Affirm and Max Levchin

in it too. And you know what, this story has some really amazing things in it. There's a lot of drama. There's a cameo by Elon Musk, there's an evolutionary step in artificial intelligence, and we're going to start it all off with a little nuclear disaster. That's actually not a joke. We really are, Okay. So Max Levchin, who is formally no, not not former but for mole lead known as Maximilian Rafaelovitch.

Levchin grew up in Kiev in Ukraine. Now back then, when he was a child, Ukraine was part of the United Socialist Soviet Republic or USSR. They gave the Soviet Union, and in nine on the outskirts of a city called trip yat ninety miles north of Kiev, the Chernobyl nuclear

power plant experienced a meltdown. And perhaps one day I will do a full episode about the Chernobyl disaster, though it's it's kind of hard for me to justify doing that because there's already an incredible mini series that aired on HBO that gives amazing insight into what happened and

why the disaster was as catastrophic as it was. The too long, didn't read version is there was a combination of bad engineering decisions and worst bureaucratic red tape that made a disastrous situation way worse than it could have been otherwise. But suffice it to say that the disaster at Chernobyl irradiated the surrounding area, which is putting it lightly.

Maybe one day I will go into more of the technical side of what happened at Chernobyl um and just leave all the bureaucratic stuff for that incredible mini series. But let's get back to Kiev. So Max's mother, Elvina Seltzmann, was a physicist and her job was at the Institute of Food Science and Kiev, and specifically she worked in the radiology lab, So her lab would receive samples of food and then the lab would test those samples to

check on contamination and pollution, specifically the radioactive kind. I mean, some of this was coming from the areas that were around nuclear power plants, so this was a way of

keeping tabs on how things were going in those environments. Now, the story goes that in April of nineteen six, not long after the Chernobyl accident, which still had not been fully revealed by the Russian government, Like, people knew that there had been an incident in Chernobyl, but they didn't know much more than that, because the government was trying to keep a very tight lid on what had happened, not just to prevent panic, but also to not let

the United States know about the severity of the problem, because that would be admitting weakness. There were other elements

as well. Anyway, around that time, Elvina had received a loaf of bread from the north of Kiev, so closer to where Chernobyl was, and was meant to do tests on it, and she saw that it was actually luminescing it was lowing in her lab and immediately she knew that this was an incredibly severe problem and that the incident at Chernobyl was way more serious than what the government was living on too, and so she wanted to

take the opportunity to try and rescue her family. So, fearing for her family's safety, she rushed herself and her family onto a train bound for Crimea, which is hundreds of miles away and presumably in a zone that would be safe from the radiation of Chernobyl. By the time their train arrived in Crimea, the Soviet authorities were already in action. They were using Geiger counters to scan each and every person who had fled over to Crimea and

checking for radioactive contamination. When they scanned Max, the Geiger counter went off, and in fact, according to the counter, it looked like Max's leg was giving off radiation, and so there was a very real possibility that doctors would amputate Max's leg. There was uh, not a full understanding of what radioactive or radiation poisoning entailed, though they were getting a pretty drastic crash course in it in the so Union at this time, so this was something that

could have happened. Max could have ended up having a leg amputated when he was just a kid. But Elvina had Max taken off his shoes and when they scanned him again, the Geiger counter didn't go off, but it did go off over the shoes, and it turned out Max had stepped on a radiated thorn from a rose bush and the thorn had stuck into issue and that's what was tripping the Geiger counter. That is a heck

of a childhood memory. Now, just so y'all know, I am only lightly older than Max, like literally by a couple of weeks. I am older than Max. I cannot imagine having had that experience as a child. Now. Max was also really interested in computers. He had been programming on things like calculators. He had designed programs on paper because he didn't always have access to an actual calculator

or computer. He did have the opportunity to work on some computers when he would occasionally help his mom in the food science lab, but the family didn't own a computer of their own. In as the Soviet Union was crumbling, his family immigrated to the United States Because in the Soviet Union, which was rapidly deunionizing, inflation was out of control. The money was starting to become like completely valueless, so

this was a move for survival. They moved to the United States, and he had held out hope that his family would be able to buy a computer once they got to the US, but they only had a few hundred dollars to their name when they arrived in the States, and of course they had no established credit in the States, so there was really no chance for him to get

a computer of his own. So the reason I bring that up is that, as it would turn out, the company, a firm that we'll talk about later in this podcast, is designed to help consumers buy things they need or in some cases many cases, things they want when they may not have the full amount of cash on hand to actually buy it. So this story is really kind of a fundamental one when it comes to why a firm exists. But let's get back to Max for a bit.

