Why AI Agents Could Finally Reinvent the Credit Card

0:00 The card payment interface is the singular best user interface ever created. It is the world's largest market by any stretch of imagination. And there are no niches and payments that are smaller than hund00 billion. >> Once you go really big, the numbers get small, which is strange. There's a lot of volume, but the large volume revenue opportunities and payments tend to be the smaller dollar amounts. >> There's always an opportunity to use another form of payment delivery device to satisfy a basic need. convenience just trumps as the total amount you're trying to send goes down. The best user interface ever created is the credit card. This may actually be finally up for renegotiation because AI is already there. It's just that you haven't yet trusted your agent to do as good a job as you would. There is something else that you're surprised has not happened yet. I went to some cryptography related conference and presented a new idea in digital payments and was literally booed off stage because it was certainly not anonymous and the the big innovation of PayPal was what if we don't care about anonymity at all and in that sense so you guys go way back having co-ounded a firm and and met well before then you guys are pioneers in in fintech you've been thinking about the space trying to make sense of the present you know think about where the future is going for 20 plus years, 25 years, maybe even more.

1:17 And I'm curious, you know, given so much time has passed since you first got into the space, what has most surprised you about what has happened, what hasn't happened, what did you expect to happen in the early 2000s of how how this space would would play out? Maybe Alex, why don't you start? I think the rise of Apple Pay and Google Pay and to the extent the the extent to which they've really penetrated because it's very hard to change consumer behavior in general and it was a bizarre set of accidents if you will where there is this merchant liability shift because magst stripes were so easy to replicate that you probably noticed a while ago you your new cards had a little chip on them and you had to dip the chip and then the machine would be like you know don't remove don't remove right that's because the chip was being rewritten it was much more secure than a magstripe and basically Visa and Mastercard. and then the Euro Pay that's what the E is for. but what is EU for? EMV.

2:13 >> Europe card. >> Euro card. >> I don't know. The Europeans somehow got their say because they always do. They they insert their not electronic. That's >> Yeah, it's it's euro something Mastercard Visa. So, it was it was called the EMV switch. So, all of these machines, if you did not want to be liable, like I could go to Best Buy, buy a TV, and then get home, use my TV, and say, "Nope, never bought the TV."

2:35 And if I was using my magstripe and Best Buy didn't have the the machine switch over, then Best Buy would be like, "Oh, shoot. We lost all the money on that TV, and Alex gets the free TV." I'm exaggerating slightly for a fact. So, everybody had to get a new machine. And then it turned out that those new machines had a little contactless, you know, thing where you didn't have to dip the chip or swipe the card. You could just tap. Nobody was using taps when those machines came out and now it's ubiquitous. So that's that's something where I mean generally speaking it's hard to change consumer behavior but I feel like between COVID and the fact that all these merchants independently had to switch over their machines and the fact that I mean I wouldn't have guessed in I mean you obviously did because the confinity was was Palm Pilot sending money. So you you're ahead of the whole PDA wave but I wouldn't have guessed that those three things would have come behavior. It's like change of of consumer behavior, ubiquitous new merchant payment terminal plus ubiquitous mobile telefan and that's that's certainly one thing that has changed the world a lot.

3:37 >> How about you Max? You you were dreaming about you know what what the future of money would look like a long time ago. Would it have surprised you about what has happened or what hasn't happened? It's very hard to step back from the soup if you're cooking in it for the last plus or minus 30 odd years. I think the to sort of further illustrate Alex's point, one of the things that's really amazing and subtle about Apple Pay/Google Pay and its interaction with the Visa Mastercard networks is Visa and Mastercard have a hard 2 and a half second limit on interaction between the network, the issuing bank and the merchant and the acquiring bank. And so the whole thing has to happen in 10 seconds where the transaction gets retrieded or maybe just canceled out and really leaves very little room for any kind of clever innovation. And online you can play games. If you're doing e-commerce you're like well yes we're going to submit your card to Visa but first we're going to run some anti- fraud checks and we're going to do some other things to like reduce liability.

4:43 But offline like once your card is presented two and a half seconds that's all you got. And Google and Apple Pay have singularly timeshifted the whole thing by creating secure enclaves inside their chips and saying I already know your card. I can do all kinds of things before I actually have to talk to Visa Mastercard. And maybe the shocking thing is that Visa Mastercard have not yet introduced some new standards saying actually it doesn't have to be two and a half seconds at all. It could be 15 seconds while we know go and get a bunch of issuers to bid on a better credit quality terms for you or any other type of innovation.

5:15 the sort of hardwritten rules of dehawk era are more or less intact and that's not 30 years that's like more you know 60 years and so I think that's probably a critical or more criticizing take on what happened but the shocking thing about payments is that it is the world's largest market by any stretch of imagination and anything and everything you could have possibly thought of being sort of deconstructed and being the nichiest little thing to poke around and innovate in always turns out to be a hundred billion dollar. There are no niches and payments that are smaller than hundred billion. And so that's probably the most surprising thing I've seen.

5:54 >> Yeah. >> Although it's interesting like once you go really big, the numbers get small, which is strange, right? Like if I send a $1 trillion wire, right? The United States just announced we we are $40 trillion in debt, right? Let's just say that like, you know, Elon's Mars colony is worth $40 trillion. and you know Roana decides to tax him $40 trillion and he needs to send a wire that wire is not going to be very pro like there there's a lot of volume but the large volume revenue opportunities and payments tend to be the smaller dollar amounts which is surprising right because it turns out I mean like all of the QSR the quickserve restaurant the payment opportunity there that's massive that's why Starbucks invented Starbucks pay because they wanted to stop having to pay it's like these prepaid they only have to pay one time. You char you put $50 on your Starbucks account. Well, they only have to pay Visa, Mastercard, and everybody else one time as opposed to every successive time. So, a lot like what's surprising about payment area under the curve, if you will, is that like the bigger the dollars, like the smaller the rake, which I guess makes sense because you're not going to get 2% of that $40 trillion payment, but everybody goes after B2B payments.

