Max Levchin on Affirm's record quarter: 43% GMV growth and first GAAP profit

minutes. Anyway, we will move over to uh our first guest of the show. We have Max Lechin. Here he is. Welcome to the show. How you doing? I'm good, thank you. That's cool. Uh walk-on music. We're working on it. Yeah. A little bit better every day. We have expect more sound effects, too. Just fair fair warning.

You guys just had a great quarter, so we might do something like this. Yes. All right. Um, where should we kick it off? Um, I mean I, yeah, maybe we should start with the quarter update. How is the business going? Give us like the the highlevel uh overview of how you are positioned in the company.

Uh, what is next on the horizon for you? And then obviously I have a whole bunch of other questions that we can dive into. Sure. Uh, quarter speaks for itself. It's pretty uh pretty killer if I do say so myself. GMBB, which is a fancy acronym for merchant sales powered by us, grew 43%.

Which is a fourth in a row quarter of accelerating um volume growth, which is pretty powerful for company. Incredible. Uh this is in the uh you know, for those not watching, uh the quarter we just reported, the GMV number was 10. 4 billion. Y so you know, compounding at 40%ish. Pretty solid. Pretty solid. Uh, you sorry.

Pretty solid. Extremely solid. Extremely solid. I'll take it. Extremely solid. We're very happy. Congratulations. Accelerating growth at scale. We love it. You don't see it often. Exactly. Um, uh, just hit gap profitability, which uh, for, you know, internet companies are not expected to do that. We're uh, 15 years in.

Uh, it's well expected of us. Uh, so we we we delivered on that. It's not a huge surprise to anybody. We we said exactly a year ago it'll take us exactly one year to to exit uh with with gap profitable and we delivered on that. Uh user growth accelerated for the sixth quarter in a row.

So it's another really nice result. Um anyway every metric is anywhere between mid30s to mid to low 40s. How are you breaking down the GMV growth? Like what what do you think is driving that? What what can we read into that on like the health of the American consumer or the broader consumer market?

like what's the story that we should be telling around GMP? Yeah. How how is macro driving it versus just your team's execution? Yeah, it's actually a really good question. Uh so normally, so every quarter I get asked 12 different ways.

Hey, so what's the standout segment and there's always like oh you know people are really traveling because co's over so airlines and tickets and then everybody upgraded their electronics during COVID and then it was like a dead lull for electronics for a year and a half and then poof electron everybody needed a new TV.

So this quarter is special because there's not a single category that is like, "Oh, wow. That thing's exploding. " Like literally every category is generally speaking contributing on par with the average or the weighted average.

And the best explanation I got, which these things you think we know everything about American consumer just given our scale, and we kind of do, but it's also now big enough where parsing it is more and more of a spelunking process.

And what what I think is really going on is we've hit an inflection point where buy now pay later as an industry is just such a part of the vernacular people like oh of course I'm going to pay over time for this thing and I'm going to use a firm. So I don't have a great like oh yeah it's a standout industry X.

Um the only thing that sort of jumped out at me when I was looking through the category results uh services like inhome services things like that are really growing nicely. In part, that's because our card, which we launched a couple years ago, y that's growing at 120% year-over-year.

So, it has a sort of its own very, very strong growth curve. That's a really nice product to pay for things that are not traditionally bought online. So, as an offline tool, it it's just surging really nicely.

So, services are kind of a standout story, but even that is like just distributed across many many different things. Yeah.

What uh what about that narrative that was kind of uh bubbling up around tariffs where there was this uh thesis that consumers would be fearful about uh like the iPhone price going up and so they would lock in current prices by pulling forward demand demand.

Did you see any evidence of that being true or pairing out or not? Uh a little bit. I I would call it as a I think a bunch of public company CEOs spoke to this last couple of quarters uh sort of pulling forward some purchases people expected uh etc. Not a major contributor.

I don't think I could stick a finger there like that's the the root cause of growth. Yeah. What what about uh interest rates broadly? Uh how are you thinking about uh profitability in a high interest rate regime? There's a lot of uh discussion around should rates be lowered. Uh is that a tailwind, a headwind?

How are you thinking about the interest rate environment? Broadly. Yeah, I feel like it it says a lot that you guys are Yeah, I was Yeah.

putting putting these numbers up in in uh and I would say critics five years ago or not five years ago only a few years ago would have said it's you know the model will never work in a higher interest rate environment. Right. That was the that was the criticism and you kind of proved it wrong.