His family settled in Chicago. Max was sixteen, and boy howdy, this kid was way more forward thinking than I was. So while I was running a D and D games and then later on a D and D second Edition, he was studying computer science. He attended the University of Illinois at Urbana Champagne, and while there he founded several companies as he studied computer science. This was in the early days of the web. I think of this time this is about the time I was finally coming around

to the Web. I had previously turned my nose up at it when I first was exposed to the World Wide Web, because I just thought it was slow and clunky and that it didn't have the usefulness of something like a tel net and FTP servers did. So I was very The web is another one of those examples of something where I was like, oh, this is never going to take off. Clearly, I have a terrible ability

to see into the future. But le Gin saw the potential to monetize a business on the web, and so most of his early companies were ways of trying to sell advertising space, like banner ads on websites. So he was essentially acting as a broker, you know, pairing advertisers with websites that are willing to host an ad. So he did not invent the banner ad. It's not like he's the guy who created that, but he got in

on the ground floor. Now, most of his companies didn't go anywhere, but one of these advertising companies got the attention of a larger entity in the advertising business. This was a company that was called link Exchange, and link Exchange was in turn, only in business for a couple of years before it got acquired by Microsoft. It did continue to operate under the brand name link Exchange for several years even after that acquisition. But anyway, that's not

really important to our story. What is important is that Legend being able to sell his business to link Exchange meant that he actually had some decent money when he graduated college, and he used that money to fund a move from Chicago to California, you know, the tech mecca

of the United States, or Techa for short. I guess. Anyway, he got there, didn't have quite enough money to really establish himself, so he crashed at a friend's house, a friend who was attending Stanford, and so he essentially grabbed some floor space in his friend's apartment outside the University

of Stanford. And at least the story I read was that he would spend his days kind of crashing lectures at the university, just kind of coming in and listening to lectures, which you know, you could get away with with big universities. I mean, a lot of those lecture halls seat hundreds of students, so it's not like they check you when you come in to make sure that you're taking the class. So he was sitting in on lectures.

And the story I heard was not that he was so hungry for more information and wanted to get the benefits of a stand Stanford University education without actually, you know, enrolling in the school, but rather it was a more practical consideration of just getting out of the apartment and also getting out of the heat of the day staying

in a nice air conditioned location while watching a lecture. Now, one of the lectures he attended, which really ended up being more of a tiny seminar, was one that was attended by like half a dozen people, and it was led by an entrepreneur named Peter Thiel. And there's someone else I could do a full episode about. Levechin and Feel met after the seminar, and they chatted and found

that they had a lot in common. They both were incredibly enthusiastic about tech and entrepreneurship, and ultimately they decided to go into business together. So they first created a company called field Link, which was a digital security company and made software that allowed personal Digital assistance or p d A s create an encrypted IT folder into which the user could safely store data. Quick quick word on PDAs or personal Digital assistants. These were devices that were

smartphones without the phone part. So before smartphones, we had these devices called p d a s where you would have things like you would store a contact list, and you would have maybe a note taking app in in that particular PDA, you would have a calendar, you might have access to email, like you could connect to a network and actually um send and receive emails. A lot of these. The way that worked as you would synchronize

your p d A with a computer. So when you would do that, it would load new emails into the p d A which you could then read and respond to, but it wouldn't actually send anything out. It didn't have native connectivity. For a lot of these PDAs. It was only when you synchronize with the computer again that it would go through and say, hey, here's some emails this guy I created or this woman created or this person created when they were using this medi a, Uh, send

those out. And so you might compose an email at two PM, but it doesn't go out until six pm when you synchronized it with your computer. But PDAs were an early hint of the revolution that was to come. I mean, obviously when partnered with connectivity features, whether it was wireless connectivity to like WiFi networks, or wireless connectivity in the form of cellular connectivity, it would completely change the world. That's where you know, the smartphone would really