7:05 Everybody has a clever idea for B2B payments and like that's the only one that is probably the exception to the rule. I was trying to find so it's lost in time the original email between the two of us which I think we have slightly different origin stories of how we actually met >> but I was trying to find the original email between the two of us where we start mentioning what becomes a firm eventually and it's dated April 2011 and in it I think I ask you like tell me more about this bill me later thing because I was working on something else while you were watching PayPal buying build me and you send me these really long elaborate sort of here's exactly what it is and all these ideas around it and we then veer off into this ping pong of emails around bill me later for business and conclude that it's actually a dumb business where there's there isn't an opportunity >> well and that's actually it's funny you mentioned I bought the domain pay me sooner >> as a result so it's like bill me later was a good idea pay me sooner would be an even better idea actually the idea there it still is it's not it's not terrible because it's not payments it's lending so think of it this way Imagine that. Like big companies beat up small companies all the time to get better payment terms. Better payment terms for them, right? It's like so if I'm GE and you're Eric Torrenberg and you're a little guy, I'm big GE. I'm like, I'm going to pay you net 90. So you invoice me and I pay you 90 days later. Now you have to pay your employees. So you go to a bank, you go to somebody else. You're like, hey, I'm Eric. I run this business. Most of my money comes from GE. They're an awesome company. They're going to pay me in 90 days. bank doesn't care, right?

8:40 They're just like, "Yeah, we're going to charge you 15%." Meanwhile, GE can issue bonds at like, you know, whatever sofur plus 10 basis points or something. Like GE is paying 5% for credit. You're paying 15% for credit, but it kind of doesn't make sense because your credit is G's credit, if that makes sense. Now, there's something called factoring where you can sell the invoice. You can actually sell the receivable. That's somewhat usurious. that that's very very actually it's not usurious because it doesn't like credit laws don't apply because you're selling a receivable but I always thought that pay me sooner was an interesting idea because the whole economy runs on the fact that like my business is waiting on payments from you like the reason why I have to borrow money is because you don't pay me sooner or other way around sorry I don't pay you sooner and yeah so but yes we didn't we didn't pursue that >> there there's some healthy businesses these days in both accounts payable financing and accounts receivable financing so it's This is it's not a bad idea, but the revenue opportunity despite being an unregulated lending space is seemingly lower than the one in consumer because the convenience factor is something that every participant understands and there are plenty of players that'll offer you a slightly cheaper chart which is also the root origin of why a $40 trillion wire to Roana is going to be >> not very profitable business whoever processes it.

9:59 >> Yes. What what's what's another idea that you're surprised does not exist yet that you were thinking at some point, hey, the world obviously should work this way? There's, you know, an obvious opportunity here and for whatever, you know, conflation of reasons just hasn't happened yet or or to use you know, Mark's quote, there are no bad ideas, only early ideas. Is is there something else that you're surprised has not happened yet? You know, we're forever in search of the great way to pay biometrically, and it manifests itself more in movies where people's thumbs and eyeballs get removed for authentication purposes.

10:36 And yet, like, we're still paying with chips. By the way, the card payment interface is the singular best user interface ever created. And it it's not something that people haven't tried to do better. remember even before PayPal, there was this wand that I think Mastercard and one of the gas refueling station networks produced this thing where you could like wave this wand next to a gas station and payment is secured and you can fuel your car. And when I saw it, I'm like, "Oh my god, this is obviously going to take over credit cards." And it didn't. And there actually therein lies a really interesting lesson in payments innovation in general. There's some unobvious a priority but clear opposeriori version of critical mass and if you don't reach it you're going to fail like there's not really a okay outcomes in payments. You either get there and everyone needs to have your widget or your network or your whatever or it's just going to go into the the time. And this is a fine example of a thing that actually made a lot of sense.

11:39 Like of course you want to have a little wand on your car keys to just sort of wave and get refueled, but it's just a little bit faster, not a lot faster than the credit card you have in your pocket. And that just works. And so I I keep on waiting for some completely different way of authenticating the payer to the device and like other than the mobile phone, we haven't done better. >> Amazon actually just discontinued the whole thumb payment at Whole Foods.

12:03 >> They actually It's not a thumb payment. It's like it's the palm. The palm. Yeah. >> I loved it. I I would literally go to Whole Foods next to whatever hotel I'd be staying in. >> I was sad that they got rid of it. I know. I used to use it, too. >> It's actually not even faster. It's just fun. >> I know. It's probably slower. >> It is slower. It's like tell me my fortune and these grapes.

12:22 >> The fortune is you owe me money. Yes. That is that is the only fortune that you ever get. Well, that that was I mean I think I called it thumb by by by accident just given the the almost almost name of a firm. >> That's right. when when sort of the crypto industry was was becoming popular or when you know some of the major projects were were starting in in the space did that were there parts of that that seemed exciting to you or realization of a you know long-held sort of dream or did it feel hey orthogonal or just not really >> so I I'm frequently late to trends like I'm not the world's earliest adopture of majority of things I encounter >> I feel like PayPal is pretty early right Well, sort of. to give you full context for PayPal, I really wanted to build something very specific and quite different from PayPal that operated on very low power chips. And to do that, I needed to work out how to make cryptographic primitives work on a very, very low power chip. And we did. And then we promptly realized that it really couldn't do very much other than encrypt some very very small amounts of data and small amounts of data that need to be encrypted and decrypted quickly that kind of leads you to payments which is how PayPal came about. But right before all of that began I went to the windown/bank bankruptcy party for DigiCash which was the original granddaddy of all digital payments. And it was sort of a somber affair. I was on Stanford University grounds and there was like you know pouring out of the 40s and a bunch of very sadl looking cyber punks telling each other how the age of digital payments is not upon us and so in that sense we were very late when sort of I was listening to these people talk whose idea was crushed it was blind signatures and David Ch was somewhere he was actually not present but he was roaming the streets of Palo Alto despondent because his brilliant idea and a truly brilliant one was you know basically being proven to be not having a a product market fit. and then we promptly soon thereafter started PayPal and I went to some cryptography related conference and presented you know a new idea in digital payments and was literally booed off stage because it was not nearly as secure. It was certainly not anonymous and the the big innovation of PayPal was what if we don't care about anonymity at all. In fact, people don't. They just need to pay for their coffees or their, you know, online purchases. And in in that sense, I feel like we were again very late to that game. The game had played out like all the enthusiasts had left the building. and so cryptocurrency, not to be confused with cryptography.

