for your assets from some of those same banks?

ML:    No, it hasn’t. First of all, I’m discerning in my combativeness, and it’s not as though I have a beef with the credit card industry at large. I think the credit card as a user interface is fantastic; as a business model it’s pretty brilliant. But it may or may not have outlived its usefulness in a sense that the Internet provides a lot of what the original private networks provided. But the short answer to your question is that the world of traditional players is divided into those who are going to dig in. And those players don’t fight through lobbying; it’s done through obfuscation and complicated lock-in deals.

FR:    And the other half?

ML:    They know that in the age of social media, the ‘no one’s going to get hurt by what they don’t know’ approach is no longer okay. I think those players are actively re-examining how to achieve more profitability through driving efficiency, not increasing fees.

FR:    So you’re not out to get the industry per se?

ML:    Well, Gregg, it’s not as though I woke up one morning and said, “I’ve got to figure something out about these credit cards because they’re bad.” I actually think that they served several purposes. But what we’re trying to do is bring a return to the days when the banker or the lender was fundamentally aligned with the customer.

FR:    Which is not the state of affairs today?

ML:    If you look at a majority of the credit card products today, an embarrassingly large percentage of profits come from things that people don’t expect to be charged for. Take private label card issuers: half their profits come from late fees, but no one expects to pay them. You ask 100 consumers and 100 will say, “I’m always on time, I’m very responsible. I don’t expect to pay late fees.” Yet the industry feeds itself on late fees.

FR:    But late fees can serve a role…

ML:    Yes. Late fees are fairly useful because it slaps people on the wrist and says, “Hey, you’ve got to be responsible,” except the incentives are so badly misaligned. You wind up with an arbitrary decision around how much more I can charge, which of course is a 100% gross margin profit. Any fee is fundamentally all about, “I should just take your money, and maybe I should just take a little bit more of your money.”

FR:    So when you say the credit card is broken, are you including the payments networks, the bureaus, the processors and other entities involved? Because you probably work with some of those folks.

ML:    We work with them all.

FR:    But I think it’s more than just the fees that you have a problem with…

ML:    It’s a long-winded answer, but I think it’s an important one, so let me boil it down. If you look at two perfectly formed entities transacting – let’s say a corporation borrowing money from another corporation – no one in the transaction has any doubt about what they’re paying for and what their expectations are.

FR:    Total transparency.

ML:    Yes. No one in the world borrowed money through the bond market to find out that there’s a hidden late fee that they’ve missed. It just doesn’t happen, because there’s a well paid lawyer on both sides. They get together and say, “Here’s exactly what’s going to happen, and here’s what isn’t going to happen.” But if you look at consumer lending, it’s the exact opposite. The lender has all the information. The borrowers have almost none and they get ripped off.

FR:    An unequal dynamic at work.

This notion of information asymmetry is being exploited by larger institutions, and I think that it isn’t a way to run a good business. That’s not a way to build a brand. That’s not a way to retain customers. That’s not a way to feel good about yourself.

ML:    Yes. I’m very much against it. This notion of information asymmetry is being exploited by larger institutions, and I think that it isn’t a way to run a good business. That’s not a way to build a brand. That’s not a way to retain customers. That’s not a way to feel good about yourself.

FR:    As you know, Affirm is often referenced as a threat to Synchrony...

ML:    We don’t really offer the product that Synchrony and the other folks in the point of sale business do. We think that particular kind of a credit product is typically not what the customer wants. If someone’s trying to borrow money to buy a mattress, they’re not looking for a credit card, and those cards don’t have the best structural systems for the customer. They have the dreaded deferred interest, where you’re billed double unexpectedly, and many other exciting features that are only good for one party.

FR:    Let’s talk about others, then. I look at the momentum of Marcus and Square on one hand. Then I look at the incumbents who fight hard using their rewards programs on the other...

I’m not overly worried about what the competition will do. I think the people worth watching, respecting, learning from and thinking about strategically are those with technology. I think that the fundamental differentiating factor going forward is going to be technology

ML:    I’m not overly worried about what the competition will do. I think the people worth watching, respecting, learning from and thinking about strategically are those with technology. I think that the fundamental differentiating factor going forward is going to be technology. I think about Gary Cohn’s remark: “My cost of capital is better than your app,” or something like that, if I remember correctly?

FR:    It rings a bell.

ML:    That’s true to some extent, but I think once a certain scale is achieved, the competition does become about technology and about trust. You can always find someone to take an amazing pack of rewards.

FR:    It sounds like you’re not impressed by rewards.

