Buy now, pay later: 'The enemy is the credit cards,' Affirm CEO says

Affirm CEO Max Levchin joins Yahoo Finance Live’s Rachelle Akuffo and Brian Sozzi to discuss company earnings, competition in the buy now, pay later space, the pullback in consumer spending, managing credit, investor sentiment, worker layoffs, and the outlook for Affirm.

Video transcript

- Affirm missed on earnings results a week ago and announced a 19% reduction of its workforce. Yet, the demand for buy now, pay later services continues to grow with the company seeing about a billion dollars worth of credit applications in an average week, but can the company maintain its edge as the new entrants emerge on the buy now, pay later scene? Affirm CEO Max Levchin joins us now to discuss along with Yahoo Finance's Executive Editor Brian Sozzi.

Good to have you on the show, Max. So as we know, of course, the buy now, pay later space, getting a lot more crowded. Apple now entering the space, as well, with its own pay later offering expected in the next few weeks. What is this doing for Affirm's business and its strategy in this space right now?

MAX LEVCHIN: Thank you for having me. I think it's important to put in perspective that buy now, pay later is about 5% of US e-commerce and less than half of a percent by my estimation overall retail. And yet, people have been borrowing money to buy things for quite some time and continue to do so. Buy now, pay later is a better alternative. So from my point of view, we are very, very far from saturation.

Affirm is unique. We cover both low AOV transactions, what's now traditionally called buy now, pay later, as well as monthly installments, which helps people buy more expensive things, like furniture and bicycles, et cetera. So obviously, competition is good for consumers, good for merchants. There's a lot of space to go after. The enemy or the competitor is the credit card, not each other.

BRIAN SOZZI: Max, it's Brian here. Good to see you here. In the earnings that investors digested, was that more of a function of the cyclical nature of the economy and macro forces? Were there are more operating challenges than you expected?

MAX LEVCHIN: It's really two things. So consumers are pulling back discretionary spending. There's no question about it. You can see it in our reports. You can see it in other reports, but folks bought a lot of furniture when they were trying to set up their house to be more like an office, et cetera. And they're now digesting that.

So the consumer discretionary pullback is very real. The more important thing from my point of view-- and it really is something that I hope all of our investors and anybody who watches the industry understands. --you can see it in the letter. As issuers of credit of all stripes, buy now, pay later, fintechs, traditional banks, the delinquencies are rising. Ours fell in this quarter.

We manage the business to credit outcomes for ourselves, for our consumers to protect their financial health, and for capital partners. We said over and over, again, we will do the right thing through the lens of managing credit to a number, and the industry will struggle. The industry is struggling. We are not.

That absolutely comes with some amount of cost relative to growth. If someone should not be borrowing money, because they can't pay us back, it is important for us to say, "We cannot do it." The billion dollars of applications are great. That a number, frankly, but the approval rate is what governs how quickly we can grow. And we will continue printing credit numbers that we control as an input into our business.

It's really, really important we continue delivering on that input. As we get through the full economic cycle, we hope to have a definitive answer to all of our watchers that say, "Well, can you really can you really underwrite?" I think we can. We've showed it last quarter. We'll continue showing it.

BRIAN SOZZI: Max, we've gotten to know you over the past couple of years as you've grown a firm, and I'm sure layoff news, having to make an announcement like that was very tough on you personally. Take us through that decision. How much money will that save the company?

MAX LEVCHIN: It's tens of millions of dollars of operating expenses that we took out. It was a really, really difficult decision, probably the most difficult one in the history of the company, and it's been over a decade now. I believe it's the right one.

Like a lot of Silicon Valley, we had hired more people that we were reasonably able to support given the revenue growth. As the economy slows down, you can reasonably expect more slowing.

Biometrics, you have to control your operating expenses as a publicly traded company. We have to take the responsibility, and that said, the team is extraordinarily resilient. I've gotten just an unbelievable outpouring of support, both from impacted Affirmers and the ones still here, and we are plugging back into work and just going after it with the same gusto we always had.

- Well, it's, obviously, incredibly tough at the moment when we do see these layoffs happening and companies having to make some of these costs. In terms of how you see the business growing from here, perhaps, different offerings that you plan on foraying into beyond buy now, pay later, we know that there's been some forays into debit as well.

MAX LEVCHIN: Mhm, I think that's the great tee up. So Debit Plus, the card that we've been working on for quite some time, and it certainly took multiple shots at sort of re-figuring out the user experience and, frankly, the underwriting challenges there. We're very excited about the state of that product at this point. The thing that I mentioned at the beginning of this conversation, the penetration into offline US retail is tiny. It's half of a percent, and that is where our products can help, especially during an economic downturn.