15:07 when so I I read the original Bitcoin paper and thought, "Wow, that's a really clever way of solving the Byzantine general problem. I sort of as all the math cryptography nerds was impressed with the approach, but I not think for a second it would become a currency or a payment method and etc. And I'm not convinced it's a payment method now and it's been quite some time, but as currency and commodity and a store of value goes, it's certainly proven to be extraordinarily successful." So I think the as I watched cryptocurrencies expand and and become a thing and more and more of a thing, the use cases are coming out now. We're, you know, stable coins are upon us and that's certainly a collection of very clear uses, but none have, in my opinion, come close to breaching the I'm going to use this to buy a cup of coffee, which is kind of that's the canonical and most important, I would argue, use case for old forms of payments. So, as currencies go, as store value goes, fascinating.

16:12 You know, when was the last time you spent a Bitcoin or a Satoshi on anything actually important? You know, putting aside people who make it a point of spending it just to sort of prove the point wrong >> and and it's the most important that buying coffee is the most important metric because of just the the volume of it because the frequency, the practical, >> there's always an opportunity to use another form of payment delivery device to satisfy a basic need. So, if you're sort of contemplating a $40 trillion transfer, you'll spend a lot of time figuring out the secure way, the the fast way, the cheap way, etc. If you're passing through your nearby bagel shop and you need a cup of coffee, if your cryptocurrency wallet passphrase is too long, you're going to look for change in your pocket. And if you don't have it, you'll pull out a debit card or credit card. So user interface as the payment amount diminishes it takes over cost takes over everything. Basically convenience just trumps everything else as the total amount you're trying to send goes down.

17:15 >> Yeah. I I want you to take us both back to me memory lane. It's the beginning of a firm and how you guys navigated the idea maze of of what would eventually become a firm. you go here. >> Well, hopefully our stories match. >> Yeah, we should put us in three questions for like no separate route. This this is like the prisoner's dilemma, right? It's just like ask if our stories match, we have to we get to leave. If they don't match, then we have to stay here all day. so my recollection was I ran this company Trial Pay, which did alternative payments for digital goods. So, you don't want to pay for throwing a sheep or doing something on some silly social game, something that was not hard, valuable, or fun.

17:58 >> Who would do such? >> Who would who would do such a thing? But, you know, you're buying coins in Farmville or you're doing something. You're buying poker chips, virtual poker chips. Of course, you don't want to pay get it for free if you sign up for Geico. There's a lot of economic value to Geico. You don't really care if you use Progressive or Geico. Oo, I can get Farmville coins if I switch to Geico or get a credit card or sign up for Netflix. So, that's what we did. And I I was somewhat persuasive and annoying. Probably more annoying than persuasive. So signed up every other social gaming company. except for this one called Slide. And Max ran proudly or unproudly ran Slide. And I went to the Allen & Company conference which I almost didn't go to because my wife was very very pregnant. So this was in March of 2009. It's like the first week of March. My son was born March 28th, 2009, but her due date was March 16th. So like I'm not going to go to this conference. And then the the Allen guys were like, "This is a very good conference. You should really go."

18:53 I was like, "My wife's very pregnant." He's like, "You should go to the conference. If she goes into labor, we'll fly you back." I was like, "All right, that sounds good. I'm going." So I went to the conference. I think we met there briefly. successfully did not persuade you. U but then I think I followed up with a note in Russian. >> Yes. and this wouldn't have worked today because now obviously I would have used Gemini or you know you know chat GBT to write this probably somewhat riddled with grammatical flaws Russian note actually that that probably would have given it away of not being chat GPT. It wouldn't have passed it would have passed panggram but I took Russian in in high school and college worked there lived there for a while and I think you were like why do you speak Russian? I think that was the response but then we just became friendly. I think I you you sold to Google so I could not ever convince slide to become a client of of trial pay sadly. but I I seem to recall you had like a tweet like I'm looking for something to do. Any idea? And that was like my reason to reach out and I think we we had coffee at the forbidden building at Google. Remember how like there was one Google building that no guests were allowed at but you just didn't care.

19:58 statute of limitations were so they can't. >> You're revealing all my secrets. >> Yes. Exactly. Because I know how much you love Vic. so, so, so we we had coffee there and then that's where this Yeah, we were talking about Bimley later, but it was like, you know, my recollection was it's really hard to pay for something on a mobile phone. Mobile phones are becoming more ubiquitous. We should have a way of solving the pajama problem of you're upstairs in your pajamas, you want to buy something, your credit card is downstairs, how do you pay? Meanwhile, not just are mobile phones ubiquitous, but social networks are ubiquitous. And maybe there's a new underwriting mechanism of kind of going back to the old general store from like the 1800s of it's like you show up in the general store, you don't have cash, like both literally and figuratively. You don't have it on you, but you don't even have it, you know, back home. But you run the general store and you're like, "Okay, Max, I got you. Don't worry about it."