But walk me through a little bit more of like the actual flow from interest rates to the business. The interest rates are certainly an input. So So we're non-depository non-bank lender which means that our own capital or the capital that we lend out is some form of sourced and there's multiple ways of doing it.

We're extremely diversified in our source of capital. You have to be because at any given time somebody may choose to no longer participate. We generally speaking have an extremely strong set of relationships.

At this point I kind of lost count at so many different folks that we work with both at sort of a huge deposiitories, insurance companies, banks, funds. Some of these people buy our loans.

We now are big enough where we securitize in a fairly regular basis which means people buy our securities, the receivables that we securitize. And then we have a whole collection of what's called warehouse lines where you finance the receivables or you borrow against the receivables as a security.

And so all of that comprises our capital markets program. Every one of these people has their own benchmark which of course is dictated by fence funds rates to a pretty significant degree.

Majority of these agreements, majority of these contracts are reasonably longdated, which means that an increase in interest rates or decrease in interest rates is a sort of a slow trickle into our cost of capital. So, it's not a tomorrow morning we go back to Zer, which I think we won't.

Uh, but as the rates will come down, inevitably, there's now enough conversation about it. It will accrete to us as sort of a tail end to the business, but it won't happen overnight.

just like the even the sharpest increase in history which is what we saw in the tail end of 23 I think uh didn't really impact us overnight but required quite a lot of maneuvering to make sure that we consistently deliver yield to the people who buy our loans or those who who lend to us against it uh but it'll be nicer it'll be easier perhaps to run this business when the rates come down but uh I think a couple of quarters ago I had a headline in my letter saying higher for longer is just fine we obviously printed did great margin.

Um, we call our margin RLTC, revenue, less transaction cost. It's a very fancy term for, you know, essentially the bottom line of the business. And, uh, that's been between three and four with I think one exception every quarter since we were public in the first month of first month of 2021.

And so, rates have changed quite a lot from then to 23 to now. And we've been able to maintain a very consistent margin. That should tell you everything you want to know. Um, are there any new like uses or unlocks in the buy now pay later world that you're thinking about?

We were talking about codory diapers earlier on the show. It's a subscription product. Um, and I always thought that there's a world where you get a year supply delivered.

You pay for a year's supply and then you use buy now pay later to just do the virtual financial transactions every month, but you only have to pay for one shipping fee.

And so the the like the cost to the consumer, there's some savings there for both the consumer and the probably it doesn't work if it's a really big object, but for small things that are that are subscription, maybe there's a match there.

Has have any of the smaller dollar merchants or or more regular purchase merchants been beneficiaries recently?

Uh yeah, actually if you look at our average ticket, I think when we went public, I already screwed this up today once so I don't want to myself again, but I think our first quarter of the public public traded company, we were on the order of $900, maybe. Yeah.

People think about it as like you're getting a Pelaton or something. You're buying a a TV. You're you're in the $1,000 range roughly. And it makes sense to and you're going to have that thing for five years. So, you make sense to match that uh that that the payments to the price.

So, this quarter, our average ticket is just under $300. Mhm. So, that should give you a really good sense for the the trickle down. All the while, our transaction frequency went up, I think, over 20% just in the last year. Yep.

And so as people realize that this is a great alternative to credit cards, we're getting more and more acceptance in all kinds of places. The thing you're describing kind of this reverse factoring, if you know, that may be the right term for it. Uh I don't know if that happens too much yet, but it was a good idea.

I didn't actually think of the shipping savings. Um but that that's very real. It's good for the environment, all sorts of things. So I I'll suggest it to our sales team immediately. Fantastic. Let's give you credit for that. Amazing. I My kids are out of diaper age, but uh but this would have been helpful.

If it works, uh I will expect you to send me a year supply of coffee because you you are you still into coffee? I read that about you. Okay. Oh, yeah. How explain to me coffee? I I I'm not I don't know anything about coffee. Where should I get started? What should I avoid?

Give me the TLDDR on how to become a coffee expert quickly. you've opened a can of worms or can of folders that you may not have wished for. Uh, really quickly. So, I'm a huge espresso afficionado. So, you got to sort of put that that's that's a bucket in of itself.

