Consumer loans – a phrase that carries images of finance charges, predatory interest rates, and hidden fees.
Affirm, a new startup based in San Francisco, aims to change all of that with a simple, transparent, online consumer financing platform.
CEO Max Levchin was one of the co-founders of PayPal. But he learned from PayPal that the existing banking system is outdated, and “after selling PayPal to Ebay, I swore to never build another financial services company,” he told Opportunity Lives.
Yet after a decade building several non-finance related companies, Levchin one day found himself looking at how to get back into the banking industry, which he says was in “desperate need of innovation.”
So he began Affirm, with a new vision. “The opportunity to build an entire full stack bank from the ground up using new technology and products that customers would love and appreciate meant we had to take it on,” said Levchin.
It’s clear that the banking industry is on the verge of change, especially for young people. The Millennial Disruption Index finds that 71 percent of millennials would rather go to the dentist than listen to what banks are saying, and 1 in 3 are open to switching banks in the next 90 days.
Additionally, Levchin noticed that millennials don’t trust credit cards. A stunning 63 percent do not have a single credit card, wary of the hidden fees and high interest rates, according to a Bankrate survey. Affirm aims to offer an alternative to traditional consumer lending.
It’s simple, really. Creating an Affirm account only requires entering some basic information. Then when you shop at a merchant that accepts Affirm, you can simply checkout with the click of a button. Affirm lets you choose your repayment period (either 3 months, 6 months, or 12 months) and shows you your exact monthly payment amounts and total interest.
The loan is instantly approved, and the merchant fulfills the order and ships the product to you. Affirm immediately covers the amount of the purchase, which means that it bears all of the repayment risk from the borrower. That’s a big plus for merchants, who Affirm must convince to get on board in order to make the system useful.
To do this, Affirm has integrated with several platforms such as Magento, Celery, and AmeriCommerce that host thousands of medium-sized merchants. Individual stores can integrate Affirm into their online stores as well, offering an easy way for their customers to finance purchases while still guaranteeing that the full purchase amount is received at sale.
So if Affirm is bearing all of the risk, how does the company ensure that its product will offer better interest rates and ensure repayments? “We leverage data, the Internet, private and public databases, advanced anti-fraud technology, and we build models after models,” said Levchin. The company hopes to identify good borrowers that might be missed by the traditional credit score approach.
Most of Affirm’s team members are millennials, so the business is good at relating to people who have concerns about traditional banking. Affirm strives for honesty, transparency, and fairness in its products – building trust with customers keeps them using Affirm for more and more products.
That doesn’t mean it isn’t a challenging journey. Affirm has only been around for two years, and the company is entering an industry that traditionally has been very complicated. “The prospect of failure is real because the problems we have to solve are big, but the prospect of failure only acts a catalyst to get us through the late nights, weekends, and lack of sleep,” said Levchin.
Consumer lending, if it goes well, may be just the beginning for Affirm. The company plans to launch more products – student loans, car loans, and more.
Levchin’s experience, both with Affirm and the other companies he has been involved in, demonstrates that “opportunity is alive and well in America.” He has simple advice to people who think they may want to be entrepreneurs. “If you want to start a business, do it now, and if you think you want to start a business but aren’t quite ready, than join a startup and you will learn how.”
First published on Opportunity Lives