Affirm: The Internet’s American Express

This episode is brought to you by Portrait. Portrait was built by former buy side investors. And they understand great investing isn't just about having more information from low quality sources. It's about having the right information organized the right way. And if you listen to the show, you appreciate diligence consists of many things, diving into the history of a business, framing the nuance competitive dynamics, tracking key signposts around your thesis. And historically, that would take up material time that you do not have. But Portrait is basically like adding an army of analysts to your team. It's powered by an AI system specifically designed for investment research workflows. So you get nuanced idea generation. Portrait assesses the same types of qualitative attributes that we discuss on this show, and that can help identify businesses which fit your frameworks. Portrait also customizes research report generation. And third, there's intelligent thesis monitoring. And that's where Portrait assesses thousands of data points across value chains. Each day, extracting the insights, driving the business. Again, all this work would typically take hours and hours and hours. It's at your fingertips now. Visit PortraitResearch.com to start your free trial today. This is business breakdowns. Business breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from. And we are here to bring them to you. To find more episodes of breakdowns, check out JoinedColosses.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers, or affiliates, may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Today, we are breaking down a firm, the by-now pay-later company founded by PayPal CoFounder Max Levchin. A firm now processes more than 50 billion GMV and is growing over 30% a year. One of the most interesting ideas we explore is that a firm is better understood as a payment network than a traditional lender. It has powerful network effects, sophisticated credit underwriting, and a long run way for growth as e-commerce takes share of retail and by-now pay-later take share of e-commerce. Joining me today is Fraser Christie, founder and CIO of Sandstone Global Investment. Fraser has studied a firm closely for years and this conversation will give you a much greater appreciation for the business and the founder behind it. I hope you enjoy this breakdown of a firm. So I wanted to start the conversation speaking about Max. From what I understand, he actually has a very interesting path to being a founder. I think a lot of people know him from his days at PayPal and the PayPal Mafia, but they probably don't appreciate his full story and background. I know you've been able to spend time with him over the past couple of years and it really gets him to know who he is as a person. So maybe just share with us his background and more just about his uniqueness that he brings to the company. Max's biography deserves its own podcast and a book as well because he's lived a pretty extraordinary life. But I mean even going back to PayPal because I think it gives you a sense of the grit. Max was born in Ukraine to a family of physicists and scientists. They left Kiev when Max was about ten after the Chernobyl nuclear disaster. He tells this story of arriving in Crimea and he set off a Geiger counter because he had a radioactive thorn in one of his shoes and they spent five years there with his grandparents and then moved to Chicago right before the fall of the Soviet Union. Max can obviously speak English when he moves to Chicago, but he does tell some great stories about the translation issues in those early years. He wanted to apply to MIT and accidentally called it MTI and the application letters for example. So he ends up going to University of Illinois where like fun, fact of history is Mark Andreessen had just launched Mosaic the early web browser. So Max enters University thinking he's going to be an astrophysics professor and ends up being bitten by the startup bug and immediately starts hisnesses and wants to be an entrepreneur. And it's actually in that period of time that the idea for a firm is seeded because coming from the Soviet Union he didn't really have a concept of credit cards and credit and how it all worked and so he basically just grabbed a credit card while he was at university and started funding his startups using credit cards and was paying them back late inadvertently he was doing a lot of damage to his credit rating. Now unlike a lot of people who never recover when they ruin their credit rating, Max would subsequently go on to be wildly successful as you mentioned early 20s as the CTO and one of the co-founders of paper working alongside Elon Musk and Peter Teal and all that cast of characters. But Max's poor credit rating still haunted him through this period despite being very successful. The story he tells is he flew to LA after the PayPal IPO to buy a convertible car to presses you then girlfriend now wife and the car dealer declined the loan because his credit score was so bad and this is despite you know he could pick up a magazine and he was on the front page as a 20-something year old so he had to sit there at the car dealer and wait for a wire to clear before he could drive away and he also talks about his friends pranking him for years at restaurants by having staff pretend his card had been declined so he had these very personal experiences of the credit card system not really working for him and for a lot of Americans and people around the world. A decade after he left PayPal, Max started a firm with a mission that still stands today which is to deliver honest financial products that improve lives so there's no late fees, no compounding balances, no deferred interest, no fine print. When he first started the business with that mission and he was speaking to people in the industry they thought he was completely insane because there is a lot of profitability and economics charged in the industry on those types of mechanisms. He's still sort of known as Max the founder of PayPal but I think if we roll forward the clock five years ten years we think he will well and truly be known as Max the founder of a firm because this business will ultimately we think be more influential than his kind of act one and it's important to know that Max is obviously very technical I mentioned he was the CTO of PayPal they were sort of early pioneers in fraud detection and cryptography and all these really interesting parts of processing payments on the internet. The culture and the DNA and the people that have firm highs is deeply technical. Max wanted to set out securing the type of mathematical talent that otherwise ends up in scientific research or hedge funds building models to make money in split second decisions. He's been able to attract a lot of talent both because he is technical but also the mission of the business is to kind of dramatically improve the credit ecosystem around the world. Are there other ways where the spirit of Max shows up in the business? One is maybe he's technical so right he hires very high caliber technical talent. Other other ways that seem significant. The biggest one for us is Max talks about this framework he has in his head of starting businesses of the problem to be sold has to be hard valuable and fun. HVF was the name of his incubation which is how a firm has started to? Yes I think the hard in HVF is the really interesting piece. Max lends in to solving hard problems and that goes to we want to solve the problem of unsecured lending large amounts of a long periods of time to consumers and not have get out of jail mechanisms like late fees and compounding balances and those sorts of things. The business has been running almost 15 years and they've nailed that and continue to evolve and improve and get better but Max's personal DNA of leaning into hard problems you see throughout the whole organization and I think despite in its early days particularly as a listed business being pretty high on the stock based comp offenders list and those sorts of things they have gone through the process of getting a much more disciplined head count has been flat for a number of years now. GNA has been flat for half a decade stock based comp has been flat for half a decade they're willing to actually make hard decisions and do the hard things to make their business stronger for the long term. When we did this with Alex Rampell who actually happens to be a co-founder of a firm a couple years ago on Visa what we did was we walked through an example of a simple card transaction when someone taps their card how the money moves who's involved which intermediaries are kind of taking a piece of it so I'd kind of like to start with doing that but for a firm let's say I'm online whether Shopify or Amazon and I want to buy a cafe so I go ahead I click a firm in the checkout let's just assume I click monthly payments can you just like walk us through exactly what happens from there on out where the people involved where is the money flowing through who's on the hook for the actual payments we just go through that as much details you can. The highest level we think of a firm as kind of the American Express or the payment network built for the internet in any commerce. And so if we walk through a transaction, I'll help give a sense of why that is the case. And so to use your example, a consumer is on a merchant's website, Amazon target, whoever it may be, and they want to buy something typically reasonably