20:45 But today, you're just like a cookie and an IP address, so I don't really know who you are. Or if you go to Walmart offline, it's like, you know, you get greeted by the very nice greeter. I don't think they have them anymore, but like you get greeted by the nice greet. they have no idea who you are. You can't do the general store thing. But if you have 500 friends on Facebook, this was wrong, by the way, but if you have 500 friends on Facebook and they all have, you have a thousand pictures that you've uploaded, you're probably a low credit risk. And if you're not looking for credit, this is the key thing. It's like a lot of credit offers are sent out proactively. So, you have an 800 FICO. I know that you have $14,000 that's revolving for some reason on your Capital One card. I'm going to send you a customized mailer saying, "Why don't you go refinance with me, Bank of America?" But if you go on Google and you say like, "I'm out of money. Need money, need money, credit, credit, credit," like you're probably a bad credit risk. So, kind of going back to the general store concept, people that aren't looking for credit that might not have their wallet with them, kind of make it like the 1800s and pay with your identity. That that was kind of how I remembered it. Yeah, I think that that that matches. the to add a little bit more color to it. So the year at Google was definitely a challenge in a sense that I was still coming to terms that I ran for like over 5 years a company in social media that I had no business running. Like I I worked very hard.

22:08 had a financially very positive outcome for a lot of people, but ultimately it never sort of scratched the sort of entrepreneurial itch that I thought I was I was scratching. And so one of the things that happened during that year, I spent a lot of time soulsearching like what am I supposed to do next with my life? I was going to start a company, but you know, maybe maybe I should be more thoughtful about what company I'm going to start next. And my wife, who's pretty much always right, said, "You know, the hardest you've ever worked and the happiest you were was during the anti-fraud days at PayPal, like when you nearly died, or we nearly died. She was there as well."

22:46 those were the days when you looked exhausted, but you actually were obviously very happy. And you know, I you know, she was telling me, "I know you swore off doing financial services. I know you're never going to touch payments again, but just this once. Give give it a chance. And that that actually had some influence as to my responsiveness, too, because you're working on a payments company. And part of my reluctance to deal with trial pay was like, I can't handle another near payments company. Like I I went into social media for a reason. I don't want anything to do with this stuff. And so, as I was slowly getting reeled back into working on payments, we started talking about this. The sort of a social BML was one of the sort of short hands we used. discussing what it would be. the general store analogy was interesting because at the same time, I can't remember which one of us knew this cuz you also speak Japanese and this this could have been the thing you told me, but I remember reading about social credit in different economies. There's a notion of just pay me later or pay me next time in Israeli grocery stores, which is still common today. If you're checking out an Israel, apparently in a small enough town, you can just show your bag to the cashier.

23:54 they'll remember and then they'll get you next time if you forgot your money. This is even more formalized in Japan where until very recently you would give your business card to the storekeeper even if they didn't know you. If you had a business card, they would write what you bought on the back of it and that was your total. And the notion of like you just put it on my tab is a thing that's you know obviously fairly American concept and so on. And so we were converging on this. I was talking to a startup at the time.

24:21 ascouch just learning about the industry that was trying to build a social credit score kind of modeling it on the Chinese social score which is used for a lot more than than credit obviously. So we were swirling around this idea of payments and solving the I don't have my credentials with me but I still need to get through this. Like another sort of metaphorical version of this was I'm watching TV. did this really cool ad back in the day when people had advertisements in between things in TV.

24:50 and I really want the thing that was promised to me at the price that it was promised to me, but I could do it on my phone, but I'm definitely not going to get off my bed. And so, like what if there's some area under the curve that you can capture by bringing these transactions closer in time and improving conversion obviously. And so, that that's the kind of the the swirly origin story. a lot of it I think the two of us had a slightly different version of what would be fun. So I think you as a payments guy you were mostly thinking like let's go do some payments stuff. As a person recovering from doing lots of machine learning in a service of social media which was you know good and well but wasn't really what I was meant to do and lusting for the days of doing machine learning to fight fraud. My mo was I just want to build a really cool credit score and then someone else will take care of payments like lending payments.

25:47 Don't really know anything about it. And I've done payments. Don't need to do lending. But building a really cool score that would be amazing because I remember just the reams of data we had access to at PayPal. We could maybe get some data. Maybe we could buy some data. We could mine Facebook for data. I'm trying to get in touch with Mark Zuckerberg to see if he might give me some of his data. And so a lot of that was sort of in my head while you were like I just want to close some transactions. I think that that maybe if there's any difference between the motivations you were much more motivated by let's go find a merchant.

26:16 >> Well but the similar motivation was like you know trial pay I think we were in the throws of selling to PayPal but then they they left me at the altter not your PayPal the many many generations later PayPal. and I was like I never want to start a company again. This is so painful. I and then you you had been in that in the throws of that as well. So, it was also like let's get this thing going. and we'll hire other Well, but then you introduced me to Nathan and Jeff and we kind of formally incorporated, but I I also like the other thing that I distinctly remember and you'll you remember this in a very negative light because it's PHP, but we had a meeting this I I kind of think of the origin as being the Allen and Company conference in 2012.

26:59 >> Oh, yeah. I I don't I don't find it a negative thing. >> No, no, I know. But it was funny. So, so we have this meeting like so, we're going through the the list with, son, remember your your old chief of staff, right? So, we're going through the list and it's like, oh, we both know Jim McCann, who's this very friendly guy who used to be on all the commercials for 1800 Flowers. Remember 1800 Flowers, you can order flowers. Order it right now for me or whatever the commercial was. So, we ping him to get a breakfast meeting. It was like 200 person conference. Anybody can be with anybody, but it's like, hey, why don't we have breakfast? And I I pulled like an allnighter making this demo in PHP. Yeah, I basically like cloned. It's just funny like a I could do this in 5 seconds now, but I I I cloned 1800 Flowers site and then made a whole like pay with your identity. So you do a checkout like add the dozen roses to, you know, make up for the bad stuff that I did. Sending it to my wife, click pay.