pick up and and carry that forward. Well, they created an offshoot service for this encryption solution that they had created for PDAs, and that offshoot was a way to transfer money digitally between p d a s where you could have someone essentially digitally wire money to someone else by connecting the two PDAs together. And they called this service PayPal. That service turned out to be the most popular aspect of field Link. Theel and Lefin would change

the company's name, but not to PayPal. They changed it to a company called Confinity. We'll talk more about Confinity and its evolution toward becoming PayPal after we take this quick break. We're back and enter Elon Musk, who was more than two decades removed from being the guy who said he was going to buy Twitter, entered into an agreement while waving due diligence and then said just kidding and tried to back out of the deal. At this point,

Musk was not anywhere close to that. He was a student at Stanford and he had founded a company that he called X dot Com. Now, like PayPal, X dot Com was in the digital money transfer business, though this was by linking accounts to email rather than linking accounts to a personal digital assistant. Musk feel and left End saw two potential pathways that were before them. So in one path, X dot Com and Confinity slash PayPal would

squabble over market share. Both ventures were still very young at this point and they could get nasty and potentially put both companies at risk because there was another digital money transfer service that was on the rise at this point. So the worry was that if they tried to compete against each other, they both would get defeated by this third competitor. So the other pathway was to combine forces and to corner the market early on, giving a much

better chance for success in the long run. So they chose option to X dot Com and Confinity would combine. They ultimately called the new company PayPal, and the service would follow X dot COM's lead, with user accounts tied to an email address rather than to a personal digital assistant. This would put Levchin, feel and Musk, as well as a bunch of others further down the line, into a group that would later get the name the PayPal Mafia.

So this tongue in cheek nickname implies that this small influential group would see their power and wealth grow substantially, which is true. All three of the folks have described so far are billionaires in the Musk, of course, is the richest person on the planet, so it is very much true that they saw their fortunes rise. Legend served as Chief Technology Officer or c t O of PayPal. THEIL initially served as chairman and Musk became the CEO for a few months, but then THEEL would take on

the role of CEO as well. Musk would step down later in that first year. One of Levchin's responsibilities was coming up with a way to prevent fraud a PayPal and Levechin and his team came up with a method to prevent automated scripts from accessing PayPal services. In other words, to prevent bots from being able to log into PayPal and to go through transactions automatically, it had to be

a human being behind it. So the method that they they relied on used distorted text that humans would still be able to read but a program wouldn't, and it was an example of what would later be referred to as a capture. Capture stands for completely automated public touring test to tell computers and humans apart. And to be clear,

Legend and his team didn't invent this. They were not the first to use this particular approach to kind of separate out the bots from the humans, but they would be the first to really commercialize the process, and it became known as the gal Speck Levechin test. Galsbeck in this case refers to David Gausbeck, who served as a technical architect at PayPal for about a decade. Now this is where that evolutionary step in ai I mentioned at the top of the show comes in. Let's break this

down first. The phrase Turing test is in the acronym capture, right, And for those who are not familiar with what a Turing test is, the phrase as we use it today typically means some form of test to see if a human can tell if a respondent is another human or

is in fact a machine and AI. So the classic example is you have a human who sits down at a computer terminal and they can type into a chat program and they're trying to figure out if the entity on the other side of this digital conversation is another person or if it is actually AI. And if human testers cannot reliably tell the difference, the AI is said to have passed the Turing test. Now with a capture, it's kind of a reverse of this, and the capture

itself is all tomate it. So instead of having a human administering the test, you have the computer doing it. And the idea is to create a scenario where a human can easily, at least in theory, pass a test, but a machine can't. So back in the primitive days of the early two thousands, using a block of text and image of text that has some distortion effects would

be enough. Humans would be able to recognize the swirling characters sometimes presented in different colors, but computers, which we're looking for more uniform representations of those characters wouldn't be able to do it. So to the computer, the the lower case are, for example, wouldn't look like an R, so the computer would be stumped. It wouldn't know that that was in fact an R Now that would set off a see saw like relationship in the AI community.