material, the average purchase price for an affirmed transaction is about $250, so let's say it's a couch. Let's assume this person is not already in a firm customer, but when they get to the checkout, they see the offers for a firm financing, so there might be a 0% interest loan over three months, a 20% interest loan over six months, and a 25% interest loan over 12 months. Now this point, these are just theoretical offers because a firm hasn't actually pulled your credit history yet. And so the consumer decides that these loan terms sound interesting, and so they click on the Affirm button at checkout to set up an account. They provide a few details like their mobile number, name, date of birth, and the last four digits of their social security number, a firm then matches not only the data from the transaction, so what is the merchant, what is the basket size, what are the skew details, with the data from the credit pool to finalize the terms of those offers. Assuming a firm is still happy to underwrite the transaction and the consumer is still happy with the finalized terms, the consumer selects the offer that they're happiest with and they check out, the consumer then pays that plan in line with the terms agreed at the point of sale, and that's a very key distinction versus a credit card. The interest rate is fixed, the repayment schedule is fixed, and the balance is paid to zero according to the rundown of the plan. In terms of the actual flow of funds on the merchant and the Affirm side, let's say the purchase price was the $250 a firm pays the merchant, the $250 less whatever fee they agree, a firm receives for the transaction, so let's say it's $5, and that's called the merchant discount rate or the MDR, that MDR varies widely depending on the merchant and the type of loan, but we can kind of get into the specifics of that later. In this instance, let's say a firm keeps the $5 and sends the $245 to the merchant, a firm then also makes money on the interest payments paid by the consumer when it is an interest bearing loan. So the merchant's happy, they've essentially secured a transaction from a customer that they otherwise wouldn't have converted. The customer is happy because they were able to purchase this couch on attractive terms, and so collectively, the mechanism makes a lot of sense for all the parties involved. Now on the funding side, about half the loans a firm originates, gets sold to third parties and moved off balance sheet, and about half remain consolidated on balance sheet, that's still utilizing third party facilities. So the things we would highlight in that transaction, the customer acquisition is extremely efficient. You can imagine the more merchants that have a firm check out the more customers see those offers, the more customers a firm acquires, there's very real network effects, very much like an American Express. And the second thing we would highlight, and we're going to probably talk a lot about this, is just how different that credit-underwriting process is to a credit card and how different that customer experience is to a credit card as they're paying back a line. Half of US credit card holders today have a revolving balance, the average credit card balance in the US is $7,000. There are mechanisms with credit cards, whether it be variable interest rates, compounding balances, late fees that mean people can end up being really unfortunate scenarios where they're constantly trying to pay down debt over many many years. That process does not happen with a firm. Every loan is underwritten on a transaction by transaction basis, and they are designed to be paid down to zero. So these are much better for consumers, and the data shows they end up with much better underwriting outcomes. I've actually heard Max say that the credit card has been the best form factor for payment, and he couldn't really imagine that being disrupted, but obviously he's working on doing that, and his background is in cryptography and antifraud at PayPal, so he spent a lot of time thinking about quantitative ways to underwrite, maybe just walk us through some of the ways that a firm is approaching underwriting that traditional credit cards haven't been able to build up. The clearest and biggest difference here is that they're underwriting transaction by transaction. If you imagine a credit card, you're approved for a general purpose line of credit, maybe it's a few thousand dollars, and you're kind of told, "Good luck, don't spend it all at once," and you're kind of left to figure it out on your own. A firm is doing every single transaction uniquely, whether that is interest rates are changing, the economy is changing, the type of purchase you're making. They're always feeding that through their models to adjust who they're lending to, how much they're lending to, and what rates they're lending at. So that's the core structural difference when you then sort of go the layer deeper. The business has talked a lot about the use of AI and transformer based underwriting models, particularly at their recent analyst day, and so they're basically seeing every time they release a new underwriting model, which is on a call at six, seven-month cadence, they're getting materially better underwriting outcomes, and this is as they load more and more data into those models to train over time. So what you're seeing is you've got the core model of underwriting on a transaction basis, gives you a step-function better outcome, and then also a firm sophistication in the team, and the models they're building gives them another step-function change in underwriting outcomes. For context, when we compare credit or underwriting metrics versus businesses like a company, a firm gets better outcomes, and that's reasonably material when you think a synchrony would talk about having 75% of its customer base being prime, whereas a firm would talk about, call it, 50% of their customer base being prime. So despite the differences in the customer base, the firm process ends up in better underwriting outcomes. It's an interesting segue, because I was going to ask about what the expansion opportunities would be from better underwriting. One of is you can just service more potential customers, whether that's prime or non-primest, that's one. Are there other things, whether from a demographic perspective or otherwise, that being much better at underwriting opens up different pools of merchants or consumers that maybe other peers or other card payments would want to touch? It sort of impacts the whole network. Merchants are happy because they're getting more sales. There's more consumers that browse the website that can actually transact. Consumers are happy because where maybe a credit card wasn't approving them for a limit, maybe a hundred dollar loan for a very short repayment schedule can be approved by someone like a firm. So they're also getting access to credit. And typically what we see when, again, a firm is talking about their business, is that frontier of we can approve more of these people across more, let's call it credit score bands, and end up still with very, very strong repayment rates and very low delinquency levels because they're optimizing the dollar amounts and the terms for each individual. I do just want to highlight, there is a big misconception that all of BNPL and all of these financial technology businesses that have credit aspects to them are generally lending to non-prime customer bases. Like the credit card industry and other traditional lending industries, it's the full spectrum. So yes, you get some players that are predominantly lending to subprime, but then someone like a firm, as I mentioned, their average customer is actually generally prime, particularly when you look at the dollars they're kind of lending rather than custom account. And it's also just not young people, it actually kind of skews perhaps older than you would think. Ages 30 plus is kind of the age bracket. And so the product isn't a kind of subprime lending to people that otherwise couldn't have access to credit. It's a much broader pool of the population. And I would just sort of re-highlight and double down on the statistic that half of US credit card holders are sitting on revolving balances. And so there's this huge portion of the population that haven't necessarily been served by a great product. They're suited to them historically. And a firm is targeting that part of the population. They're not targeting the American Express platinum card holder that wants points and airport lounges. It maybe takes a step back and set the stage on the actual business. So I want to spend some time on the economics and unit economics, because I think a lot of people in the here, buy now, pay later, they may just assume, right? It's just like that merchant discount rate where the merchant pays a fee and that's the business. Or you have these very simple, no interest, pay and acts or paying for types of installments or options. But from reading and hearing more about the business, it's actually much more complicated and layered than that. And there are pretty much various products. I think there are four primary revenue streams for the business. So maybe you could just walk us through the different sources of revenue, how they fit together, the volumes for each in terms of GMV. It certainly is one of those businesses that can feel very complicated when you look at the PNL, but at its core, when you think about the biggest line items, it is reasonably simple. There are basically three types of