27:49 Oh shoot, I don't have my my my payment card with me. I can pay with Facebook. What does that do? It does Facebook connect. It makes sure that I have over 500 friends. And actually Facebook had I mean to your point, they had a lot of interesting data. They had their own internal flags around did they think this account was fraudulent or not. And fraudulent for back then was more of like it was just created not as a real account. It wasn't a real person because an account is not a person, right?

28:14 Hopefully they're the same thing, but not necessarily because one person can have multiple accounts. but if there's one to one. So, so that was that was our fun demo and then I remember Jimmy was like, "This is great. Let's do it." >> Yeah. So, I two other colorful points from that. So, it was a good breakfast. And then in the middle of it, he goes, "Oh, yeah. We used to do exactly this thing back in the day when the service members would call us and say, "Send me my wife some flowers." And "No, I don't have my credit card with me." And like, oh, that that's fine. Like, you know, thank you for your service. We'll we'll just get you on the next one. And he like intuitively grocked this idea that like you can absolutely postpay a thing if you have enough trust. And we were basically there raising our hands saying we'll take the responsibility for, you know, if they don't pay you, it's okay.

29:00 We're going to eat it. And so he was like instantly smitten. He he had been a great proponent of the product and like a supportive, you know, person slashpresence in my professional life ever since that breakfast. And he had absolutely no reason to trust us other than like he has some degree of sense who we were. And it was like you guys are great. You seem like you really know what you're doing. Like he was so excited. We have no idea.

29:25 >> Well, then we got handed to this what was his name? He actually now runs a successful startup. The the guy that was Amit. Yes. Amit Sha. >> Yes. >> Yeah. So, Amit took over. We implemented he was very very excited. But and I remember I I I came up in Microsoft I think I did this in Microsoft Word or Excel like here's our pricing sheet. We need a pricing sheet and I was like why don't we charge 7%.

29:48 like so in in consumer finance for these things there's a concept of an MDR and an APR. So merchant discount rate because you're discounting what you pay the merchant because you're advancing in the cash right now. You're not collecting it until later. So call it a 7% merchant discount rate but I think there was like some table. I just literally made this up. and then and then there was an APR. but the APR here there was no APR. It was just MDR.

30:13 but then nobody like I I showed this to somebody. I think it was Rob Feifer actually before we hired >> you had like a real finance employee. >> yeah. So but but I I showed him this. He was like free flowers, right? Because he's like you just didn't have to pay us back. so the the returns were not fantastic on that. >> So cynical. >> but yeah, I think he literally said free flowers. It's like this is this is a great deal free flowers.

30:34 >> This is just a generally a very smart but very cynical guy. So we were not going to be perturbed by some cynicism. >> I love route. >> his sister used to work for me. So I remember interviewing him in the context of a firm although I think at the time it was still Expedite. >> Yeah. It briefly bumped around as expedite and then we finally renamed it. >> What was it? It was it was incorporated as Expedite Software Inc.

30:56 >> Yeah, I think that's right. >> And so how did the idea evolve as you you know went from there? When did it start to really get get product market fit or how did the space play out in the way that you know >> every startup has the 40 years in a desert like it's just a a given like if it's worth talking about expost I mean some some people just like quit too early or you know something happens to to destroy it but I've never run into a company where people start a company and they just like hit product market fit and 24 hours later they're just selling and you know everything's going swimmingly. So you always have this period where like kind of still makes sense to show up to work, but you don't really know if it's going to end in like a great nothing. And we were definitely meandering through the great nothing period for a while. After 100 flowers, we had a sort of non-stop interactions with said Ahmed, who was never happy with the conversion rate, with the user interface, and he was mostly right. like he he was kind of a grumpy demanding guy but he knew what he was talking about from the product and financials perspective and he was definitely not going to pay 7%. and so we were sort of limping through that. We're generating a little bit of volume, but among other things, the notion of, hey, you can pay us later showed up after you selected the flowers. And so he would say, "Look, you guys are cannibalizing my credit card volume. If I charge if I were charged nothing for it, of course, I'd send you more transactions, but you're charging me more than credit cards, so it's it's a dumb idea. like I don't want to pay anything for it at all. You know, you guys ought to be ashamed of yourself basically. And we were sort of trying to convince other merchants, but we had one merchant that was essentially saying, "Yeah, I mean, these guys are nice guys, but it's kind of worthless." And so it it was it was going nowhere fast. And then we had another friend, somebody named Nils, who ran a company called Beautylish, which is kind of still around, but they were selling online cosmetics and beauty products. And the only difference that Beautylish did as they implemented expedite, I think by then it may have already I think it was named the firm by then was that they told their shoppers upfunnel basically as they were selecting their shampoos and and perfumes that you could pay in three installments or 30 days later or or whatever it is we were trying to sort of do. then and that had an instant 30% increase in conversion and that was the oh we know what this is this isn't an alternative this isn't actually solving the pajama problem it is solving my budget is this but if I could pay over multiple periods of time it would expand a lot and so the second we sort of understood the very beginnings of that notion we turn it right around into a sales campaign and very quickly found a bunch of smallish brands primarily direct to consumers who could not care whether we charged them 1%, 5% or 12%.

34:02 Because they were trying to grow their top line and telling their shoppers that, hey, you could pay for this over time instead of having to cough up the cash right now. It was transformative. And so I would literally get these love letters from merchant CEOs saying, and I'm still friends with a lot of them, like early adopters. Most of these people have now either sold their businesses or the business has failed or they've gone on to do something else.

34:21 But I still run into people who were like there's this woman named Tracy from Tradzy. Tradzy.com was a >> Oh, yeah. I just saw her. Yeah. She She's wonderful. And she was an early advocate for us >> because her business literally >> I forgot about her. >> She would email me screenshots of her dashboards and say, "This is the affirm effect. Here's a 35% pop you guys caused for me. Like, please do more." >> Well, there there was a solution to the pajama problem. And then it was also all the mattress companies.