There's plenty of people who think that the highest form of coffee is something else, but I love espresso. Uh, the easiest way to get into it. Yeah.

uh is find a great what's called thirdwave coffee shop nearby and that's typically a place where they don't sell food they don't or they may sell like some pastries in a corner but it's a coffee centric small coffee shop. Sure. And chat up the barista behind the counter and ask them to teach you about tasting espresso.

Okay. And like from I don't no idea what this is to I can understand what you're talking about when you say crema and sour versus bitter shot and all sorts of fun jargon and uh minutia will hit you. Okay and you be like oh I can totally taste the sour apple in this shot.

You're like I have no idea what you're talking about. If you're in the former group you've hit the right rabbit hole and like six months later you'll be buying your first lumber zoko for $10,000. And so when do you have your last espresso? When do you have your last espresso shot of the day? Yeah.

What's your caffeine stack look like? Um, so I wake up pretty early in the morning and uh before I brush my teeth because I don't want to mess my uh you know I'll Exactly. So I'll I'll uh have some water, but uh sparkling water is the right thing to drink before espresso. Just go.

Yeah, I'll head downstairs and uh do what's called dial in my espresso machine, which is in fact a very expressive lomoko, of course, and not the only one I own in either, but uh that you you asked, please be a blowout quarter that we can just talk about coffee for for 20 minutes.

Uh we should go back to affirmative tomorrow.

I've got but but uh but but uh so I I'll dial in espresso machine which means that I'll grind and pull and two is like a good like I can get to a really good tasting shot by two shots if I feel by the time and uh feel especially passionate or it's not working out I take you mean you're making you mean you're making the first shot you're tasting it seeing the the if it's if it's where you're trying to iterate on it to get Yeah.

And dialing in is basically two things. You're setting your grinder finess setting and then you're playing with a time of the pull, which the two are not entirely independent variables. Like the finer the ground, the longer it takes to pull the shot, but you control when you want to stop it. Interesting.

And uh you you have three different tenth of a gram precision scales in my kitchen just to make sure. Yeah. What's the most What's the most you've spent on a single bag of beans?

Because that's one thing that's interesting about coffee addiction is the upfront cost of the machine can be high, but then the actual habit enjoyment of it doesn't actually, you know, it feels like something that everyone can get into. Yeah. Uh espresso is expensive, but it's not outrageous.

I think uh at any given I mean it's also advertised over time of consumption.

So on one hand, yes, you can blow a lot of money on extremely rare espresso, but even if you tried, like you couldn't spend more than $100 per bag, unless you go into like crazy outlier, but like, you know, really rare, very timesensitive, you know, only roasted in this particular time of the year, from this particular single origin espresso farm in some far away land.

Like even that will run you like $150. Yeah, there's some exceptions, but that that's a good high tensile average. I spend probably $30 per espresso bag that I buy and I try to buy larger sizes so to save on shipping obviously. That's great. Smart. Um um what's the going back to the business?

What do you think the is the number one misunderstanding around the category from investors? Because I feel like uh buy now pay later is something that people experience as a consumer all the time. They're seeing it all the time.

and they they think they might have a good sense of of how the business works but um it's still relatively still relatively new at least in this form. Totally.

Um you know I I today's market reaction actually tells me maybe you know we'll we'll see we'll see what happens uh in the days and months ahead but I think for the first time the reaction correlates pretty well to our perception of our performance. We've been printing exceptional quarters for a very long time.

The stock has been essentially not a good predictor of our performance. Just yeah, fairly uncorrelated. Uh it's gratifying to see like we have a blowout quarter. The stock does really well. So that that's a putting that aside.

Um there's a bunch of things that are still misunderstood probably, but I feel like they're less misunderstood now, at least today. Uh I think a lot of people think, oh, that's for people that can't afford to buy things. They borrow money and that's why.

And that that's such an arrogant point of view that's just it frustrates me a lot. And maybe that's the thing that angers me the most. I'm not sure it's the most important thing that's misunderstood, but it's the angriest thing that I have to uh have a beef with.

It's it's fundamentally a better product than credit cards simply because credit cards are designed to get you into revolving debt, which is a exponential function. Like sort of the simplest form of math. You borrow $1,000, make minimum payments, sit on a balance, it looks like this.