offers that affirm, generates GMV from. So there's interest bearing, the 0% loans, and then the pay and ex. And basically, let's call it in round numbers, 70% is in that interest bearing category. in the rest of the world. is evenly split between 0% loans and the Paynex. And so if I were to split Paynex and 0% loans look pretty similar from a Paynex perspective and then interest bearing looks different so I'll split it really into the two categories. So if you look at Paynex you're buying some jeans for $100 and you're agreeing to pay $25 over four installments. The primary way a firm makes money there is on the MDR that we've talked about. So that's negotiated. Merchant by merchant, big merchants get a smaller MDR, small merchants get a higher MDR. Interestingly the MDRs on the Paynex transactions are generally trending towards credit card rates over time and are sort of almost there. The 0% loans because the interest is being funded by the merchant, those MDRs are still very high. But that's typically where you see the big merchant revenue or network revenue coming from. The second pool of transactions which is the 70% of GMB is the interest bearing loans. This is a different kind of economic structure because the MDRs are actually very small here, smaller than the Paynex or the 0% APR loans. The vast majority of the economics are coming through the interesting come that the consumer is paying to a firm. And so that's the way to think about the revenue. Paynex is mostly coming through merchant revenue, interest bearing loans is mostly coming through interesting come. And then the way to think about well how profitable are these products and a firm discloses this in their recent investor forum. Those Paynex, those shorter terms, smaller dollar value loans generate RLTC margins or gross profit margins of about 1 to 3% of GMB. Whereas the interest bearing loans generate a gross profit margin of 4 to 6% of GMB. So you can see the smaller ones, 1 to 3% interest bearing larger value, 4 to 6% of GMB, which is why when you look at the firms P&L, it's actually very healthy, particularly when you compare it to other businesses in this landscape. Because they gravitate more to these interest bearing loans, they're very profitable. That number is after all of the losses, all of the funding costs, we've talked about losses being higher on the interest bearing side, obviously, it's the longer term loans versus the short term loans. That's after all of that. It's still just a much more profitable product to be sitting at interest bearing loans. And I think that was the concern with the card product is if people just start using the a firm card everywhere and start doing more short term Paynex style loans, maybe the economics won't be as good. But interestingly, people are using the a firm card. The mix of transactions is actually even more heavily weighted to interest bearing loans than the core business. And so it's actually an extremely profitable product. Because as I mentioned, a firm isn't actually generating that much MDR from interest bearing loans when it's directly integrated with merchants. So the difference when using a card or buying direct online for those interest bearing loans is not materially different to a firm. All in, I talked about the different gross profit levels relative to JMB blended a firm generates about a 4% gross profit on JMB margin, which is industry-leading. Before we started recording, you were talking about how it's a payment network, although it's also kind of a lending company. And right now it's maybe even valued more like a traditional lending company, less like a payment network in terms of just like the overall multiple visa and mastercard are seeing much better multiples than a firm is today. But it is definitely a payment network and has network effects. So I'd love for you to just describe the payment network component of the business. So I'll make the distinction between master card and visa and American Express. All three are payment networks that as most listeners will know, master card and visa are purely just the rails. And then the card issue is sitting on top, extended the credit. And so they've kind of disaggregated the credit from the payment network. American Express vertically integrates. And so they have the payment network because they're directly integrated with merchants around the world as well as extending the credit. American Express is a wonderful business and is very well covered by news media. But it has always traded at a multiple discount to visa and master card because there is a credit component to it. And so that's why when we talk payment network, we very specifically talk American Express because a firm has also integrated the payment network in terms of having direct integrations with merchants or be it online instead of the cafe down the road or the restaurant down the road, but also having the credit sit on top. Proof of that network effect when we sort of just think at the highest level is that a firm today processes over 50 billion of GMB still growing over 30% a year. And that's actually growing faster than it was a few years ago despite the business now being 2 to 3 times the size. And so rather than seeing kind of an asymptoting growth rate as the business scales, it's actually being able to maintain or accelerate growth at scale, which is a good indication that the network effects are very real. So a firm benefits from all the same network effects that are well studied for a business like American Express. As more merchants integrate the a firm button, it's available in more places for consumers to adopt. And then as more consumers become a firm customers, it becomes more interesting for more merchants because there's a larger consumer base to drive more revenue. And if you're a merchant assessing which the MPL button to install, you're generally going to gravitate to the one with the largest customer base because it's generally going to drive the highest amount of purchase volume. That network effect also feeds through other parts of the business. For example, since IPO, the average user has increased their usage from two transactions a year to seven transactions per year because the product is available in more places, existing customers are seeing a firm and using it even more. And what's also interesting is in any given quarter, about 95% of transactions are from existing customers. And so the flywheel is working both in terms of acquiring customers, but also in how frequently they're using the product. And that translates to things like sales and marketing's cash spend is very low and has barely moved in dollar terms since 2021 because you have this very efficient customer acquisition flywheel where most customers, the vast majority, are signing up when they see an offer that is attractive to them on a merchant's website. And so a firm is not pouring money into Instagram ads or WorldCup sponsorships to expensively acquire customers that is very neat flywheel. But these network effects are really important. There's a lot of apps out there and they've been very successful and they're growing quickly in their good businesses. But you sort of go into the app, apply for a loan and it kind of loads it onto the account or kind of onto a virtual card and you then go spend it in the world however you want. That process doesn't have the network effects that a firm does. And so those other products, we wouldn't call those payment networks. We would call those lending businesses, whereas a firm has vertically integrated the kind of lending in the credit and the payments network. And that's why it looks more like the internet version of American Express, whereas the credit coming out of the credit loaded onto a mobile app or a virtual card looks more like the kind of historical credit card ecosystem. And so we think a firm will grow larger, faster, for longer because of the network effects and deserves to trade at a premium multiple because of that flywheel. I heard that their CAQ is actually negative. Yeah, so if a customer signs up on a merchant's website, a firm makes money on that loan and they've just won a customer, it's negative CAQ for customers that come through that channel. If I was being really picky, when they originally sign the deals with Shopify and Amazon, they did issue equity to those players. So if you sort of incorporate the amount of equity, they issued to those to merchants in particular, there is a cost to the CAQ of customers that comes through those two channels. But generally for the average merchant, the negative CAQ pace is very real. A firm also has these two double tailwinds, kind of this Pac-Man effect of like we have e-commerce eating more and more of retail e-commerce is let's say a trillion plus and retail is a multiple of that seven or eight trillion. So like both of those numbers are probably going to continue to grow and e-commerce is going to eat more and more retail at the same time you have BNPL by now pay later eating more and more of e-commerce. So I'd love for you to subscribe some of these tailwinds. This is kind of the growth for the TAM thesis you perfectly articulated. You've essentially got e-commerce taking share of retail and the U.S. leads a lot of Western countries on this front with e-commerce representing about 20% of sales. But the reason that perhaps and listeners may be wondering why there's an Australian talking about an American payments business, the reason Australians and Australian investors are generally interested in these