34:48 >> Oh, yes. >> That that that was >> that was another that was the big one. I just remember it's like, you know, wait, there's a company called Purple and there's a company called Casper. It's just like they just kept coming out of the woodwork and that was transformative. And I remember actually we were talking about this in the context of like how can you charge a high MDR and get away with it? That sounds bad. Not get away with it, but like actually show sufficient value to the merchant. The highest MDRs are actually for-profit education institutions. Mhm.

35:16 >> So, some of them are like 50 like I mean I I don't like these guys in particular, but like University of Phoenix. >> so there's the private equity firm Apollo, but there's also like this holding company of all these for-profit institutions called Apollo Group or Apollo something. And University of Phoenix, I think, is the biggest one. And they just assume that most people aren't going to pay. And the the gross margins are so high because it's an online course. They're like, "Okay, you could take 50%." Right? you're stuck with the receivables on the back end, which goes back to the fraud fighting that Max was talking about before because the gross margins of the mattress, like these mattresses, I don't know if you ever bought one. It's pretty cool because they didn't actually ship you a mattress that looks like this. It rolls out. So, you get this like cylinder. It's pretty small.

36:00 >> Some of them are boxes. >> Some of them are boxes, but some of them it's like you just open it and then it just like it's like one of those old like toys that you'd put in like your bath and then it would expand or something. It's that was like the mattress. So they had very very high gross margins. So therefore a lot more flexible on the MDR and more importantly nobody wants like you're in your pajamas on your uncomfortable mattress. You don't want to spend $1,200 on a mattress but if it's like 30 like it once you subdivided it just has a massive increase of conversion rate.

36:31 >> Yeah. There's a couple of other sort of technical things that are probably worth tapping into in in that story but that that that was the next big leap. So, the mattresses was the precursor to the great expansion into DDC brands, which I'm sure we'll touch on. But before we get there, a firm briefly flirted with being a payment provider to the online educational facilities, >> which we ran out of kicking and screaming because the reason they're willing to pay these enormous MDRs is because the quality of education is largely terrible. Yeah. So, the reason people don't pay most of the time isn't because they're like, "Oh, I thought about it. Now that I have a master's degree in basket weaving, I just don't want to pay for it." See, it turns out my degree is worth nothing. Like, why did I sign up for this ridiculous thing?

37:16 And so, we were, if you go back to sort of, you know, things like what is it called? General Assembly. Is that their whole sort of class of these like we will teach you how to code? Another PEI thing like learn how to code. Just ask Chad GPT to code for you. But back in the day when it was still important to learn how to code, but you didn't really want to go to college for it. You just want to take a six week course. There were plenty of the sort of University of Phoenix clones that >> Academy.

37:41 >> Yeah. There's all the all these guys. And we saw that trend and thought, "Oh my god, like these people are willing to subsidize education, which is cool and on mission for us." And yet the loss rates to consumer dissatisfaction were so high we lasted like a half a year in that space. But back to mattresses. So the thing that's really powerful about direct to consumer or you can think of them as vertically integrated businesses. So there's some factory in Brooklyn presumably or who knows where.

38:10 >> China. >> China. I thought the mattress guys manufactured locally because >> I don't know but they were all in Utah. Remember that? >> Yeah. I feel like it was like there was like a Utah mattress town or something. But I think they just all originated there. Casper is in New York or was it purple I think was in and then there were like other purples that were >> I think one of the weirder things the manufacturing was actually all consolidated so they ultimately sort of paid very little for these mattresses that were kind of all the same. I mean don't want to reveal any industry secrets but memory foam is memory foam.

38:42 >> anyway and so they their primary value or their their their value equation was really interesting. So, first of all, they bought this memory foam in a box and sort of compressed and shipped it to you with a cool effect. The margin there were gargantuan because you are in fact just sort of taking petroleum and turning it into foam. But the other thing is the replacement cycle. And this actually goes to a I think a Harvard Business Review article that came out right before Casper was founded. And all these guys, all these really entrepreneurial people read the same article which essentially said this, people replace mattresses once every seven years. If you're the company that sells that mattress, it is the most important thing in the world. And if you miss it, the next opportunity is seven years from now. But the margins on mattresses even before the sort of the foam and the everything else are like 80% or some some eyepopping number. And so suddenly four or five companies were born from that article basically saying like, "Oh my god, so if we just figure out how to market a mattress that you will either shorten your replacement cycle, so you you buy the next mattress 6 years instead of seven years from the last one or you just decide this mattress is the best mattress or the coolest one or the one that pops out of a box." that is like oh you know there's so much money in it and one it resulted in a saturation of mattress industry obviously but more to the point it created this enormous premium on I will just compel you to buy a mattress by any means necessary so telling you I will give you a three-year loan at no interest at all powered by a firm of course is like a small price to pay and a cool marketing campaign and and and and so that was there were multiple events like this in a firm's history where we saw an opportunity for the merchant to significantly contribute to the MDR which allowed us to eliminate the APR. In other words, consumer got a true 0% loan. The backdrop to this that's actually really really important to understand and one of my sort of you know things that I rage against have and and will continue to until it's made illegal or eliminated by by other means is the fake 0% law. So if you ever have gone to a, you know, fill in your favorite department store, there is a sign somewhere these days somewhat less prominent that says get a branded credit card from fill in the blank 0% APR.

41:02 There's an asterisk next to the zero which says something along the lines of assuming you make a purchase for the next 12 months or 24 months, if you're a penny short or a day late paying your principal, the interest acrru retroactively to the beginning of time. Basically, the day you got that card, you swiped it for $1,000. You wake up and you owe $3,000 two years later. So, this is called the deferred interest credit card. And a huge opportunity we tapped into directly from that rage was this idea, well, our 0% is going to be a real zero.