It just goes up and up and up and people on coasts us generally speaking look at them like I don't understand I just paid it off at the end of the month. A lot of people don't. It doesn't make them poor. It doesn't make them dumb.

They actually have much better facility with interest rate math because they actually pay interest. And for a lot of those folks it's not a matter of I cannot afford it. In fact, we will not lend money to someone who cannot afford it.

Our whole model is built around the idea of no late fees, no gimmicks, no compounding interest, which means that we can only lend money to those who can't afford it. And so they're discerning customers. They're not poor.

They have jobs pretty much 100% of the time, and they are the very middle Americana that fuels this country in every way imaginable. They use this product as a great alternative to credit card, but they're not like, this is not the last resort.

this is not even near kind of a bottom of the uh the economic strata and so that's been a suit for a long time. I think it's a lot better now that people have seen the performance of our our securizations are public in terms of their their results and they're updated more frequently than our quarterly earnings.

And so you can pretty easily see that the loss rates are meaningfully below those of credit cards which even the casual observer can be like okay so clearly this thing is performing better than what they compete with. Yeah.

And how how is the competitive dynamic how have the competitive dynamics changed over the last few years? It's a competitive space. Payments has never had a monopoly ever in any version of payments which is not a surprise given how enormous it is. It's the single largest industry in the world.

like maybe energy gets close and uh it's very competitive uh which is good in a sense that it forces people like us to compete or everyone to compete on substance.

It's very hard to compete in a highly competitive market on things like clever slogans and temporary promos like you have to perform day in and day out and year in year out.

And so our competitive edge has always been underwriting, just depth of understanding of the borrower of the end customer, better usage of data, better modeling, kind of living in the cutting edge of whatever most interesting math thing that happened in in the sort of the research world for us.

And so in that domain, we're unmatched and that's always been our strength and and we continue to win there. Um, but there are plenty of competitors and many banks that looked at us 10 years ago and said, "No one will ever use this thing. It's stupid.

it's barely understandable have now come around and said actually we have our own buy now affiliator product it's gonna be great you guys should use this stuff tomorrow so that's probably uh that's pretty outside of the outside of the narrow competition within this particular category BNPL um what does it look like to think about the next like 10 or 20 years there's this interesting dynamic that I've noticed where there are a few kind of broadly fintech founders who are still at the helm They're in double digits, billions market cap.

They don't seem to be slowing down and they're somewhat on a collision course where they're starting to build products in the other spaces and the legacy players, the really big banks are maybe less in founder mode. And so just as like a startup Silicon Valley guy, I kind of root for the the next wave.

And I'm wondering um obviously like the the current product is working well. everything. You've been on this for a long time. Like is there a desire to build uh like a mega firm and and expand into a bunch of different categories? What are the risks associated with that?

How narrow do you want to stay and over what time? Do you have a do you have a vision for where you want to go over the next like several decades? Yeah, for sure. Um, so if you look at our mission statement, which very proud to uh note has not changed a word since the day we started the company.

We're almost 15 years old. So we're Wow. still a startup. We're definitely in founder mode. I am the founder. Yeah. But uh we're 15 years. Sorry. That's one of our sound effects. Gotcha. Love it. I I I'm I'm urgently uh in search of a of a soundboard here. We we'll set you up with one. Excellent.

Uh anyway, so our mission is to build honest financial products that improve lives. Mhm. That is not nearly as narrow as Yeah. Let's have some loans at the point of sale. Yeah. Now, loans at the point of sale turn out to be a roughly trillion dollar TAM. And so, like, we're pretty busy trying to claw our way.

You know, we're every quarter we uh we print 10 billion. That that's a roundoff error. And so we'll we'll we'll continue trying to get our way to uh to a one or or or you know multiple percentage points of the overall just in the current plan. Yeah.

But the consumer that we attract and this sort of speaks to sort of your your broader question like where's this whole thing going? The thing that's really amazing slash sort of what a time to be alive sort of like the thing that I wake up to every morning like we're all getting so much smarter. It's so cool.

like this this whole AI revolution and the various sort of offshoots of the idea even before and certainly what what's to come next it's like the general increase of the IQ of the universe that we are familiar with like certainly general increase of the IQ of the internet savvy consumer which naturally to the younger player people 25 years older than me have a harder time catching on to the current thing people 25 years younger than me they're born with it like they have no idea what it's like not to have an iPhone.