business models is BNPL adoption in the U.S. is actually very early and the countries and regions that actually adopted it the earliest and the fastest were actually places like Australia and Sweden and Europe because after pay and Klan are we're kind of born in those regions. So today BNPL is about 6% of e-commerce in the U.S. That number is about 15 to 25% depending on if you picked Australia or Sweden or other European countries. So we think BNPL and we use that term loosely what we actually mean are these merchant integrated payment options so after pay Klan are a firm that in America can triple and then you're also in terms of it's penetration of e-commerce and then e-commerce is also going to take share of a retail So you've got these double tailwinds at the industry level and then a firm itself is the market share later It has about 50% market share and it's actually gaining share. It's growing the fastest in the US in the US Specifically not international so it's got about 50% market share in the US and it's gaining share and it's actually growing Faster at its larger scale than both Clarner and after pay and so again when we think about network effects Typically once you have that escape velocity It's very hard to catch the market later and it's a good segue into Agentech commerce because we think Agentech commerce only accelerates those two kind of industry level tailwinds We talked about in the sense that agentech commerce is only going to result in more retail happening online and Agents are going to be great at figuring out what the best Credit and payment options are when you're checking out and a firm We can get into the specifics of how it does it but is an exceptionally good option for a very large chunk of consumers That are actually optimizing for the best financing offer not just where they get the most points Could we walk through an example with agentech commerce because I actually think that the stock had dipped on the news of News and maybe even instinct and rock bots and you have now dots Maybe there's just like a lot of uncertainty Everyone in payments is a little uncertain at the moment or how these things are gonna impact it It certainly seems exciting on one side It could also be a little scary on the other Can you maybe just articulate a little bit more about the potential upside and Maybe why the stock had dropped a bit and some of the concerns that agentech commerce presents So I think all of financial services and lending and payments Dropped on the idea that agents will just be better at comparing and contrasting offers Which is right? But I think the important thing when we think about a firm is it's Directly integrated at the checkout at the point of sale and that they Personalize the offers that a customer is seeing in the sense that there are multiple options And they are tailored specific for that transaction and that user particularly when that user is already in a firm customer And so when you're buying that couch from target for $250 The credit card paying a high interest rate the revolving balance the terms and conditions Doesn't necessarily stack up that well against something like a firm where there's multiple options Affirm and we can get into the founding story, but there are no late fees There's no hidden terms. There's no junk or gunk as Max Levson would describe it What you see is what you get and then the other thing that helps a lot is often the merchants are actually Subsidizing the affirm loans. So if I give the example of the 0% Loans that a firm offers the merchant is actually subsidizing that. So you buy your 250 dollar catch You may get an offer for a 6 or 12 month 0% loan no credit card or Credit app can compete with that type of offer and so you can imagine when Instinct or Muse is doing your shopping for you and you go great. I'm ready to check out That's what I want it goes just so you know there's a 0% offer from a firm here. We think that's actually the best It's going to be better for you to use rather than your high interest credit card and you go fantastic Can you fill it out for me and get it done and of course it's got your name and mobile number and email address and Potentially last for numbers of the social security number and so it can fill it all out for you So there's actually less friction than there is as a human to sign up for one of those offers The affirm product is built for e-commerce It is e-commerce native and it's only going to be better in a world of agents or more rational Less emotional decisions on what the best credit option is I'd also say We haven't talked about max and the team But this is a San Francisco business highly technical and you already see it today in the integrations they have a firm is very happy Providing the credit in a white label fashion to things like digital wallets. So shop pay is the canonical example Shop pain stormance is essentially just a white label version of a firm We would anticipate that as agents Want to build wallets into their businesses a firm will build the credit aspect of those and share economics with them in the same way They have done that to date with businesses like shop fire Maybe a naive question, but assuming that you can see multiple options at checkout So whether it's a firm or Clarna or after pay or one of the smaller players Why a firm would be so much better for just like an average consumer the key distinction Without being too dismissive of after pay obviously. I'm an Australian. I have a sort of an emotional affinity for after pay But in the US really today the two main competitors are Clana and a firm will be a firm is 2x the size plus of Clana in the US the key distinction is the types of products and the types of loans they offer a firm has always Historically gravitated to higher ticket size Interest bearing longer term loans much harder problem to solve if you're lending someone $500 over 12 months as max would say there's 12 times that consumer can decide they don't want to pay you back Clana has more typically gravitated to the kind of $100 pair of jeans paying three paying for short term loans and they have very different credit underwriting outcomes Affirm has shown you on their monthly installment plans your cohorts typically have a loss rate of about three and a half percent On those more traditional bnpl short term low ticket size loans the loss rates are more like one percent Now why do I highlight that a firm offers and has a long history of offering the full suite of credit products from those pain three pain for 0% loans through to Many listeners may remember they originally the biggest part of their business when they listed was actually financing peloton bikes on kind of 24-36 month time frames They can service a much broader selection of merchants and products or they have experienced servicing a much larger set of products and merchants Then Clana has historically Clana is moving into these longer term loans But still that when you look at their business the vast vast majority is the pain x Style product and so when you're an agent and you're on a merchant's website a firm is generally going to have the broader suite of options and the firm is also committed to things like no late fees No penalties, whether Clana still does make money on those sorts of mechanisms So there's some kind of nuances and quirks in the kind of terms and conditions But fundamentally we would just say a firm has taken the time to solve the hardest problem of big loans over long periods of time and has backfield the easier loans Whether it's Clana kind of started on the easier loans and is now trying to figure out how to do the harder loans And so today when you sort of see the results a firm is kind of larger growing faster on more merchant websites in the US And that's where there's less head-to-head web both buttons coexist than probably people think What was some of the reasons that Australia and that's specifically after pay and then Clana specifically in Sweden and other countries in Europe Why were they the pioneers of this specific technology? This seems like it would normally come out of Silicon Valley And you said a firm is a San Francisco company yet Clana I think started in 2006 Affirmed in start until 2012 talk about like what was some of the ingredients for this starting in Europe in Australia Clana had been around for a long time the firm had been around for a long time But the Ruck market fit moment of really these occult and pay-in-x paying for whatever it might be these shorter-term loans Didn't happen until the late 2010s but the big moment occurred In the US when COVID hit and the NPL volumes kind of 3x in a year through that 2020 period And I think what was interesting is at that time a firm had been doing these longer-term Interest bearing loans or monthly installment loans with businesses like peloton But the pain for type phenomenon hadn't really hit the US because after pay had started in Australia Clana had started in Europe When COVID hit it was actually those shorter-term loans that all of a sudden took off A firm actually went from being the biggest business to sort of being one of three and The market shares were probably actually going against them And again, it's sort of interesting talking to Max about that period of time Because we sort of cast our mind back and think that must have been pretty nerve-wracking You were the first mover in the US but very quickly these international players started taking share But he sort of reflects on that point I spoke about earlier where