Max Levchin, the entrepreneur who helped build PayPal Inc. and Slide Inc. before they were snapped up by Silicon Valley giants, sees his latest startup as the one with staying power.
Affirm Inc., a company he co-founded in 2013, has developed a new way to lend money to consumers. And while many Silicon Valley entrepreneurs would be loath to enter the realm of banking services, the move puts him alongside companies like JPMorgan Chase & Co. (JPM:US) that have lasted more than a century, Levchin said.
“Financial-services companies -- for better or worse, they learned how to be here,” Levchin, Affirm’s chief executive officer, said in an interview this week at Bloomberg News headquarters in New York. “In aspiring to leaving a mark, you want something that sticks around.”
Affirm, based in San Francisco, offers on-the-spot financing for shoppers making purchases online. The idea is to let consumers take out a loan with an upfront charge, rather than having to put the purchase on a credit card and worry about late fees and interest payments.
By actually lending money to shoppers, Levchin is going a step further than PayPal, which manages online transactions. PayPal gained a following by allowing small e-commerce companies to accept payments -- either from a customer’s bank account or credit card -- without having to work directly with financial-service providers. EBay Inc. (EBAY:US) acquired the company in 2002.
Affirm, which has raised $45 million in venture funds, aims to capitalize on millennials’ antipathy to credit cards. Sixty percent of people in that generation -- often defined as those born after 1980 -- mostly rely on debit cards and almost half have no interest in using a credit card, according to the company.
The startup has forged partnerships with online retailers such as electric-bike seller Faraday Bicycles Inc. and high-end brewer maker Blossom Coffee. When it’s time to pay, Affirm evaluates a shopper’s creditworthiness, calculates interest and divides the purchase into installments. After the item is paid off, the loan disappears -- unlike a revolving credit line.
Affirm doesn’t use the traditional FICO credit score to calculate borrowers’ risk, which could be appealing to customers without a lengthy credit history or who don’t have a strong rating. Instead, the startup takes into account the cost of the item being purchased, social-media profiles and a range of personal data. The company also sends a text message to borrowers’ mobile phones to help confirm their identities.
‘Behind the Curve’
Traditional financial-services companies have been “behind the curve” when it comes to lending to customers who have lower FICO scores or don’t fit a certain profile, said Jason Arnold, an analyst at RBC Capital Markets in San Francisco.
Unlike credit card companies, which profit from late payments, Affirm makes money by taking a small portion of each sale, as well as charging interest that typically ranges from 6 percent to 26 percent from consumers.
Even if Affirm’s technology can effectively screen borrowers, the people who take out so-called microloans could be a risky group, said Larry Berlin, an analyst at First Analysis Corp.
“I look at the market for microloans to be younger and slightly less creditworthy,” he said in an interview from Chicago.
Levchin also faces plenty of competition in lending to millennials -- both from peer-to-peer lenders such as Lending Club and Prosper Funding LLC, and newer startups like the payday-loan alternative LendUp.
“It’s almost a wild, wild west of lending,” RBC’s Arnold said.
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