So computer programmers would create software that would get better at recognizing characters, even ones that had been distorted. That would mean that earlier versions of capture would become obsolete, because the whole purpose of capture is to prevent automated scripts from accessing something. And so capture designers would go back to the drawing board and launch a new version of capture, one that would exploit the limitations of text

recognition software, for example. Then the computer scientists on the other side would train up the next batch of recognition software, which ultimately would defeat the newer capture strategy, and so on and so forth. From one perspective, you could say this was the evolution of computer security, and on the other you could say it was the evolution of AI.

And it's kind of both um and in fact, we can see even more uh overt examples of this when you're looking at things like you know, you're presented with a panel of nine different pictures and you're told to pick all the pictures that have, say a fire hydrant

in them. Well, in that case, not only are you UH acknowledging that you're a human by picking out all the fire hydrants, you're also empowering an image recognition software in the background because you are you're teaching the computer systems this is what a fire hydrant is, and this isn't So legend has played a part in that evolutionary process. In two thousand two, PayPal would hold an i p O,

which is an initial public offering. Now, this is when a privately held company goes into a cocoon and emerges into a publicly traded company like a butterfly. UH. Investors then can purchase shares of that company on a stock market. PayPal made the transformation in February two two, with an

initial valuation of the company at around eight hundred million dollars. Meanwhile, eBay, the web based auction site, had launched its own digital payment processing service called bill Point with Wells Fargo back in two thousands. So bill Point is the competitor I was alluding to earlier, the one that x dot com and Confinity needed to be concerned about. So bill Points stood as the major competitor against PayPal, but by two

thousand two. Mid two thousand two, PayPal was on such a steep climb that eBay sought out an acquisition, which was announced in the summer of two thousand two and completed toward the you know, in October two thousand two. And the deal would be valued at one point five billion dollars, which is um a fair chunk of change. I think it was an all stock transaction. However, it wasn't like a cash purchase, so PayPal went public and

it was acquired all in less than one year. Selections share of PayPal meant that he was more than thirty million dollars richer. As a result of this buyout, things moved pretty quickly. eBay's culture was different from Paypals, and that was a big issue personally. I've seen that happen a lot, so tangential to this story. Once upon a time, I worked at a company that did human resources management consulting.

I won't name them, but I worked for them for seven years, and I like to say that I was kind of working for the bobs from the film office space. But one thing that our company really did was observed company culture, particularly in the wake of an acquisition or merger. That's because more often than not, there were disconnects between the two or more cultures, and these often would become the source of friction, frequently in the form of lower

employee morale and productivity. So addressing culture is important. It's also really hard to do now. Whether or not eBay's culture rub folks at PayPal the wrong way, I can't really say, But I can't say that. Over the following few years, more than half of the founding members of PayPal chose to leave the company, and ultimately that included Levchin. Although he hung out longer than most because he really

wanted to see a smooth transition over to eBay. Max looked around his next opportunity, which apparently was a very um traumatic experience for him because he found that if he didn't have something really occupying his time, he didn't know what to do with himself. His girlfriend at the time ended up dumping him because she said that he was like a junkie who was going without a fix because he didn't have a project to work on. She would eventually come back and the two would reconcile and

and ultimately mary and have kids. So it all worked out. But at the time, it was looking pretty uncertain. So one thing he did was he had kind of an incubator that he designed, a company that's meant to help other companies, you know, launch, and within it he developed a sort of social media service that other platforms could use,

called slide Now. Originally, the plan was to create a image oriented shopping service, so that when you went shopping for stuff online, you would see photos of the things you were browsing for and that would make the experience better. But it then evolved into more of a photo sharing service, and it wasn't a standalone competitor to like Facebook or MySpace or that kind of thing. Instead, it was a behind the scenes media sharing service that those sorts of

platforms you know, Facebook and MySpace could actually utilize. They were essentially apps that could work within those frameworks. In Google purchased slide for somewhere between a hundred two million and two dwenty eight million bucks. Uh. The amount actually depends upon which source you read, and according to a two thousand seven Business Week article, Levchin had previously thought that any buyout of less than one point five billion

dollars would be the mark of failure. So I guess Sad Trombone, except Sad Trombone feels weird for a deal that was still more than a d fifty million dollars and maybe more than two hundred million, depending upon which sources correct. Google would later shut down Slide, because of course it did. I've done episodes about tools and services that Google has introduced or acquired and then subsequently shut down.