His philosophy was always starting with this really hard problem And then backfilling with the easier problem rather than trying to go the other way And so while you had this The product market fit usage explosion in COVID in the US since then you've seen Max and affirms philosophy of we want to be able to offer everything to merchants and customers actually come to fruition and they ended up signing Amazon and Shopify and Costco and a bunch of these Super large merchants I can get just happened to be the founders happen to be there when the business model was created and in terms of penetration Getting the U.S. and affirms specifically engentee commerce may be one tailwind that will help them close the gap in terms of penetration where in Sweden in Europe It's 20% Australia might be 15% it's much larger than what it is here in the U.S. So what are some of the levers or tailwinds that a firm can kind of ride in terms of closing the gap and just growing overall penetration So interestingly only 75 of the top 250 U.S. merchants are on the Affirm platform We'll have the Affirm button integrated into their checkout. So there's still a lot of growth just from the Enterprise sales motion of turning up to these merchants and getting a firm integrated Affirm now does offer a Card to those customers that effectively come through the core funnel So this is someone that has signed up for an affirm loan through a integrated merchant They're views the app they've kind of repaid a loan and affirm now offers this card and the card can basically toggle between debit and credit using the visa network The customer can either pay now pay later or pay now and decide later as they like to say and that card Let's affirm reach install payments and the online merchants that aren't Integrated with a firm. So you can be shopping for furniture in store and still take advantage of a multi-month interest bearing loan from a firm And that product has been very popular so that about 20% of users and GMV now comes from card and it's still growing over a hundred percent year on year The mechanism is kind of the same in the sense that a firm is still underwriting every transaction and interestingly They still maintain very strong unit economics because the card Fees they earn are basically the same as what they would otherwise get on these interest bearing loans with an integrated merchant but what's interesting is the firm now has all this data of where their customers shop At merchants that aren't integrated with a firm and so it's a great sales tactic when you walk into a new merchant and say hey Our customers are already spending X million dollars with your business We think we can drive an uplift of why dollars to your revenue if you'd it integrate us directly into your a commerce site that flywheel He's also spinning to kind of help that core engine of the core pain its network with the direct merchant integrations Why do you think penetration isn't higher on the enterprise side? It's kind of a win-win solution the merchant kind of knows that conversion rates will be higher Maybe average orders will be higher to and then consumers also obviously happy They're able to like pay overtime and have these various options. There's flexibility to it. Why hasn't penetration necessarily been higher It's an education process and it also kind of occurs industry by industry So what do I mean by an education process? There are many businesses that just view Card acceptance as a cost. How do I lower that cost? How do I have add in and brain tree and strut beat each other up? So that my processing costs are as low as they can possibly be And they don't necessarily view it as a strategic lever to drive growth So it's an education process to say integrate a firm into your checkout We show all these various offers the cost to the merchant can vary considerably For an interest bearing loan the MDR the merchant pays It's kind of similar to what they would pay for a card transaction But if there's a 0% loan that's merchant funded that can be high single digit MDR and so some merchants look at that and dinkits are excessive and totally unnecessary way to drive Revenue but I think what a firm would say is Well, you can either do a 20% store-wide sale and every customer that turns up is getting a discount And it's lower gross margins on all those sales and you have a bunch of customers that otherwise would have paid full price That are now getting a discount This is it these sort of 0% APR loans are a clever way to effectively discount but do it on a personalized basis customer by customer And so when you think about that phased approach to discounting over particularly for a fashion business over the life of that season Maybe you start with the 0% loans to help move some volume and then end up in the kind of 20 or 30% discount A firm tries to educate merchants on the strategic merits and the strategic value But it just takes time to win those merchants You do see it also sort of happen industry by industry that all of a sudden once And Amazon all of a sudden Launches a firm and this happened in 2020 2021 A lot of other e-commerce players then follow very very quickly because they realize hey the biggest business has decided This is a valuable tool We don't have to overthink this lets integrate and so It's kind of the ground game of going industry by industry business by business and educating them on the merits of the product We would love it to be faster, but that's the process Do you have a sense of churn and maybe the traditional sense of churn Which I assume it would be pretty low because it's just another option that's available at checkout But at the same time you can see companies some very big like Walmart try to do this themselves and kind of move off of Affirm also notably it cuts the other way where apple tried to do this I think it was apple pay later and they Sunset of that because the underwriting side is actually just like very very difficult They just went with a firm. I think they integrated clarinet as well So maybe just talk about that side of the business people maybe trying to build it their own or just overall churn for a firm The way the company thinks about churn engagement over time is more on the consumer side So I'll share some of those stats But basically what you see is cohort steadily expanding over time They initially start typically purchasing through a firm offers twice per year A few years ago the average was a couple of times per year and today the average transaction count is about seven times per year So you can see that when consumers join they typically Increase their usage of the product over time. So the consumer value prop is very clear the customer churn pieces interesting I don't have the specific set off the top my head, but it's very very low and Walmart is kind of the recent exception And basically what happened is Walmart turned off a firm and turned on its own one pay powered by Klaner by now pay later offer What is interesting is the economic impact to a firm was actually quite minimal for two reasons The first is that wasn't a very profitable merchant. You can imagine Walmart Needs their suppliers up on terms and so it's not particularly profitable despite being a lot of volume So what you do lose is the cac but again powered by a firm white label of a Walmart digital wallet is less exciting from a cac perspective The other interesting thing though which the company recently disclosed is and I think they use the word large majority of customers that were shopping with Walmart Are still shopping with Walmart by a firm. They just use the card So they still prefer a firm. They still have loyalty to the brand. So they've got access to the firm card And they pay with the firm card and select the interest bearing loan or the offer that best suits them When they're shopping other install or online with Walmart There's some kind of interesting nuances and I think people probably thought the Walmart churn was going to be worse than the reality actually was We talked about covid which is when they went public in 2021 and they went through this wild ride of I think the market kept doubled on the first day and then after some period of time macroeconomic Changes impacted the business Peloton's stock and business cratering also had a very heavy impact I think the stock went down 80% 90% plus but there's such a resiliency part of the story And a lot of that probably has to do with max and the people leading the business I know we talked about earlier some numbers it's growing on a much larger base But maybe we just give us the center. How big is it? How fast is growing? Is it profitable? The journey has certainly been wild. I think it listed at about $49 a share Closed day one almost $100 a share got to about $175 a share a year later And then bottoms during the rate height cycle at $9 so more than 90% drawdown Max's LTI massively underwater Broke as the piling on with sell ratings and price target downgrades I can imagine that would have been a very very tough time for the business to go from kind of a Market dialing in that class of 2020-2021 IPOs to where they were during that period But roll forward a few years and today share prices back to about $60 to $80 depending on the day It's about a 25 billion dollar market cap business on a fully-dollar basis And trades at about 20 times Adjusted P I'm stripping SBC out of that number GMV is about 50 billion dollars growing 30% a year and they generate Revenue less transaction costs RLTC, which is effectively gross