They have no idea what it's not like not to talk to Chad GPT about. You know, my kids just like pull up their phone and be like, "What's the answer to this thing? " And like it's a lot of steps. Like no, it's not. It's just like one bicep movement. And so as we all get smarter, lots of things are changing.

And the idea of I got tricked into this stupid financial product.

Man, I'm so unhappy about the dumb loan I took out or the sale I did with my stocks or you know all the many things that people regret about financial products is going to start trending down because you will have a PhD level adviser as Sam Alman likes to say at all times in your ear telling you hey that's a good idea that's a bad idea that you will trust that will be completely dispassionate and will have a really deep understanding of who you are and where you're going financially and and in your life with your goals.

And so as a company that's built to create products that we are proud of like lending is kind of a dirty industry. Like the reason we tackle this thing is because you I've done payments my entire professional career on and off and lending is like the thing you don't touch because it's like kind of yucky.

Like you want to maybe stay away from that because like ultimately it's all about late fees and compounding interest and we started the company specifically to not have late fees to not have compounding industry interest to all the things that people hate. We wanted to be on the opposite side.

And I was told over and over again by people like this is stupid. One, that's where the profit is, but two, you can survive. Like the whole industry depends on this. Like don't be an idiot. And we just kept on going like, yeah, we'll figure it out.

And for the longest time, people look at us like, okay, you have less margin and less opportunity for margin. And boy, that's going to be tough. And it wasn't easy.

But with every passing day, as people get smarter, it gets easier because the machines will not make the mistake that consumers make when they're like, "Oh, it's a big zero. Add the asterisk. I don't care about the asterisk. " Like, you should care about the asterisk. We don't have an asterisk.

The rest of the industry is about to find out what it's like when a PhD level advisor like, "Mind the asterisk is about to screw you.

" And so so that that's like a a lyrical digression, but where the world is going in financial services is there's tons of opportunity to apply the same level of purism that we brought to lending to other things from mortgages to banking to auto loans to all sorts of fun things where if it's not good for consumers, it will be naturally demoted by the next generation of search engines which are the AI bots.

Yeah. So there's there's a lot to do. It's it's not just point of sale loans for sure. I want to play out a hypothetical counterfactual. What would the world look like if you couldn't sell PayPal? No one could ever leave PayPal and the original PayPal mafia was still working together on that business.

Uh, well, you wouldn't have SpaceX, you wouldn't have Tesla, you wouldn't have found Founders Fund, you wouldn't have David Saxs, the AISAR. Yeah. The world would be a boring place, I suppose. Yeah.

Do you think PayPal would be like a trillion dollar like owning everything like financial institution for everything like you know get your mortgage get trade your stocks crypto everything like would it just would there be any chance for an upstart fintech company you' to have a first true monopoly in Yeah yeah yeah you said you said it's it's a it's competitive space would it still be competitive if if the entire team was was there Uh, I don't think so.

Uh, it's a this this dates me, but it'll date anybody. There's a great comedic musician slashmath professor named Tom Lair. If you don't know who he is, he he is worth knowing. Uh, he had a great quote. I had a great time in high school, but I certainly wouldn't want to repeat it.

And uh I think PayPal was a little bit of a high school for all of us. It was crazy times. We're super young. Some strange things happened. Some tough words were spoken. And uh the fact that we're all friends now is a function of the fact that we're no longer working together in some ways. Sure.

Uh and so I think we all graduated with decent grades and went on to uh everything from graduate school to uh other fun projects.

But uh I think in many ways PayPal was as successful as it was in spite of some of the decisions we made and some of the behaviors we exhibited then because I think all of us went into our next set of ventures with a very strong view of I would love to do that again and I'm definitely not doing this other thing ever again to myself.

So that the learnings of the crucible of PayPal are unique, but I'm not sure the original the original crew starting another company together would be a really fun thought experiment. That that would be quite something because we're all older and presumably smarter. The Avengers. The Avengers. Yeah.

Uh well, what what lessons from PayPal have you codified in um sort of like the employee handbook at a firm or like what what are the stories that you tell to a new hire at a firm where you can go and say this has been true not just for the history of a firm but it's been true for every business I've been involved in for my entire career.