You don't just use buy now, pay later, or at least, from our point of view, you don't just use buy now, pay later for couches and bicycles. You can also use it for groceries. You can also use it for all the daily consumption decisions that you make, and the card that we're rolling out will help us bring the service, and the transparency, and the late fees, and no deferred interest, all the things that we are known for to every Affirm consumer.

So we're very excited about growing offline usage, very excited to help folks buy commodities and things that they just need as opposed to want. So there's just a lot of growth we see there.

BRIAN SOZZI: And, Max, listen, Affirm, it's a challenging business. It's complicated, I think, for a lot of average investors to understand. Now, maybe you could explain to them some of these contract renegotiations you're going through and the pricing structure on that. What are you trying to do, and are you through this process?

MAX LEVCHIN: Yeah, I think that's a-- this particular aspect of Affirm's business is actually not that complicated. The long and short of it is we charge consumers, and we charge merchants for the transactions that we power. The EPR the consumer pays, not exactly the same thing, by the way, as a credit card EPR, but you can almost think of it that way.

The maximum rates that we set in our contracts going back 10 years was 30, and the national-- there's not a law. But there's certainly a national consensus that the reasonable maximum rate is 36%, and that's about 3% per month goes back about 100 years. That's sort of how conventional wisdom was created, because it's really important for us to be transparent with a maximum rate disclosure and because there's fair lending laws that we absolutely have to meet. It is important we go and resign our contracts with merchants saying, "Hey, that is the new maximum rate."

We take great pride in how we treat consumers. It's not a renegotiation, but it is something that has to be contractually documented. And the mistake I made, which I owned in the letter thoroughly, hopefully, fairly clearly, we waited a little longer than we should to speak with our merchants about amending all these contracts. Doing that through calendar Q4 is a fool's errand. All these things took a lot longer than we expected.

That said, we have very high confidence our merchant partners want more transactions. Being able to expand the maximum APR allows us to approve more people, and both sides, all three sides, Affirm, the consumer, and the merchant, want more transactions, especially in a tough economic market. So that is not a long term concern. I feel very confident we have gotten through that, but the timing of it last year had a real impact on our ability to approve more people.

- And, Max, I want to ask you about a suggestion by Morgan Stanley Analyst James Faucette. He was saying that, perhaps, using buy now, pay later as a way to get customers in and then, perhaps, having the best customers then move to more traditional credit products would be a way to improve efficiency and, perhaps, grow the business. What are your thoughts on that?

MAX LEVCHIN: You know, I think that's a little bit of, no offense to the analyst in question, sloppy thinking. Buy now, pay later is what, I think, is typically referred to as the pain for no interest six week products that is really fun. It really doesn't work for a lot of transactions.

If you're buying anything that's more than a couple hundred dollars, you want to pay for it over time, but over five months, over 12 months, sometimes, over three years if you're buying something particularly expensive. And that is a great product. It's a great alternative to credit cards. That's what we launched with.

We've been doing this for a decade. So I think arguing that you give people a taste of buy now, pay later with a 0% six week product, and then you sell them a traditional credit card is profoundly not what we will do. However, we do get a tremendous number of users through the six week, zero interest product, and then when the time for them comes to buy a couch or a bicycle, and they want to pay for six months or 12 months, we're there for them as well.

So as a company that offers a full suite of credit, we are already there, and in fact, we don't think of one as the user acquisition engine for the other. It's just a full set of features that we must offer to our consumers to be a viable competitor, to be a viable replacement for a credit card. I think there's a fair number of other companies that only do buy now, pay later paying for, and for some of them, especially some of the contracts they signed or economic decisions they make, those are not profitable transactions. And they are struggling to figure out a business model that works for them.

Our business model is great. One thing that we spoke about in a call is that the loans we generated last quarter are some of the most profitable, margin rich loans that we've ever made as a company, and it suggests that our product is more valuable to consumers. It is really important for them to pay over longer period of time, which the reason they become more marginful is because the terms of the loans are slightly longer, so a little bit more interest earned in those.

So generally speaking, I think buy now, pay later is not a user acquisition engine. It's a real product with real value for real folks, and we have 15.6 million of them last quarter to report are happy users.

BRIAN SOZZI: And, Max, you've been consistent with me in the past when we've talked, and you said, "Brian, I've not sold a single share of Affirm." Is that still the case, and are you looking to buy anymore just given where things have gone?

MAX LEVCHIN: I have not sold a single share of Affirm in the history of the company. I have bought shares of Affirm not in extremely recent history of the company, but I didn't just sit on my founder's grant all through the fundraising process for the company. As a private enterprise, I bought shares, so I remain in possession of extreme conviction around what I'm building with my team.

- You can tell indeed. Thank you for joining us this morning, Affirm CEO Max Levchin. Thank you so much, and of course, our very own Yahoo Finance's Brian Sozzi, as well, thank you.