profit with about two billion dollars a year And so that's the rough shape and size of the business as it exists today When you go back through the case study of the share price journey that the business has been on, it was obviously overvalued in those early years. The big part of the share price decline is going from 20 times rubbing you to 20 times PE. When you actually look at the rate height cycle and the impact on the business, it was actually only one quarter, the December 22 quarter, where we weren't shareholders at the time and weren't following the business closely, but kind of looking back at the trajectory of the business. As a long-term shareholder, when that result printed, it would have been reasonably terrifying. Growth slowed dramatically, margins were down, materially, and it sort of felt like the numbers were in freefall. But by the next quarter, it had already inflicted and margins had improved materially. And then the following quarter, both growth and margins, were reasonably healthy. Revenue, less transaction costs, which is their version of GrossPrivate, is something that management talks a lot about. Other specific metrics that are important to understanding a firm as a business, whether it's relative to other businesses or just independently, what are the things that you guys care about and see that are improving or accelerating over time? It'd be ones for us. We're obviously looking at JNV growth. We're looking at JNV growth X-card, so how healthy is the core online business with direct merchant integrations versus the card business? The card business is fantastic, and it's helping to grow custom usage in the network, but that core flywheel still needs to be firing, which is important that that's firing for us. So JNV and the two constituent pieces are really important for us. The exact blend between the types of loans doesn't bounce around a lot and is somewhat less interesting to us. The GrossProfit or the RLTC is important because it captures all of the revenue of the business, so the merchant discount rates, the interest, the gain on sale piece, and then nets it off against the funding costs that they're paying on their debt facilities, as well as processing costs in terms of their customers paying back the loans, as well as all the credit loss type costs. So it really captures that core economic engine of what dollar value is left for a firm to then pay its corporate business in terms of sales and marketing R&D and OPEX. As I mentioned, we do benchmark that sales and marketing number compared to other Fintech and financial services businesses, again, just to get a sense of are these network effects real and the answer is yes. We're really tracking the GNA R&D SPC, those sorts of wine items very closely. GNA has now been essentially flat in dollar terms for five years. SPC has essentially been flat in dollar terms for six years. And so where this was one of those classic Silicon Valley businesses that was a pretty egregious offender on things like stockbass comp when at first IPO'd. The levels it now reports are well and truly in line with even what the Mag 7 would report in terms of stockbass comp, so it's middle of the road. It's not offensive relative to plenty of other businesses that are out there. We do also obviously track credit losses and those sorts of things just to make sure there's no material issues in their kind of health of the business, but those sorts of things get more into the nuances, the core kind of how fast and how big is the network becoming the kind of where we're spending most of our time. Inherently in keeping GNA and headcount flat, it also means that you're not laying off people, which presumably with a very technical team and a very tinkering mindset with AI, you may be able to lay off people, but that seems to be not his method or in his DNA. But Henry Elenbogen, who came on to invest in the best, talked up Max. This is being his act two and that he gave a story where like you would actually go to different departments and see how they were leveraging AI. Does that still feel true in how the different methods of management and leadership that Max imputes? Definitely. Max is reading scientific papers late at night on AI. We caught up with Max a few weeks ago and he said one recent weekend he used AI to build an app to control all of the TVs and stereos in his house because he was sick of hunting around couches for remotes. He's an engineer. They are extremely technical. 70 or 80% of code is already being deployed by AI. You compare that culture and that leadership team, how AI build they are with every other credit card business on earth. It's just not a fair fight or a fair comparison. The reason we backfoundal ed businesses is this alignment piece because the founders are economically tied to their businesses and care deeply about pursuing growth opportunities and taking advantage of big transformational innovations like AI. Just for context, Max's salary is less than $40,000 a year. He owns no cash bonus. He owns a couple of billion dollars with a stock and does earn an LTI of stock that's tied to the financial performance of the firm. And interestingly, the two presidents of the business to your point on longevity of the team, those two presidents have been with the business eight to ten years and they each own a hundred million of stock plus, which is more than most CEOs of US public businesses. So the alignment is there through the organization and starts with Max. They've even recently made some sort of org design tweaks so that Max is now spending more of his time in what he's kind of calling his innovation lab in a firm. And so the two presidents kind of effectively run the day-to-day of the core business. And then Max has a small team of engineers and product people to basically build the next suite of kind of growth levers to layer on top of what already exists in the business. This is like the zero to one idea that's inside the business and a firm card is kind of spun out of it. Exactly. So a firm card we've mentioned 20% of JMV growing a hundred percent year on year. That is a product that spun out of this innovation lab. A lot of what we're talking about on the merchant funded zero percent loans network. Where are the brands? So you can imagine Adidas can fund a zero percent loan when someone buys an Adidas t-shirt on Amazon or Amazon could fund the zero percent loan. That behind the scenes network has kind of been built out of this innovation lab. Max is very focused on making sure the whole organization is obviously implementing AI and we've already talked about it being in their underwriting models. But also the innovation coming out of a firm continues long into the future. We haven't talked about it but edge is another example where banks are going to start white labeling a firm's offering. So imagine you're a regional bank. Your customers have a debit card but you historically haven't played in credit cards because it's just too competitive a space. You can now turn on functionality in that debit card like the a firm card where your customers can kind of move between debit and credit offers and a firm powers all that. Does the underwriting? Does the servicing builds in the kind of functionality into the regional banks at to manage the repayments? So it's another way that a firm thinks of itself as a payments network and in the same way you can have a I'm going to get this analogy wrong because I'm not American but a Delta American Express card or an American Airlines American Express card. Today you can have the shop-pay installments powered by a firm or the regional bank hybrid card powered by a firm and so a firm wants to be everywhere and it wants to be the payment network. It's not trying to be the primary bank account like a lot of other FinTechs are kind of racing to be. So in the same way that the JP Morgan's and the Bank of America's and the cities exist to be a kind of full-service traditional bank American Express exists as a payment network. They still accept the positives and those sorts of things from a funding perspective but at its core it's a payments network and a firm is very closely aligned to American Express in that sense. We've talked a little bit about interest rates and now it's particularly important as rates are going up quite fast and one could say that a firm's vote is really it's incredible credit underwriting which we've talked a lot about and it's only getting better now as they moved into some different architecture with the transformer based architecture and it's access to capital markets. So I want to spend a good amount of time just talking about what maybe lease understood and most important particularly for this environment where the money actually is coming from to service some of the loan portfolio what happens when interest move particularly upwards you could intuitively say and maybe this is reductive that like they're borrow money to lend money and if interest rates are going up that's presumably quite bad but maybe just levels that is there on the capital market side of things and interest rates. The key principle to think about on the funding side of the business is a firm is trying to build out a diversified range of funding sources with lots of redundancy so they have different investor types banks insurers and other institutions funding these loans securitized non securitized on balance sheet off balance sheet static revolving fixed and floating rates the list goes on a firm is in the process of getting a banking