Tuesday, October 18, 2016

Where Credit Is Due: Max Levchin and Banking For A New World

HVF is his motto. And the name of the umbrella company that arches over his many undertakings. He is Max Levchin, one of the founders of PayPal, and therefore member in good standing of the PayPal mafiawith personal investments in over 100 startups, the most recent of which are a fintech company and a women’s reproductive health company

The HVF part stands for hard valuable fun, which is how Levchin decides which projects to take onThe hard part refers to something that is challenging, something that is a problem to be solved. If it was easy, anyone would do it. The valuable may be something on a global scale, such as a shortage of clean drinking water or it may be something of a more everyday nature, such as simplifying banking. And the fun, that’s where personal obsessions and passions come into the picture. If you love what you’re doing, it’s fun. It may not be Tommy Lee’s idea of fun, but we’ll leave the drumming on a roller coaster to him and the real HVF to others.

Levchin’s latest project is Affirm, which seeks to solve the problem of banking in a world which has changed. Whereas people used to get into professions in their mid 20s and stay in them until the arrival of the gold watch several decades later. As he put it during a recent conference keynote interview: “banking doesn’t have to be an industry that helps you shoot yourself in the foot”, referring to the fact that the banks’ objectives – of charging as many fees to customers as possible – and individuals’ objectives – of paying as few fees as possible while hopefully being able to squirrel away a few dollars here and there and earn a bit of interest – are generally at cross-purposes with each other. 

Max Levchin, interviewed by Kara Swisher in Boston, October 15, 2016

Does it have to be this way? Levchin doesn’t think so. “It’s possible not to charge 5 to 7% overhead, as most banks do, and it’s possible not to have 100 disparate software systems, which is what you find in a typical bank”, Levchin told the crowd. 

“I think the bank of the future is more like an app that works in real time, linking your decisions and behaviors to your financial goals and overall fiscal health”. In other words, if you say you’re saving up for a vacation, or a car, or a pricey jacket, then maybe visiting Starbucks twice a day isn’t in your best interest, and the app could help with reminders that nudge you in a more productive direction. And when it comes to determining creditworthiness, the Fico score has been the accepted standard since 1989. 


Lenders are in the business of risk assessment....i.e. are you a reasonably good candidate for credit? What recourse does the bank have if you default on your loan or mortgage, or if you overextend your credit? This doesn't sound at all unreasonable but, as Levchin is quick to point out, the Fico score system does not reflect today’s world of fairly frequent job hopping, of startups and creative endeavours funded on credit cards, of flexible work and the gig economy, or of rising student debt loads. The Fico system effectively penalizes people that don’t fit into neat little boxes of creditworthiness assessment, and that’s where Levchin sees the opportunity. 

After all, according to a recent McKinsey study, as many as 162 million people, representing 20 to 30% of the working age population, are said to participate in the economy of flexible work. This does not, by definition, make them irresponsible or poor candidates for loans; it just makes them people who don’t fall into the existing buckets of the Fico measurement system.

And this is where digital, networked systems -- whether they are deployed for fairly mundane functions such as dating or providing alternate accommodation options or for more serious enterprises such matching organ donors with those in need or identifying scientific, technical, or socio-political problems and providing monetary incentives for their solution -- are fascinating to both observe and participate in, manifesting new ways of operating that in no way resemble the rationales of the previous era.

For more thinking on this topic, here's Max Levchin speaking at SXSW 2016 about what he sees as the unstoppable trends in our midst.