Growing up in Ukraine, Max Levchin was fascinated with the West. As a teenager, he fell in love with the Massachusetts Institute of Technology (MIT), after getting his hands on a book about MIT hacks.
Once in America, however, since the Russian abbreviation of MIT is MTI, his high school counselor couldn’t quite understand the college he wanted to attend. It would lead to a full-ride offer to the University of Illinois at Urbana–Champaign, making him change his plans.
Levchin went on to co-found, along with Peter Thiel, the online payment system PayPal, which ultimately netted him $34 million after it was sold to eBay for $1.5 billion. Since then he has helped to start Slide and Yelp, Levchin now wants to change the way we borrow money.
Levchin’s new start-up, online lending platform Affirm, was born out of the dire need to revolutionise the lending industry, which still uses a decades old system to determine who’s at risk and how much each potential borrower can – or cannot – borrow. It also capitalises on the opportunity to capture a lucrative market that has been disillusioned with traditional banks.
"Credit cards are the thing that will try to screw you at some point," said Levchin at a recent event at MIT (honestly) I attended. "The big banks make a lot of money on late fees. 15 years ago, people knew about it but couldn’t do anything. With the advent of social media, though, people are starting to share the problem."
In fact, the big three banks in the United States: Bank of America, JPMorgan Chase, and Wells Fargo, are on scheduled to bring over $4.5 billion in overdraft charges by the end of this year. "It wouldn’t hurt them to build reminders," says Levchin. He continues, "The only bank that gained customers in 2008 was USAA, the armed forces bank. They do things right by the customer and it is very well trusted. So could I build one of those for people?"
Instead of relying on traditional credit scores, Affirm has developed an algorithm that calculates the risk of borrowers based on a much broader and more inclusive range of personal data. Such data includes information from social-media profiles and the cost of the items being purchased. It then determines what rate, as well as what structure of payment, to offer customers. Customers apply for their instant lines of credit and online installment loans as they shop. Affirm’s process is much more consumer friendly, much more convenient, much less gruesome, and much more transparent than the monolithic alternative. In fulfilling Levchin’s plans of turning Affirm into, ultimately, a full-service bank, Affirm recently branched into offering student loans for coders – again, with much better terms than the traditional, and often predatory, student lending houses.
Does this sort of disruption represent the future of money, the future of lending? If we take as examples other, however not-so-distant, industries, the answer may very well be yes. In the battle between big companies and customer preferences, incumbents rarely win. "Traditional banking services will look completely different in 10-20 years. We will move from big traditional banks that do everything to specialized financial services companies that are best in breed experiences," says Monte Malhotra, CEO of 401(k) startup, MoneyIntel.
The heavily regulated, and often underperforming in terms of customer satisfaction taxi industry, is one example. So is Blockbuster, which at one point was the absolute leader in rentals, until the more convenient Netflix came along.
Affirm, the extension of PayPal, is convenient, friendly and helps solve a big problem for millennials. PayPal ultimately won the war to make it easier for you and me to send and receive money. Affirm may also ultimately win the war against the establishment to make it easier for consumers to borrow when needed.
If industry numbers are any indicator, 27 of the Inc. 500 companies from 2015 are from financial services, with a combined revenue of $850.7 million. In the last two years, investors have globally poured $23.5 billion in fintech. According to a recent report by Oliver Wyman: "Of this investment, 27% has been in consumer lending, 23% in payments and 16% in business lending." In addition, "Fintechs have two unique selling points: better use of data and frictionless customer experience."
The field seems to be ripe for disruption. But which companies will be the ones to make the cut? Levchin says, "The thing that really predicts success for entrepreneurs [and companies] over multiple times is drive - you know, willingness to grow it out. How often will you take the pain and do it again?" Ultimately, it may be "the willingness to man/woman up and do it" that will help determine the answer.
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