ML:    Do they come back for the second transaction? One that’s easy, convenient and transparent? I ultimately care a lot more about companies that have technology to deliver that than the ones who just bring money.

FR:    Let’s turn to some of the news Affirm has made recently. First, you announced a direct-to-consumer strategy. I found that interesting because it seems like you have no shortage of opportunities on the merchant side.

ML:    That’s still a large component of our business. This is not a pivot.

FR:    Okay, and in walking around Affirm’s office here, I get it. Your team is customer-obsessed, and this move is linked to serving your customers.

ML:    Yes.

FR:    At the same time, you’ve made no secret about the fact that you want to broaden your relationship with customers. I take it this is another step towards Affirm becoming central to its customers?

ML:    That’s exactly what it is. We think that in today’s world, there’s more than one mode of operation that we could be the best part of. So when our customers say, “Hey, are you guys offered elsewhere?” we say, “Yes, here’s where we’re offered.” When they say, “Well, I want to shop somewhere where you’re not offered,” we didn’t have an answer for it. Our direct-to-consumer product is the answer.

FR:    How does it look to the merchant?

ML:    It looks like a card transaction. In that sense, it’s still a two-sided product, where we’re serving our merchant partners. Having said that, it’s been our story from the beginning that many parts of financial services deserve to be reimagined with technology.

FR:    So that’s a great segue to something you said recently: ”Trust me to give you sound financial advice.”  

ML:    Yes.

FR:    And then there’s this one: “Here’s a button that we will power, that you can use to pay off your debt, to reduce your interest payments.” What did you mean by that?

ML:    I think that was more of an evocative statement, perhaps, than a product roadmap.

FR:    Okay, I was wondering.

ML:    One is free to interpret such things which are said in the moment.

FR:    Okay, but when I hear the words “financial advice,” I’m wondering if Max and the good folks at Affirm are hinting at asset management, perhaps some sort of roboadvisor.

I think you can be certain that Max and the good folks at Affirm are thinking about all kinds of crazy stuff. Having said that, I don’t see a roboadvisor in our instantly available product road map. What our customer wants is a sound financial footing.

ML:    I think you can be certain that Max and the good folks at Affirm are thinking about all kinds of crazy stuff. Having said that, I don’t see a roboadvisor in our instantly available product road map. What our customer wants is a sound financial footing.

FR:    So what does that advice product look like?

ML:    We come at that question by asking when we should speak to our customer in an advisory voice as opposed to one of, “Here’s where you spend it.” The most important case, perhaps, is when we have to tell someone, “We can’t give you a loan, you can’t afford it.” It’s a much better story if you can then show them a few things they could do.

FR:    So arming people with advice to improve their situation?

ML:    Yes. I think there’s plenty of prospective borrowers who are told, “You’re not welcome, you’re too risky, you don’t have enough assets and your debt to income ratio is too high.” Whatever it is, that’s not helping them.

FR:    And you believe Affirm has the trust necessary to have that dialogue with customers?

ML:    Well, our NPS score is +82, which I believe puts us very high in the financial services product ratings.

FR:    It’s strong.

ML:    PayPal, much to my retroactive chagrin, isn’t quite there, but some of the banks you mentioned earlier are in the negative, so we’re in good company with Apple and Tesla. I think there’s real room for us and others who want to give customers honest advice.

FR:    I’m sure you’ve been following the bank charter applications being submitted by a few fintechs. I’m guessing you’re rooting for them.

ML:    Absolutely. I think the position that some of the regulators have taken lately is refreshing.

FR:    But we haven’t seen any new charters approved yet.

ML:    Well, I think it’s important that there is a fintech applicant approved sometime soon, because it sends a signal to the rest of the industry that it isn’t a locked door anymore. It’s almost as important as a signal vs. the actual event.

FR:    Agreed. And when I look at Affirm, I think you’re in the trust business, right?

ML:    That’s exactly what we’re in.

Bitcoin

FR:    I wouldn’t be surprised, then, if one day we’re talking about Affirm’s application, but speaking of trust, let’s turn to the opposite, the world of trustlessness. You made some comments recently about Bitcoin, which then went all over the place. You said the math is beautiful. I’m wondering if you’ve studied Ethereum, Litecoin, XRP and others, and if you see similar beauty.

ML:    With a pen and a napkin, I went through the Bitcoin math to convince myself that it really does work, and it does. It’s pretty beautiful. I spent a moderately similar, but not as obsessive amount of time on Ethereum, and less with all the others. They are somewhat repetitive as far as their solutions to the Byzantine generals problem. Proof of stake is kind of fascinating, though…

FR:    So just to clarify, you’re not a Bitcoin skeptic…

ML:    Right. I occasionally get written about as a hard skeptic. That’s completely untrue. I’m a big believer that Bitcoin is the single best distributed ledger system out there. Mind you, a bunch of improvements have to happen around block size and speed of network.   