It happens a lot some so that if you do create something really cool and Google buys it, you should probably resign yourself to the fact that the cool thing you made is not long for this world anyway. Legend briefly worked for Google, and according to some reports, that was the whole purpose in the first place. The Google bought Slide not to buy Slide, but to get access to Lefjin, and he wasn't really happy there. He didn't find that it was challenging him enough, so he left

the company in pretty short order. He had also invested in various other startups along the way, including Yelp. In fact, he was the largest initial shareholder of Yelp, and he got a new idea for a company, the one that would be called a firm. Now before a firm, there was HVF. This initialism stands for hard, valuable and Fun and it's another incubator. It's the second incubator that lef Gin made. And again this is a company that helps

folks bring other companies to life. So it's a company air you can kind of work on a concept and work on it on every stage, all the way up through the company launching. So essentially, HVF is kind of a safe space for companies to take shape so that they have the best chance of success when they actually go live. So sometimes that might mean sitting on an idea for a while because you're waiting or you're actively trying to develop the technology that will actually support the

businesses mission. And maybe that I've got this great idea, the tech to make it happen isn't there yet, but it's on the horizon, and so I'm using the incubator to kind of flesh out my business idea while I'm waiting for the tech to mature. In other cases, it could mean holding off until you've really nailed down the business model for the company, because we've seen that over and over where the tech is there, but the actual plan on generating revenue isn't and ultimately the company fails.

So that's the purpose of the incubator. Well, a firm would be a company that came out of HVF. The concept behind a firm is relatively simple. For generations. Wealth in America has been tied tightly to the concept of credit, and to build up credit you need to make use of tools like credit cards and loans, right, but these can be tricky to understand, and for younger generations, stuff like credit cards and loans represent a huge scary risk.

We've been through enough economic recessions we're heading towards another, and the idea of having to purchase stuff on credit is kind of scary. The threat of insurmountable debt is very real, particularly for folks who already have substantial student debt. That's why there's this big move to have more and more student debt canceled, because it's holding people back from being able to engage more fully with the economy. There already saddled with such huge debt that they can't really

think ahead to anything else. It's also a big challenge for people who have immigrated to the United States who have no pre existing credit history in the US. It can be hard to integrate into the system, and so there are millions of folks who are left behind because they aren't part of the traditional banking and credit system. A firm is a fintech company that partners with merchants primarily, although now they also have a standalone program, but we'll get to that. So what affirm does it is it

offers a buy now, pay later solution to customers. So let's say that you wanted to purchase a new computer. Let's say that you're newly immigrated to the United States and you want to purchase a new computer, but you don't have the scratch to do it. You don't have all the money that you would need to buy it outright. Well, you might find that the seller you're looking at is partnering with a firm, and in that case you can take what is essentially a small loan to purchase the computer.

So it's a loan specifically for this purchase. Then you pay back a firm in regular installments. A firm does have a bank partner to make this work in the background. It's c us River Bank, and there are a lot of things that have to happen in the background. For this to even be possible. We'll talk about that more

later in this episode two. Now, when we come back, we're gonna talk more about what Affirm's model is like and how it does what it does, and also why some people have criticisms for this particular model of purchasing. But before we do that, let's take a quick break. Okay. So Affirm offers small loans to customers, loans that are enough to purchase something, whatever it might be, and you do that at the point of purchase, where you essentially

apply for this loan. Affirm promises no hidden fees, no late charges. Uh you will if you get take out a loan with a firm and you refuse to pay it back, a firm can report to you to credit agencies, so that does have consequences, but they don't ding you for being a little late on your payments. You do have to pay interest on the loan, otherwise a firm

would be writing off a way to make revenue. That interest rate, however, varies by retailer, and at least according to Medium, it can be anything from zero percent, meaning that there's no interest at all. You're literally just paying back whatever the cost of the item. Was, or it could go all the way up to nearly thirty interest. Now, whatever the interest rate is, it means that you'll pay that much percentage on top of the final price tag

