Point-of-Sale Lender's Simple Pitch to Consumers: No Surprises

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While many alternative lenders — OnDeck Capital, GreenSky and others — have lately formed partnerships with banks, and bank executives have begun to view them more as allies than as enemies, one well-funded financial startup, Affirm, remains largely aloof.

Founded in 2012 by PayPal co-founder Max Levchin, Affirm specializes in point-of-sale installment loans with what it says are more transparent and affordable payment terms than credit cards. More than 700 merchants, including Coleman Furniture, Expedia and Eventbrite, offer financing through Affirm either online, over the phone or at cash registers in their stores.

Its indifference comes in no small part from its chief executive's aggressively combative stance toward financial institutions. Levchin has been vocal about what he sees as the extortionate fees charged by banks and his aim is to disrupt their business model.

The San Francisco firm raised $100 million in April, putting its total financing at about $425 million — a war chest which is earmarked for expansion. The startup plans to introduce new financial services this year as well as partnerships with a number of big retailers. The April funding round, led by Peter Thiel's Founders Fund, values the company at $800 million.

American Banker recently spoke with Brad Selby, Affirm's vice president of growth and new markets, to find out what opportunities the startup sees in the marketplace, what advantage it believes it has over other consumer lenders and whether it would ever partner with a bank to offer any products and services.

What follows is our interview, which has been edited for length and clarity.

Are we witnessing a resurgence in consumer lending, and if so, what's driving it? What opportunities do you see in the consumer lending space?

There are a few new players who are entering the consumer lending space, but not enough to call it a resurgence. There is an opportunity to make significant improvements that will help consumers and merchants.

The current credit system isn't transparent or fair. Consumers aren't aware of hidden fees and onerous compounding interest terms buried within the fine print, and are often caught off guard by these costs. And merchants who offer these credit products are mostly unaware of these unfair credit terms, which can ultimately tarnish their brand.

Furthermore, the current FICO-based credit scoring system severely underserves a large population of consumers. One in 10 Americans do not have a credit record and 19 million consumers have unscored credit records, which is roughly 8% of the adult population. That is a lot of people the current system is excluding. We are finding many of them are creditworthy borrowers.

What does Affirm offer?

Affirm offers shoppers an option to buy now and pay over time in a transparent, responsible way. We provide shoppers with clear information about the APR, monthly payment amounts and total interest associated with their purchase before they make the transaction so they can make an educated decision about whether the purchase fits into their monthly budget. We never charge late fees or hidden fees, so what shoppers see at checkout is exactly what they will pay. There are no surprises.

How can companies and financial institutions innovate in the consumer lending space? What innovations are most needed?

To stay relevant, existing financial institutions would need to undergo a major overhaul of their technology infrastructure. Much of that technology is outdated — and patchworked together when they've grown through acquisition — so transitioning to new technology would require significant time and resources. And it'll be difficult for lenders to move away from a FICO-based credit model to one that incorporates more data points about consumers.

What does Affirm bring to the table that banks can't or don't?

Affirm is built from the latest technology, and we are nimble enough that we can continue to update our technology as new innovations are developed. Furthermore, our underwriting processes were designed from the get-go using risk algorithms that do not rely solely on FICO, or any specific criteria for that matter. We are constantly learning and making adjustments to our risk models.

A significant portion of credit card revenue comes from late fees, making it difficult for financial institutions to be incentivized to help their consumers pay on time. In fact, only one-third of credit card holders receive some form of "payment due" text message alert. This isn't responsible lending. Consumers are frustrated with the promotional gimmicks, the hidden fees, the lack of clarity around terms and conditions and the misaligned incentives.

Can you share some numbers to show your recent growth?

We do not disclose growth numbers. We currently partner with over 700 merchants across verticals who offer Affirm, including Expedia, Casper, Peloton, Eventbrite and Jomashop.

Affirm's CEO, Max Levchin, has stated publicly that banks are ripping people off and need to be disrupted. Would Affirm ever consider partnering with a bank to provide loan products?

We have partnered with Cross River Bank in New Jersey, which assists us with originating the loans we offer to consumers. All loans, however, are kept within Affirm's loan portfolio, and we service all loans. We have not partnered with any financial institutions to jointly offer any consumer or merchant products or services. We are open to opportunities to do so, but we would need to ensure that the financial institutions share our values and our commitment to helping consumers lead more financially responsible lives.

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