PayPal co-founder Max Levchin is gearing up for a busy holiday season, especially from millennials.
Levchin's latest venture, Affirm, is an online lender that's offering a new way for consumers to buy gifts for friends, loved ones and themselves. Jewelry from Chloe + Isabel, guitars from Dean Zelinsky and wireless speakers from Sol Republic are among the latest items that can be bought with a loan from the start-up.
When purchasing an $850 mattress from Casper or $1,500 electric skateboard from Boosted Boards, buyers are given the option of a payment plan from Affirm. Launched last year, the company has about 100 merchants on board.
It's just the first step for Levchin in building what he ambitiously expects to be a bank of the future, one that customers enjoy rather than loathe. Next in Affirm's product pipeline is education lending, which Levchin said is coming "imminently." Small business loans are on the horizon, and Levchin has designs on eventually housing consumer deposits.
"People born in the '80s have absolutely no love for banks and have witnessed their parents get(ting) manhandled by the banking establishment in the 2007-08 crisis," Levchin said in an interview at Affirm's new office in downtown San Francisco. "The thesis is—there's actually room for honest finance."
Levchin is by no means the first tech entrepreneur to apply techy smarts to loan underwriting. LendingClub, which is on file to go public, and Prosper Marketplace pioneered the peer-to-peer lending market by creating programmatic underwriting and connecting borrowers with individual lenders. Think Finance and ZestFinance developed technology for lending to the underbanked, while SoFi and CommonBond provide online refinancing for college debt.
But none of those companies are led by the guy who developed PayPal's antifraud software 15 years ago, when e-commerce was in its infancy. After leaving PayPal, which eBay acquired and is now spinning out, Levchin went on to start social game developer Slide in 2005 and sold it to Google in 2010.
"With PayPal, Max reinvented how people make purchases with plastic cards," said former PayPal executive Keith Rabois, who is now a partner at Khosla Ventures and board member at Affirm. "With Affirm, Max is reimagining the antiquated and opaque credit system in favor of consumers."
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Right off the bat, Levchin is going up against the company that made him rich. PayPal Credit, formerly known as Bill Me Later, is an online lending option used by mega retailers such as Target, Best Buy and J.Crew.
Affirm is distinct in a couple notable ways. Whereas PayPal's service was built for the Web, Affirm starts with the assumption that many consumers will be buying from smartphones. And PayPal offers a revolving credit line, so consumers can pay it off right away or over many months. Affirm issues installment loans, where the borrower decides at the time of purchase whether to pay it off in three, six or 12 months.
While Affirm doesn't charge late fees or add interest, the company says in the frequently asked questions section of its website that "a late payment may prevent us from approving a future application for financing." (PayPal Credit charges late fees.)
According to Levchin, the comparisons to PayPal Credit make sense now, but he doesn't expect they will for long. That's because he's aspiring to create a full-service financial institution. PayPal didn't respond to a request for comment.
"A year from now, I hope it's not a fair comparison," he said.
Consumers who choose Affirm fill out some basic personal information like date of birth, address and Social Security information as they're checking out. Affirm immediately runs a credit check, using traditional methods as well as its own algorithmic fraud detection and underwriting tools. For those approved, Affirm tells them exactly what their monthly payments will be, with interest included. Annual percentage rates range from 10 percent to 30 percent.
For any lender, particularly a start-up, the biggest risk is bad loans. It's a risk so great that for an immature business, raising cash to fund loans tends to be extremely difficult, if not impossible.
Levchin financed early loans with his own money, and then raised $45 million in equity from investors including Khosla and Lightspeed Venture Partners. Affirm also has a credit line with Silicon Valley Bank, and Levchin said the company is big enough now that it can raise warehouse debt lines and start securitizing loans.
"All those things are in the cards," he said. The cost of capital is "actually quite low, but it's probably going to go down over time some more."