of the item you're buying. Right, So you know, if it's a hundred dollars and it's a thirty interest, it means ultimately you're paying back a hundred thirty dollars for the item. Um. That's a very simple example, but you get the idea. So the flip side of that is you're playing paying in installments, right, so you're paying smaller amounts over time, uh, that being three months, six months, or twelve months. Also, Affirm states that customers can pay

off their loan early with no penalties or fees. So if you have the money to do it, you can pay off the balance and save yourself the interest that would otherwise accrue over time. So how does Affirm determine if a customer is a good fit for a loan? Because you wouldn't just go out loaning out cash to everyone. You need to at least be reasonably sure that whomever you're learning the money out to is going to be

able to pay you back. Otherwise you're going to find yourself out of business, essentially robbed by folks who took out loans and then skipped on them, or people who took out loans and then, through whatever reason, we're unable to pay those loans back. In either case, the end effect is that you are left holding the bag if you've loaned that money out and they aren't paying you back for it. So AFFIRM judges a person's ability to pay back a loan own by doing a deep data

dive on that person. AFFIRM searches through tons of data, including social media posts like this gets a bit creepy, y'all. A firm is essentially crawling through your payment history on any publicly available transactions, your social media history, getting an idea of how financially responsible you are. So you know, if you're posting lots of stuff about how you bought that sweet scooter but you have nowhere to live now that you can't make the rent, that might not help

you out. When you apply to use a firm on a purchase, the evaluation only takes a few seconds, which is incredible, and that is something I find both impressive and scary. So there's this massive amount of information we're talking about the software has to comb through all this data, identify the points that relate to us, the potential customer, and then come to a conclusion. Now, I assume that behind the scenes, there's probably some sort of threshold or

score that a customer has to meet. Uh. It could be codified as a score or a rating or something, but I don't know because the inner workings of a firm are mostly hidden. What I can say is that it doesn't just look at a person's FICO score. Uh. That's a score that judges a person's credit worthiness here in the United States, though reportedly, at least think in some journals I've read, a person does need a FIC a score of around five fifty to qualify for an

affirm loan. Again, according to some sources, others dispute this. They say that you don't need to have any particular FICA score at all, so your guess is as good as mine. Now, this is what it's called a soft credit check. And that's important because and y'all, I know that this is bonkers, but a credit check alone from a lender, for example, can affect a person's credit score. So, in other words, your credit score could be one thing.

Then a lender checks your credit score, then your credit score could be lower as a result of the lender checking it. This is kind of like the observer effect in quantum mechanics, this idea that by observe something, you actually affect the thing that is being observed. But yeah, hard credit checks can ding a person's credit score, even if that person is otherwise being a financially responsible person.

No wonder. Younger generations don't trust credit cards, And to be clear, I'm not talking about when you check your own credit that should never have an impact on your credit score, but if a lender orders the credit check,

that potentially could do it. Now, the standard repayment plans, like I said, come in three, six or twelve months installments, And obviously the further out you spread payments over time, the less the individual payments will be the monthly payments, right, But then the longer you spread out, the more interest

you will pay accumulatively. So while a twelve month repayment plan will mean you're paying out less money per month, once you toll it up, you'll have paid more in interest than if you had gone with three or six

months of payment plan. Anyway, a firm is essentially sizing up each potential customer to get a judgment on if that person will be able to pay back the loan, and I can definitely see the business need for that, but it also feels invasive because frankly, it is I mean, it's going through your social media for goodness sakes, and it just makes me lean further away from credit and loans and stuff like that. And it really makes me understand the appeal of debit card culture, where you're only

spending what you have. You know, you don't spend more than what you have and then put yourself at risk. But Leftin's whole perspective is fundamentally different from that. He's looking at how people who for whatever reason, have little to no access to traditional credit solutions and how they can take advantage of purchasing power that otherwise would be outside their grasp. So there are two sides to this coin, and I think it really comes down to how each

individual out there judges how they feel about this situation. Like, I have credit cards, so it's not like I have completely abstained from this. I have a mortgage I pay, so there are definitely cases where I've got this thing going on right now, But I also can understand the reluctance to get into that world is scary to have

that debt sitting over you. Now, for a firm to work it originally had to partner with the merchants like that was the only way was by getting a partnership, and because a firm would assume the risk of the loans, merchants tended to be pretty cool with using it. The merchants get paid either way, right, So if the person pays back a firm or doesn't, the merchant still gets paid the actual price of the item, So that's great for them. Now, a firm collects a small fee from

each purchase. Uh, they also get the interest that's generated by the loan, and merchants can pay a firm for different levels of interest rates. So if a merchant wants to offer lower interest rates and therefore attract more buyers, like if a merchant says, you pay zero percent interest on this big ticket item, then it can pay a firm a feed to do that and affirm well, this is kind of in return for the money that affirm quote unquote loses by not having interest on the loan.