41:35 When you go to buy the inflatable mattress or the mattress from a box, you're going to get a 0% loan. And even if you're a month late or a year late, we're not going to change the price because we are so sick and tired of these ridiculous people who are lying to you about zero with an asterisk. It will never be an asterisk on a firm zero. That that is the origin story of why we don't charge lead fees. We don't do deferred interest. all the sort of gimmicks and gotchas that the industry loves to throw at people. We we've run away from all of that primarily as a point of like you know what when you decide to do this for three years with us you will never get screwed. You will never be surprised to the negative and so that that was another sort of big bounce up point and then then every mattress company was like oh wow like these guys are doing it we should do the same thing. Okay so fast forwarding a bit a lot of people hear a firm today and you know one quick thing they think is you know buy now pay later. What does this not fully encapsulate or what does this miss about the company today? It's in its entirety. One of the things in the email thread that I just reread in the origin origin of a firm was your claim that advertising and payments are converging which was the thesis behind trial pay thesis behind a bunch of different things actually a failed project within PayPal called PayPal shops where I was trying to personally I built this thing where was trying to remarket what you just bought. That affirmation should give us a sense for what we might buy next and you know all that. And all these things by the way have turned out to be true. Like there was just you know 15 20 30 years before their time. But a firm more and more today is means for merchants to not just satisfy demand. So somebody comes in and says look I'm going to buy this thing but my budget is this big. I won the shoes and I love a bag but I'm and a firm is there say actually we can help you finance this on transparent terms. a lot of times, a third of the time, no interest at all. You should get the bag and the shoes. It's safe. That that that is the brand promise of a firm and it works tremendously well. You know, tens of billions of dollars a year worth.

43:28 That is now becoming more and more about creating a platform for merchants to tell their shoppers, hey, we are launching a new thing. We have this desirable new product we are selling. We've transacted with roughly 50 plus million Americans alone and we're now live in four countries and and growing pretty quickly. And so we have shifted to just satisfying demand to helping merchants create or guarantee demand. And the convergence of payments and advertising is upon us. Although 15 years later predicted it, >> you're too early with travel pay. I'm certainly too early with PayPal.

44:04 >> Well, the the other side I remember maybe it was in that thread or not. I should I should find that email. But most companies have very high customer acquisition cost. And like the joke that I make now as a VC is that when I see 90% of consumer companies, I'd kind of rather buy Google stock or Facebook stock because that's where all the customers come from. And I distinctly remember many many conversations around how do we have negative CAC, right? And like I think to me one of the coolest things about a firm to this day is it has negative customer acquisition cost.

44:34 I mean, it is paid to acquire a customer. And there there are some companies that you would think they look like this, but they don't because they're basically white labeling something. But going back to the mattresses, let's just say that you're late on one of your payments. Casper, the friendly white ghost mattress company, because Casper is a white ghost, doesn't want to go or cat or something. We had a cat named Casper when I was growing up. They don't want to send you a dunning notice saying like, "Get off my mattress. You haven't paid me back." They want that to be a third party versus other companies where yes, you know what is the difference?

45:05 What B2B TOC is a really interesting category. It's business to business to consumer. I tried doing this with trial pay because it's like all right, you're playing a Zinga game. Go get free coins if you sign up for Geico powered by trial pay. Nobody knew who the hell trial pay was. So we we actually tried sending messages to consumers like you know we got I think we got blocked by our email provider because nobody we we actually had a right to email these customers but they had no idea who we were whereas actually having a financial relationship with 50 million people with negative CAC. I mean it really is not to pet but it's incredible like it's so hard to do and we never see anything like this in the venture land or you know like because yeah there are lots of companies that can get to scale. I mean Casper got to scale but lots of CAC lots of CAC and that's why a lot of these business models they tend to degrade over time because all the economic value goes to Google and Facebook so if you can have negative CAC and then you can launch other products as well right because you actually own the customer and most important the brand wants you owning the customer like this is what I didn't get right at trial pit like Zinga didn't want me owning their customer Netflix didn't want me owning their customer I just connected the two but a firm the the merchants She wants you to own the customer.

46:20 >> It's very you already have a burden of supporting your product and dealing with unsatisfied customers or technical support issues or whatever. A company that tells you 12 times for your long loan or 39 times, you know, if it's a three and a half year loan, hey, you're late or you got to got to make your payment or all the communications that come from your lender is just another type of burden that the brand is kind of like, you know what, a firm you guys can handle this. This would be great. And so the the relationship with the customer is a key component of the foundation of a firm and the our ability to develop new products is is really built on that.

47:00 One of the other really sort of cool to sort of going all the way back to the credit scoring thing. So we are the only company in the industry really there's plenty of competitors who are trying and some some degree of success but mostly not really who will go into these longerterm loans and by longer I don't mean mortgage for you know 15 plus years but like three and a half years is a fairly long period of time relative to the average bailator which is like 6 weeks and to do that you have to underwrite like you can't shortcut the I'll just look at your FICO score or I'll just sort of you know I'll look at your Facebook friends like none of that works you actually have to do a real very sophisticated degree of u machine learning work. There are two cool things about it. It's hard to do and so it's just hard to compete with us on that front. But the other side is it gives you 39 shots on gold or 12 shots on gold to tell this consumer as you send them billing notices and as you have conversations with them as they pay you to upsell them on a new service. And so these long-term loans, which are actually quite hard to manage and quite hard to maintain reasonable default rates and and delinquency rates on, is the price you pay as a provider of financing to upsell consumers on more and more services. And so our our business has been fueled by these long-term products, even though they are probably the the most challenging part of payments.