FR:    And you believe that practical benefits will come from the various blockchain initiatives out there.

ML:    Yes. Verification of provenance on anything from food to fine arts and notarization of documents will eventually be done in a blockchain. These aren’t enormous industries necessarily, but they’re important, and they will take the cost from a little bit to nothing.

FR:    How about digital assets as a store of wealth?

ML:    As a modern version of gold it makes sense to me, but I think the volatility right now is not a great thing. Putting five percent of your net worth in Bitcoin probably makes sense for some people. If you’re going to put 90% of your net worth into Bitcoin, you should just go to sleep for a while, because the volatility is going to give you an ulcer.

FR:    So jumping back to the other ones, you don’t seem as enamored.

I’m skeptical about the smart contract ones like Ethereum because I just don’t see a killer use case for any cryptocurrency making its way to things like buying bread. It’s just easier with credit cards or cash.

ML:    I’m skeptical about the smart contract ones like Ethereum because I just don’t see a killer use case for any cryptocurrency making its way to things like buying bread. It’s just easier with credit cards or cash.

FR:    Cash?

ML    Yes. Cash is all kinds of bad in terms of actual transactional usefulness, but Ethereum isn’t better. I’m not going to bust out my phone and fumble through my private key. You can clean up the user interface and it eventually might make sense. But by definition, if it’s growing almost exponentially, why am I spending it on bread?

FR:    Right, but that’s more of an issue with the volatility than the utility.

ML:    If the volatility goes away, sure, maybe I’ll exchange it for bread, but I still haven’t found the compelling use case. The footnote is in use cases such as contracts on people’s heads and anonymous purchases of weapons. I’m not in either of those markets, and I hope they remain small.  

Amazon and Other Investments

FR:    Besides Bitcoin, another widely discussed topic these days is Amazon. As you know, some fear that Amazon and other big techs will become a threat to mainstream financial services. What’s your take on that given your perch at Affirm?

ML:    Amazon clearly chose to play in the significantly less regulated part of fintech, namely small business lending. It’s not clear to me that it stays that way, and it probably has the single largest database of credit cards ever assembled, so in many ways it’s a payments provider par excellence with scale. But as to your question, Amazon is already in a lot of businesses, and I think that’s probably why people have good reason to worry about Amazon entering anybody’s territory.

FR:    Looking beyond Affirm, you have investments in start-ups including Kalo, Reverb and ClearTax, among others. Is there a unifying theme to your selections?

My investment theme involves stuff that interests me personally. I then ask myself if I think I can help and if I think the founder is brilliant.

ML:    My investment theme involves stuff that interests me personally. I then ask myself if I think I can help and if I think the founder is brilliant.

FR:    Old-fashioned chemistry?

ML:    Yes. Do I have a deep connection with the founder? Do they want my involvement, and if they do, do I feel like I can help? I don’t invest in things where I think, “Wow, that’s the coolest thing ever. I don’t understand the business, but gosh, that’s a great way to make money.”

Politics and Social Issues

FR:    Lastly, I’d like to turn to politics.

ML:    I try to stay out of that.

FR:    Yes, but your Nuzzel feed and some of the things you share on Twitter indicate a perspective on things.

ML:    Sure.

FR:    People have come to expect opinions from The FR, but we’re niche. You’re trying to build a massive financial services company. Do you ever struggle with whether you should share a specific piece of content, given that you want huge numbers of people using Affirm?

ML:    No. I generally come at all these things from a very pragmatic but empathy-filled point of view. I think I understand why people voted for Trump, even though I didn’t agree with the outcome, but I can appreciate the hope they’ve lost and what they hoped to gain by voting for him.

FR:    But you like to call out stuff as well.

ML:    When I refute something, it’s fundamentally about what I think is right and wrong. It’s because I can relate to the issue at hand. I care about people, as trite and self-aggrandizing as it sounds. And as an entrepreneur, I try to improve people’s lives. So if I think things are wrong, I will say something about it, but I try very hard to never let it boil down to being a representative of a party or a set of dogmas. Because if you do, that’s when you have to worry about pissing off the other guys.

FR:    Well, keeping sharing stuff, Max, and best of luck to you in pursuing Affirm’s mission.

ML:    Thank you.

This Interview has been edited for content, length and clarity.