Affirm will says sure, we'll offer them alone with no interest. You have to pay us to compensate us for that, and the merchant, if they want to move this big ticket item, might do that, and then the consumer at the other end gets a zero percent interest loan. Now that's incredible, right. If it's saying you're gonna have up to twelve months to pay this off and you will be paying only the amount that you need in order to buy the item, no interest on top of it,

that's that's an incredible deal. Doesn't happen all the time because merchants again have to pay to offer those kind of zero percent uh interest rates. Now. One of the early merchants Affirm partnered with was one E. D. Flowers, and slowly Affirmed began to grow. It began to add more in network merchants over time. There's even a story that at one point Legend wanted to buy a gong so that the team could bang the gong whenever they

landed another major merchant part or. In two thousand seventeen, Affirm launched its pay with a Firm service, which allows loans for purchases from any retailer. Essentially, So I'm guessing the gonging at that time must have been excruciating and never ending. Now one partner that at least initially really gave a firm a boost was Peloton, and this all gets concentrated into that very short, intense span of time during the early days of the pandemic, when much of

the world was under quarantine rules. That's when Peloton saw an absolute explosion in orders. Now. Peloton, in case you don't know, is a company that sells high end stationary bikes and treadmills and offers web based subscription training services so that you can take classes from the comfort of your home. And they have different instructors who lead these classes, so you can find an instructor that you vibe with, take their classes on the equipment, and then Peloton gets

data from your workout. You get feedback, all that kind of stuff. It's like working with a personal trainer, it's just you're doing it remotely. Now, early in the pandemic, Peloton saw this huge jump in orders and a firm as a buy now, pay later company, got a ton of business from folks who wanted a Peloton but didn't wanted to shout. The two to three thousand dollars needed

to get one. There's a whole range of Peloton products, and it goes from somewhere like around the dollar mark all the way up to nearly four thousand dollars depending upon what it is you're buying. Now. According to the Generalist, Peloton sales at one time accounted for twenty eight percent of affirms overall revenue. Now, when nearly a third of all your revenue is coming from a single source, that can spell danger if something happens to that single source,

and Peloton would have a dramatic fall from grace. In late one early two, the company reportedly had warehouses full of product that was selling like the after that burst of interest from twenty came out. It turned out it could not sustain itself, and as a result, Peloton found itself flush with stock. So it had an enormous amount of supply very low demand. Uh, it became really in

in a precarious position. The company actually had to put a halt on production because it had nowhere to store the ding dang durn things because they were already chock full with inventory. And so this naturally raised questions about how that was going to affect a firm, the company that had depended heavily on those transactions. Now a firm had actually gone public in twenty one. And you know I mentioned already when I p O is the initial

public offering. A firm's initial public offering was a roaring success. So the initial price for shares before it went on sale on the market was estimated to be somewhere around forty nine per share. That's what they thought it would open at. In stead had opened at nearly around ninety dollars per share. It closed trading for the day at ninety cents per share, so nearly twice as much. Ultimately, the stock price for Peloton in November of would hit

around a hundred sixty eight dollars per share. Now, by the time it went public, a firm was working with more than six thousand retailers, so it's not like all of its financial eggs were in Peloton's shaky basket. But

this still raised concerns. I mean, twenty eight percent of your revenue in twenty that's so much so when in the late earnings call, when it became clear that Peloton was in serious trouble, affirm reps quietly side scept questions that related to Peloton because that was obviously a question that was going to be very difficult to answer. And chances are the folks in a firm we're working very hard to find a solution themselves. At that time, it

