Affirm's BNPL Model: Ethical Lending, Customer Loyalty, and Credit Building

Key Quotes

"Max Levchin probably knows as much about online payments as anyone. He was part of the original "PayPal mafia" before going on to become co-founder and CEO of Affirm, the $22 billion player in the Buy Now, Pay Later industry that's hoping to disrupt the incumbent credit card companies."

This quote introduces Max Levchin and his significant background in the payments industry, highlighting his role in both PayPal's early success and his current leadership at Affirm, a major player in the Buy Now, Pay Later (BNPL) sector. It establishes his expertise and the disruptive potential of his company.

"The banks they mostly seem to be doing pretty well still but there's this dream that they can always be sort of like disintermediated away or that each one of these functions that they do can be better done somewhere else."

This quote from Joe Weisenthal captures a recurring theme in the financial technology landscape: the persistent effort to challenge and potentially replace traditional banking services with newer, more specialized solutions. It frames the broader context for companies like Affirm, which aim to offer superior alternatives to established financial products.

"The problem is the structure as you fold interest into principal and pay and pay and pay late fees it can be extraordinarily expensive and so from the very beginning of affirm we asked the question how can we make a product where you don't have this weird misalignment of interests where the lender tells you please pay your bills on time but what they're saying so to vouch for is but not too on time and ideally take as long as possible because that's when we make the most money."

Max Levchin explains the fundamental flaw he sees in traditional credit card models, focusing on how compounding interest and late fees create a misalignment of interests between lenders and borrowers. Levchin highlights Affirm's foundational principle of creating a product where the lender benefits from the borrower repaying on time, directly contrasting it with the traditional credit card structure.

"The obvious answer is of course obvious make a plan that you commit as a lender that you'll never change and don't charge late fees and that's it if you agree to those design principles you are not going to make more money if someone is late and you're not going to make more money if they take longer to pay you back obviously you'll make less money because getting money to lend isn't free either we have to pay for our source of capital as you know as everybody else does which means that it immediately rotates you sort of 180 degrees where you say i only want to lend money when i have a lot of conviction that the person is going to pay me back on time because if they don't i am just going to lose money."

Levchin elaborates on Affirm's core business model, emphasizing the commitment to a fixed repayment plan without late fees. This approach, he explains, fundamentally shifts the incentive structure, compelling Affirm to rigorously underwrite loans to ensure borrowers can repay on time, as their profitability is directly tied to successful repayment rather than penalties.

"The average size transactions for us is roughly 300 so that just gives you a sense for what people use affirm for so that's just you know apropos apropos where it's being used what we glean from the information about what's being purchased one good mental model which is like an approximation but a decent one if the useful life of the item is meaningfully shorter than the time it takes you to pay it back you may find yourself questioning the quality of the item long after it's disappeared and so a natural question we should be asking is what do we understand about this item but also maybe the item's history of quality before we say oh yeah sure buy this thing that's going to be out in six months and pay for it over two years."

Levchin discusses the typical transaction size for Affirm and how the nature of the purchased item influences their underwriting considerations. He uses the example of an item with a short useful life being financed over a longer period to illustrate how Affirm considers the longevity of a product in relation to the repayment term, suggesting a more nuanced approach to assessing creditworthiness.

"The connection between late fees and lack of reporting is unfortunately the underlying fact and because we don't make any money from late fees because we don't charge any we're very pro reporting just out of curiosity since you're talking about late fees and credit and all that stuff here we are recording this on december 2nd 2025 you take the temperature of the consumer for us how are things going seeing any signs of growing missed payments or anything like that not as of december 2nd 2025 the important thing to understand i'm asked this question fairly often i am a great i am a firm is a great lens into the financial hearts and minds of north american consumers."

Levchin directly addresses the reluctance of some BNPL providers to report to credit bureaus, linking it to their reliance on late fees. He contrasts this with Affirm's policy of not charging late fees, which, he argues, removes any disincentive to reporting positive repayment behavior to credit bureaus. Levchin then offers a positive outlook on Affirm's consumer base's financial health.