license they will also have consumer deposits as a piece of the funding mix and the idea is that if you have the broad group of funding sources you're never reliant on any individual piece if for whatever reason the private credit market has issues or the banking ecosystem has issues or insurance companies are having issues, unless the whole system dries up, a firm has built a very sophisticated capital markets engine to ensure it's got this diversified funding base with plenty of redundancy. So the outcome of this diversified funding strategy is about 50% of loans are off balance sheet in forward flow facilities and static ABS facilities and then the other 50% is on balance sheet in warehouses and revolving ABS facilities and you can imagine the warehouse is typically where a lot of the redundancy is because you fund the loans by the warehouse and then think about where you want to move them subsequently. But it's not a case of your sudden building up lots of loans on balance sheet and then three quarters later sell a big chunk. The split between on balance sheet and off balance sheet and the splits between the different funding sources is very consistent and constantly managed. The key risk you have on the funding side of the business is more in the short term and this goes to the 2022-2023 scenario. But a firm when it writes the loan to the consumer and the consumer accepts the loan, the interest rate is fixed. So if the average loan term is 11 or 12 months, the interest rate is fixed over that period of time. A small portion of the funding base is floating and so if the Fed lifts rates very quickly in serious magnitude, you have this short term gap where you're not earning any more interest on that pool of loans that's kind of amortizing and you've got to wait for the new loans at the higher interest rate that you're charging to kind of flow through the book. Because the book turns so quickly, I think I mentioned within a quarter 50% of the loan book would be on the higher interest rate and within two quarters 75% would be on the higher interest rate. So it's one to two quarter air pocket. That's really what we saw in 2022-2023. Because that book turns quite quickly, rates have to move very quickly and very sharply to sort of have a material impact. So for example, in the most recent reporting, I think the business said if rates rose by 100 basis points, it would have caught a $90 million impact to the PNL and this is a business doing $2.5 billion a gross profit this financial year. I think the bigger issue is if rates go from 0 to 5% and you have a 500 basis point increase, the net causes a big issue. 50 to 100 basis points over the course of many months or quarters doesn't have as much of an impact. What's also interesting, the mechanism is slightly different to a credit card. Let's say a firm was offering 12-month loans on a $500 catch at a 15% interest rate and then the Fed lifts rates and now of sudden the firm has to charge a 25% interest rate for the new loans it's writing. That actually chops out a bunch of the loans they were otherwise writing at that lower interest rate. There are a certain pool of consumers that turn up and a firm says that's good credit and good underwriting to offer someone a $500 loan at a 15% interest rate but it's not good credit and we don't think it's worth the risk to offer that same person a $500 loan at a 25% interest rate. The bigger issue in these air pockets is actually growth slows materially because a firm just stops writing loans to a portion of their user base that they were previously and because the interest rate being charged to the consumer on the loans outstanding doesn't change you don't necessarily see a huge blowout in credit losses. Credit losses did rise in 2022 but typically it's because there's a whole bunch of other debt that consumers have that's variable rate and so they sort of get squeezed elsewhere in the credit ecosystem. It's a combination of growth and margins and it's one or two quarters of impact and that's only in those moments where 2022 was the largest and fastest rising interest rates in 40 years or something the average durations of interest rates shouldn't have a material impact on the business. When we think about these credit businesses it's not like a credit card portfolio where you have a whole bunch of people sitting on a revolving balance paying the minimums every month with balances that are compounding on variable rates so that when interest rates rise they were paying 15% on their revolving balance announced 25% and so all of a sudden you have this huge washout of credit losses. A firm the mechanism that it impacts the P&L and the business is different and we think healthier and lower risk than what you would see in these credit card businesses which is why and we can talk about valuation. The network effects alone make the business more like an American Express than a capital one or a synchrony but also just how the credit hits the P&L and what happens in these downturns also makes a firm a better business than the capital ones and the synchronies. Now the fair argument is that obviously Amix has a very affluent customer base a firm is called the average American. Arguably there's some sort of trade off there between different customer base but operating in a faster growth part of payments in the sense that we've talked about B&PL taking share of e-commerce which is taking share of retail and so you've got this big tailwind behind you relative to Amix which is that more traditional card network. So we've covered now the economics the modes underwriting models the team the funding the mechanisms behind it and I want to talk about like where it goes from here management has been pretty aggressive and has laid out a plan to roughly doubling the business to 100 billion in GMV maybe just layout where the different levers are to get there where you feel the most conviction and maybe the most skeptical. If I start at the highest level of the 10 and then we can drilling to the next few years the stats are somewhat overwhelming in the US alone is about $1.3 trillion of credit card balances outstanding. Thus a firm's total loan book on balance sheet and off balance sheet of about $20 billion. A firm is a spec relative to the US credit card ecosystem even if you look at GMV where a firm processed $50 billion if you added up these Amasta card dynamics as credit card volumes it's about $13 trillion each year so a firm is still tiny relative to the overall opportunity not suggesting it's going to ever be as big as visa card master card or amics but there's still a lot of room to grow even if we were to just pick capital one capital one processes over 15 times a firm's GMV each year so a firm is large in the sense it processes $50 billion of GMV and is integrated with some of the biggest merchants in America but there's still a very long way to go and I think when you speak to Max and when you hear Max on podcasts and earnings calls you get that sense that they are still very early and he is very ambitious about where he wants to take this business these sort of medium term milestones they set themselves that these investor forums every few years are the stepping stones along the way it's not a final endpoint where investors should assume the business hits the wall at a hundred billion of GMV and never grows from their or grows at industry card volume from there so if we're then to drill into that medium term framework as I mentioned they delivered they have a junior end but they delivered about 50 billion of GMV to June of this year they're targeting a hundred billion greater than 25% and your growth on that path so it works out they'll get there within a few years in theory and when they communicate to the market they are very explicit about what is in that guidance and what is not in that guidance and so what is in that growth target is the core US business plus the card plus international edge which is their white label offering for the US banks and agentic commerce sits on top of that so if those two products were to be successful we would expect that 100 billion of GMV to actually end up being higher so if we focus on very quickly running through those three pillars core card international we've talked about the core e-commerce is still taking share of US retail at a touch over 20% share BNPL can still triple it share of US e-commerce if you look at benchmarks elsewhere in the world and a firm is about 50% market share of BNPL and expanding so you've kind of got the triple tailwind in that core business the added context is only 75 of the top 250 US merchants actually use a firm will have a firm integrated today so that core business should continue growing very nicely through the future the second big lever is the card product again this isn't a product that's being advertised widely with very high cax like a lot of other card products that are out there it's purely for the consumers that are already coming through that core customer acquisition funnel and it allows consumers to pay now pay later or pay now and decide later and spend in store and with online merchants without a direct a firm integration it's already called 20% of users and GMV growing very very quickly and has been hugely successful and delivers great unit economics to a firm at roughly the same rates as the overall broader business potentially actually a little bit higher there is the obvious downside from card is you're not getting the product level data from the merchant integrations. What's interesting