didn't have much that they could say. But you know, then we have the economic recession that's coming on, and that paired with the pandemic has really created a unique situation. It's had a big impact with a firm. Now, as I record this, a firm's share price is at thirty nine dollars and some change per share. That's ten dollars lower than what a firm estimated it's opening price would be during its I p O. It is a far cry below the hundred sixty eight dollar height of the

stock from November. Now, that being said, it is an improvement over where the stock was at a certain point back in May and May it dropped down to below fifteen dollars per share. So talk about dramatic changes in value. Right to go from a high of a hundred and sixty eight dollars to a low of fifteen dollars in less than a year. Now, again, a firm has recovered quite a bit since that fifteen dollar low. I think it was like fourteen dollars six three cents if I'm

being more specific. But still thirty nine is not great, right when you when you once were at a sixty eight. Now, part of the issue is that so far a firm has not been a profitable company. It has operated at a loss. But then a lot of companies do that, especially early on. Right and a firm expects to reach income profitability by the end of fiscal year twenty twenty three, so the end of its fiscal year next year, it should be a profitable company, at least according to its

own projections. Now, at least some analysts think that affirm is actually in pretty good position right now, and economic recession could mean that more people will start to rely on buy now, pay later solutions in order to get the stuff they need. That being said, there are other concerns. There are people who say, well, that could mean that fewer people will be willing to do buy now, pay

later because they're worried about the debt. Then you have Apple, which launched its own service called Apple Pay Later that stands as a potential threat to affirms business. It also reaffirms that a firm was onto something with this business model, and a firm had to tighten its underwriting standards early in the pandemic, meaning that the company had to become more selective when it came to choosing who who would

get loans and who would not. Uh so much was uncertain that you can understand where the company was coming from. You know, we weren't sure which businesses we're going to survive the conditions of the pandemic and which ones might fade away. And yeah, talking about this is ikey because at the end of the day, what you're really talking about are the human beings who need money in order

to purchase stuff. I definitely feel way more sympathy for the people who rely on buy now, pay later in order to get necessities, rather than say, affluent folks who just want to spread out their payments for an expensive exercise bike in their homes. I don't feel a whole lot of sympathy for them. Now, you might wonder how the Heck Affirm can actually loan out money in the first place. I mean, it's how how do you have

a company just magically grant money to people? Well affirm borrows from around twenty different banks and pension funds and other pools of cash, which, yeah, I mean pension funds. Man, what a world we live in to think of a pension fund is a viable place to borrow money from that that a pension fund deps when someone wants to buy an expensive toy. Now, maybe that's just me being

particularly anti capitalist today. Sorry about that anyway. As long as folks are paying back their loans, everything works fine. But if there is a surge in delinquencies, it puts a firm in a really tough position because it will still owe the borrowed money to those various funds and banks. Now, I know I've talked a lot about finance in this episode, but we have to remember this is all built upon technology, affirms. Tech includes this process of evaluing a potential customer before

approving a loan or denying it. We're talking about digital money transfers. We're talking about transactions that are mostly happening online. So there is a big tech aspect to this um. As for what's in the future for a firm, I don't know. And as for my own personal thoughts on it, I've got mixed feelings. On the one hand, I think a better solution for most people is to put money aside for purchases and just to to wait until you

have the money to make the purchase. So, in other words, maybe using an app that lets you set aside the same amount of money you would be spending on a buy now, pay later scheme, but then just using that to outright purchase the stuff, and then you don't have to pay interest, right, You're just paying the asking price for whatever the product is. But that means you have to wait, and in some cases you may not be able to write for necessities, you might not have that luxury.

And in other forms, I'm thinking, you know, there there is so much of our world that is based upon our ability to access credit, and for tons of folks that's an avenue that just isn't a viable option. So yeah, I have I have complicated feelings about this. I think it's a valuable service. It's just a valuable service that is built on top of or next to a an infrastructure that I personally find somewhat scary and nikki, but hey, you know, we got to navigate the world one way

or another, right anyway, That's the story. On a Firm and Max Levchin hope you enjoyed. If you have suggestions for future topics, make sure you reach out and get in touch with me. One way to do that is to download the I Heart Radio app. It's free to download. Navigate over to tech Stuff, use a little microphone icon, leave me a voice message, or send me a Twitter request like this one was. And the Twitter handle we use is tech stuff HSW and I'll talk to you

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