How Max Levchin stumbled into ‘buy now, pay later’

This story is part of Protocol's special report, "Buy now. Pay later. Win the future." Read more here .

Max Levchin is a fintech pioneer. He co-founded the company that became PayPal as the dot-com boom was underway, saw it through the bust and sold it to eBay. In 2012, he got back in the finance world as the co-founder and CEO of Affirm, whose "buy now, pay later" service helped define what's now the hottest trend in ecommerce.

Levchin calls the rise of Affirm, which went public in January , an "accidental success," the result of his own desire to "build a better credit score" along the way to a fairer, more inclusive payments system. He doesn't even love the label that's stuck to the industry he helped create. Call it what you will, though: "Buy now, pay later" is dramatically changing the way many consumers pay for products and services, and Levchin's seen it from the earliest days.

Read on for Levchin's insight. The interview has been edited for clarity and brevity.

The origin story for Affirm is actually pretty cool. It was an accidental success. I was hanging out with the guy who eventually became my co-founder [Nathan Gettings]. We were shooting the breeze about how the FICO score is just this really poor representation of credit worthiness.

I never had a credit card until the age of 19. In college, I managed to wreck my credit history by using credit cards to fund my businesses out of it. I remember when I got into terrible credit-card debt in college. I would be scared to take a girlfriend out to dinner because: What if my credit card would get declined? That would be embarrassing. It happened enough times where I really know exactly what that feels like.

The plan for Affirm was to actually build a better credit score. [But] some banks where we had friends said, "Look, no one's gonna use a new score unless you use it yourself. No one's gonna risk their money on lending against a brand new score."

Up until that point, I'd never even looked into this whole thing. I became more and more incensed about how insane the whole thing is, this idea of compounding interest which everybody knows, but nobody really understands. The more I dug in, the more I realized that it basically is designed to make money on consumers who don't understand how credit cards work.

Affirm went from this math project to make a better credit score to this mission of like, "Hey, we need to just clean the whole thing up. Let's actually build a credit product that doesn't charge late fees, that just makes better underwriting decisions so people aren't late and reminds people instead of pushing them into being late."

We're just going to build this lending thing. Its differentiation will be we'll include more people because we'll have a better underwriting system. We're going to make it our mission to be completely gimmick-free, not profit from people who are down on their luck.

People asked me, "How can you afford not to charge late fees?" I would answer, "You know what, we think we can build such a good underwriting model that we don't need to have late fees for profitability. In fact, we could use that as a differentiation."

Every year, it seems like more and more people kind of went, "OK, maybe you're not completely insane." About four, maybe three years ago, it seemed like something flipped. This idea of, "Hey, transparency is really important. Simplicity is really important. Clarity and financial services, this is no longer a thing that you do because you want to stand out."

I just think that the overall industry is shifting. The consumer sentiment is shifting towards asking for more transparent products that are actually designed not to screw them.

This idea that merchants have to do discounting is something that I knew about. Merchants want to attract incremental foot traffic or incremental online traffic, but they're loath to admit that the price is not the price. Discounting has this really toxic effect on pricing integrity and generally, the perception of the merchant. Their consumers feel they just need to wait for the next sale.

This idea of using Affirm as a way of making something more affordable without compromising the price is a very powerful concept. I would lie if I said that that's exactly what I walked into this thing doing. But one of the really important things we learned very quickly was this idea of instead of using your marketing budget to explicitly discount, why don't you use your marketing budget to make the interest rate on these transactions zero?

That was sort of a hunch that we had early on, based on what I'd seen during my 11 years on Yelp's board. It is a huge component of what makes Affirm and "buy now, pay later" in general very powerful. It's nice to have clarity. A Peloton is $2,500-plus paid over 39 months. But it's still $2,500, just paid over time. There's no difference in price. It is a profoundly powerful thing for consumers and for merchants.

I can tell you where "buy now, pay later" has not yet found its perfect product-market fit. If you go to physical retail, it's still relatively marginal there.

That said, people are now very used to buying online. If you need to return or replace or in any way modify your transaction, one of the things that happened is that services like [Amazon] Prime, etc., taught you that you want everything right now. The immediacy of fulfillment has really grown.

All these companies that have massive real estate footprints like Walmart, which is one of our largest partners, and lots of other companies like that, they're all starting to use in-store transactions as a kind of a focal point around replacement and returns and managing post-transaction logistics.

You have all these new models like "buy online, return in store" or "buy online, pick up in store." They're really important. We've invested a ton of effort into making sure that we are there to offer those services to our real estate-rich retail partners.That's an area of growth and opportunity.

I don't think anyone has this fully figured out. We're spending a lot of our cycles on it. I wouldn't classify that as an area of weakness, but I would say that that's going to keep on evolving over the next year or two.

It's a good idea to have more regulatory attention to "buy now, pay later." We've sort of positioned ourselves in such a spot that if the consumer is overextended, or if we are about to overextend them, we are far worse off.

We don't charge late fees. We don't compound interest. It's a simple-interest loan. If you're late by a year, and we quoted you 0% interest, you will pay 0% interest. The model doesn't work unless we actually are good at underwriting and don't penalize ourselves by creating loans that you will never pay back.

Regulatory attention that would normalize the industry and say, "Hey, here's what it looks like. Here's which behaviors are considered OK and not OK" wouldn't be the worst thing in the world.

I spent three years on the advisory board of the Consumer Financial Protection Bureau and found it is far better to engage with the regulators in a conversation and say, "Here's my mission. Here's what I'm trying to do. Here's why I'm doing this. Here's who will benefit." That's been very productive for us.

Undoubtedly, there are players in the industry who are great and mean well and really want to do the right thing by consumers. Eventually, there'll be players who are not so great and they need to be regulated lest they damage consumer financial health. All things being equal, I think it would be a good thing.

"Buy now, pay later" is a very blanket statement. These taglines, it's always dangerous to ascribe too much importance to them. Affirm is different in a sense that, in our case, it's "buy now and pay over time" with certainty that the price tag will not change.

I think that's actually what's unique and very important about us. Consumers love not just the transparency that we offer them, but also the absolute immutability of the price. I think that's been really powerful and I haven't figured out a way to express it in very pithy [language], something as clear as "buy now, pay later." So we're sticking to that one for now. My guess is it's been repeated by enough members of the press that at this point we don't get to decide what we're called.