You know, it's not necessarily true for every business. So I I had my own educational journey, if you will, where after PayPal, one of my erroneous conclusions was, man, PayPal was such a tough environment.

Like it was not out of character for any one of us to storm out of a meeting because like that is the dumbest thing I've ever heard. You're wasting my time. F this and f all of you. Like not quite. But like think, you know, I wasn't kidding when I said tough words were spoken.

like we we could tear down each other and our ideas on any given Tuesday, etc. And when I left PayPal, I was like, you know, I'm going to definitely start another company. I'm would love to start with people like these or even these people.

And by the way, one of my firm co-founders was one of my closest collaborators from PayPal.

So this is we were the band is still comes together as and and you know builds interesting things but I was so overindexing on the tough interpersonal relationship side of things was exhausting and I don't want to do that again and I really overdid the let's make a family not a team and that was a that was an error like I'm I had since realized that one of the huge benefits of PayPal was this no holds barred your idea is stupid and I'm going to tell you, and you're not like, I may be driving this idea of yours into the ground and stomping on it and trying to kill it, but just so you remember, we're here because you're brilliant and I'm not so dumb myself and like, let's work together to make a better one.

Figuring out how to package that into a conversation that holds across 2,200 people is like the team strategy at a firm. Yeah. like you should be able to tell someone that's a dumb meeting, it's a dumb idea, I'm out of here.

Please do better than this while not tearing them down personally, while not damaging their conviction around their place in the team, the company's mission, all those things. And so that that's a tricky balance to strike. I think we do a pretty good job here, but that that is a probably single most important lesson.

Yeah. Embracing disagreeableness as a character trait of a high high performing performing employee or co- co-orker is uh it's it's so underrated and and once it clicks and you feel it and you feel someone disagreeing with you, but they're not they're not disrespecting you.

They're just actually making their own decision and bringing their own information and their own perspective. Uh it's it's extremely refreshing when you first when you first feel it, at least in my experience.

Uh the the thing that stuck in my head is then and then we'll let you go is this idea of the the entire lending industry being built assuming that the average person doesn't have access to legal services, right?

uh this uh you know traditionally a wealthy person will get a loan agreement and they'll have their council you know review it spend thousands of dollars you know making changes or potentially walking away and uh I I'm very excited for for what you guys can do in this space in a in a world where anybody in the world can take a loan agreement or fine print drop it and get maybe it's not the best lawyer in the world but it's uh at least decent and it's dangerously close to the best lawyer in the world.

It's it's really uh it yeah that's exactly right and I think that's uh we built the company on the assumption that that's coming the fact that it's coming so quickly and in the way that is conversational and easy is just like deeply inspiring like I I am very pro AI because the notion of everyone's IQ is just getting lifted every day more and more is so powerful like this whole the sideshow of oh gosh you know the jobs like everyone has gotten so much smarter they can do the jobs that were always out of reach for them.

The whole thing is just going to elevate the That's also one of the most interesting like AI is a is a tailwind for my business thesis I've ever heard. Instead of just like I'm going to use AI to, you know, lay everyone off and cut my costs.

It's like, no, AI will make my cons will make consumers pick me over the competition. Incredibly confident. I love it. That's right. Thank you for sharing. Brilliant. And thank you for hopping on the show. This was fantastic. Uh we'll talk to you soon. Thanks for having me. Have a great rest of your day.

Enjoy your weekend. Sound bored. Let email me if you want coffee advice. I got Yes, we will definitely we will definitely ping you about more coffee. I I I think the entire team in the studio would be would be happy. Yeah. Congrats. Congrats to the to the whole team on on the market.

Finally finally waking up and and seeing your guys' level of execution. It's really fantastic. Getting started. Amazing. We will talk to you soon. See you next quarter. Thanks so much. Bye. Up next we have James Bosik from Sendut send. One of the hottest companies in defense tech.

Anyone who's building anything, they know send, cut, send. They use them regularly. I'm very excited to bring custom sheet metal MVPs. Yes. World champions from the Reream waiting room into the TVP and Ultradome. Welcome to the stream. James, how you doing? What's happening? Great. Great. Thanks for having me, guys.

Uh, did I did I get this right? I So, I'm not a customer, but I know a ton of your customers. Uh, why don't you just like explain exactly who your customers