is that hasn't seen to have hurt underwriting outcomes. What a firm would say is it just makes personalizing offers a lot harder. So when you're integrated with a merchant, you're getting all this really rich data from what you've clicked on, what you added to the basket, what you took out of the basket all the way through. You can imagine all the data points. And so ultimately, what offers you're showing can be personalized not only to the user and their kind of history of free payment and the offers they've selected, but also the types of things in the basket. So that's the card. The third piece, and this is more nascent and the company would suggest is a smaller driver of growth is the international piece. There's a range of perspectives on international. You can imagine, we've just mentioned that BNPL is already reasonably saturated in a lot of overseas markets. When you think about Europe or places like Australia and New Zealand and recognition where it's due, Clana has a much stronger international business with a very large merchant and consumer base and they've built a great payments network in this international region. But what's interesting is a firm is kind of getting pooled into these international markets by its existing US merchants. Whether that's Shopify or Costco, some of their largest partners, I think see the value of the broader suite of credit products and want to bring them into places like Canada, the UK and Australia. The international business in and of itself is interesting as just a driver of growth in and of its own right. But it's actually in our mind, strategically very important to have to continue winning businesses with US merchants. There are examples of merchants with global footprints and I'll pick on an Airbnb or eBay that actually went with Clana globally because they just wanted one button to hit a global customer base. And today a firm can't really do that. Over time, as a firm opens in more regions, we think that head to head on Clana for some of those merchants actually gets stronger so that there's no reason why anyone shouldn't go with a firm because you can imagine, at the end of the day, if you're a US-only merchant, a firm, the network effect is basically subject to the economics not being wildly different. You generally prefer to pick the platform with the most users because it's going to result in the most transactions. The same is true globally. So if you're a global business, it's hard not to pick Clana today because there's so many regions where they have a large customer base and they're going to result in more transactions. Over time, we think that'll change but that's why the international business is important to build. Even though I think some investors would be skeptical that that market is saturated and maybe there's no point going after those markets. Those three buckets are what's in the actual greater than 25% growth, 100 billion of GMV. The business was then very deliberate and specific that a firm and agentic commerce were incremental products to that growth. And so Edge is the white label for regional banks and then agentic commerce will involve a myriad of things from personalized offers through the direct integrations with personal agents as well as AI more broadly through the business. - When you speak to skeptics of a firm, what are they most worried about? Is it mostly just around the concentration risk which seems to have been mitigated to some extent even when you lose a player like Walmart and maybe they had high volume but it wasn't super profitable. So it didn't make such an impact to the business. But in general, I think the numbers are pretty concentrated across the top five and then even Amazon being like the number one which is over 20% of the business. How much of it is it just around concentration risk? Obviously, interest rates have an impact too but we covered that maybe just hit on concentration risk and any other significant risks to the business. - We're not strictly bank investors where more found a lead growth investors. When we speak to our network, the number one thing people worry about is that they're just not comfortable with credit businesses that is just too hard, requires too much work not in their circle of competence. The issue is not so much a firm specific as it is just where they play. I think there's also a lot of misconceptions. We speak to a lot of investors that still say, oh, they're just lending to subprime customers that can't otherwise get credit cards. It's a hyper competitive industry. What's the competitive advantage? And what's interesting is it was very similar with Afterpay in Australia. The investor community was generally very dismissive of Afterpay when it was listed here because again, their personal experience, our personal experience is very different to the types of customers that use a firm where typically not sitting on revolving credit card balances and where typically optimizing for points and travel and airport lounge access. And so the counter position of a firm versus a credit card isn't obvious to us in the same way it is obvious to the average American who actually just wants to get a great offer and not end up trapped in a credit card debt spiral. The pushback is actually normally based on some of those aspects. The concentration piece we've talked about, it can be offset. It obviously hurts the customer acquisition flywheel if an Amazon or a Shopify were to turn no doubt. There are very long-term agreements in place with both of those companies. You can imagine Max and Toby, I understand they're reasonably close. There's reasons why those partnerships have been very successful for all the players. So it would surprise us if those relationships were to end but it obviously is a risk. We've talked about the capital market side and interest rates. You just see it in the stock price very clearly. Anytime there's a Wall Street Journal article that private credit are gating funds and potentially imploding the stock is down. I think it's one of those businesses where when things are going well, you get a lot of growth investors involved, when things are going not so well or the bank guys turn up. And so there's this constant tension of, should it trade on 10 times PE? Should it trade on 20 times PE? The growth investors haven't necessarily done a whole lot of work to get really comfortable with the credit. And so anytime there's a risk, they're straight out. But similarly, the bank guys don't necessarily value a founder-led, tech-native business, those aspects of the culture and the organization, and the same way the growth guys do. So in the same way, people were arguing for many years these amazes on a retailer or a tech business. I think people today argue is a firm of lender or a tech business. And the answer is both. And it's important to understand both aspects of the business. There's all the games of how quickly to consensus estimates come down and all those sorts of things, but really during a really, really bad, interest rate hike cycle. It was one quarter where you would have sort of looked at each other of, is this business about to implode? And then the next quarter, it got better and by the following quarter, you were sort of back. So I think when you look through the history and study how the business self-healed through that process, I think you can get comfort on the credit. Not to say the share price won't get hurt if there's major interest rate hikes. But it's not an existential risk. I think the way some people would otherwise think of it. I hope people can appreciate the resiliency of this company and of Max and of the team, because as we talked about, it could have died so many different times. And yet it's still here and growing very fast with a leadership physician, particularly in the US, and with plans to expand globally. I often like to close with a lesson for founders building a company today. And I think we've kind of covered that today with HVF, do things that are hard, valuable, and fun. That's kind of Max's way. And so maybe the last question can be for investors. What's the lesson from studying and investing in the firm? - We love these businesses that are tech native, that are operating in what I call non-tech industries, when they can merge across section of the talent. So in a firm's case, they have serious underwriting talent, but they've also got serious engineering talent. And so you sort of merge all the best things about a tech company with all of the complexity of the real world operating business. And that gives you a competitive advantage that can't be built by Claude Code, frankly. And we could run through a list of businesses that we think fit in this category, but a firm is clearly one of them. The biggest businesses in the world, whether that be Google, Amazon, Apple, Shopify, have absolutely no interest in extending credit to their customers, they outsource it. It's hard and requires a lot of expertise. And they have core businesses to run. And so a firm has been able to build its competitive advantage by marrying its tech talent and its underwriting talent. And that gives it a competitive advantage previously, before AI became a huge factor, and we think a competitive advantage in this new environment. - Awesome, please, I was thinking through time. - Awesome, thanks for having me. - To find more episodes of Breakdowns, ranging from Costco to Visa to Moderna, or to sign up for me. for a weekly summary, check out JoinColossus.com. That's J-O-I-N-C-O-L-O-S-S-S-U-S.com.