48:18 >> Yeah. You know, we've been covering some a firm history. While we're doing a historical episode, I also want to ask a question about PayPal history. >> >> I'll keep us straight and >> you know there's been you know a book came out founders recently there's been sort of a lot of you know revisiting of of of PayPal both in its impact as u you know pioneer in sort of you know payments and and and fintech but also in terms of the the people that came out of it and sort of the it it feels like the you know highest concentration of highest hit rate of people who would go on to do incredible things. The only comparable thing I could think of today is it's not even a company is the deal fellowship or or something. I can't think of a comparable company to PayPal today. I'm curious if you you can and you know all with or many with extremely strong strengths but also you know very strong personalities and some strong weaknesses as well. And so I'm curious if there's something you think that is goes as that story is being told of both of its impact in the industry, you know, how early was and and sort of the people that came out of it. if there's something that's underappreciated or you think not quite groed or any any additions you want to make to how we perceive that that company in that time period >> sort of an old answer and a new answer to this question which I've you might you might expect I've answered once or twice before u so the the canonical answer that I gave in a book which by the way is very good so there there have been many much ink spilled on the history of PayPal the founder is actually a very good book like and part of it is because it's well written but part of it is because Jimmy the guy who wrote it interviewed every single character in the story extensively. He spent a lot of time talking to all of us and so it's at the very least grounded in fact. so the the answer I gave for his research was as we were interviewing certainly the early team and even the later team we kept on selecting four entrepreneurs. We would ask like one of the stock questions I would ask so what are you going to do after PayPal? And the answer that I welcomed the most was oh this is the last one I'm going to start my own afterwards. So this notion like oh if you're coming in here to kind of get your final graduate degree in entrepreneurship of course we'd love to have you like you know if you're you're that smart you're that good and you're that ambitious you know please come along and so that's kind of the why I think so many people that came out of PayPal proceeded to start companies and like literally you know hot second after we all dispersed YouTube and Yelp and Peter's first major fund and LinkedIn and so that was not an accident we for attracting entrepreneurs by design. The other part that I think is actually not been talked about and maybe subtle and sort of my own cut of this, but we knew the people in the room intimately like we literally, you know, exchanged firm by hanging out in these sweaty rooms, brainstorming, screaming at each other and spending a lot of time as whiteboards and declaring the other person's ideas idiotic and and so on. we knew the the true version of that person, the sort of the extremely I don't know the the the ultra philosophical Peter Teal and the you know go all in every time Elon Musk and the these days gubernatorial David Sax, you know, all these people like they all have kind of the the present the presentation layer and then there's like the kind of what they are like in a dinner party and then like what are they when they're really stressed out and just like head hurts, don't know what to do, and we have a real problem we need to solve. So, if you know kind of the true base version of who we all are as you watch one of these people go for something really big like Elon taking humanity to Mars, which is extraordinary. And yet, you know, he's a human being. Like, I've seen him sweaty and tired and grumpy at the company kitchen a thousand times. or Peter when he is in his doubt and calls me from some fundraising trip saying, "I think we might run out of money." You know, they're not gods. You know, they're humans. And that inspires you to actually like, you know what, if that guy who's just a normal dude, I spent a lot of time with him, he's normal.

52:18 And he's going for this big of an idea, I should do the same. I I should I should strive, too. And so, I think the combination of these are very ambitious people. We all wanted to be entrepreneurs, but we also knew each other when we were young and filled with doubt, which many I think still are. I think that that sort of gives you a confidence that it's not all, you know, bed of roses. It's it's it's paved with with with with with bumpy parts.

52:44 >> Is there anything we didn't get to that you want to make sure that we get to while we're here? >> I'm probably less optimistic about agentic shopping and I'm very optimistic about aentic payments. Yeah, >> I think the the notion of robots will buy our Friday night outfits is misguided. We want to know what we look like long before the robot delivers it to your door. But I think the friction, this notion of so the best user interface ever created is the credit card. This may actually be finally up for renegotiation because agents are in fact smarter than pieces of plastic and even pieces of plastic with rewritable chips.

53:22 And so I think that's a lot of conversation around aentic commerce is probably looking 20 degrees off where you know how can I convince you to just trust a robot to buy the right thing. I don't want to like I love buying bike parts and I spend way too much time looking at two slightly different bike parts because I just you know have to participate in the purchase but the part where like okay that one the end right now that one is the beginning where you pull out your wallet or you and so I think we we're we're about to see some interesting innovation in payments user interface.

53:56 >> So I can I ask a question on that? So, I mostly agree, but I think it depends on there's like the I need to research what to buy. >> Mh. >> Where AI is just yet another tool at your disposal. Like you ask your friends, that's what I'm if it's a bike part, I'm asking you. I'm also asking AI. I'm asking both of you. But now I have the skew that I want. And I don't actually care which one of the 19 different places that I get it from. And I kind of think about the world like you have people that care more about money than time. You have people that care more about time than money.

54:28 The way that I kind of think about ajected commerce, again, none of this is happening right now. So, it's trying to prognosticate what's going to happen is here is the the UPC. Here's the the skew that I actually want. Go buy it for me at the lowest cost. It's kind of the thing that people that have a lot more time than money do right now anyway. And like that's why I always point to Camel. Camel. Camel is like my favorite example of this because it's one of the top hundred websites in America that probably nobody with over $100,000 a year of income has ever heard of. But it's it's a way of saying I know what I want. You're not helping. The robot's not telling me what bike part to buy, what telling me what soda to buy. I know. Just give it to me at the lowest price. But it takes way too much time.

55:10 And sometimes you can just observe one group of humans that already have something as table stakes and then porting that to another group of humans. I I guess do you think that that form of agentic commerce because it's actually related to edgentic payments as well. >> I have nine different cards. I don't remember the Amazon Chase issued by Chase card terms for a nonrest purchase of something under $500. and if I've used my whatever. Like it's the same thing. Like people that care more about money than time, they will figure that out. People that care more about time than money, they probably won't. I think directionally that'll make sense. I think the adoption curve is probably going to be fairly slow. And these things are always sort of easy to predict to be very slow. And sort of the usual adage is well slowly at first, not always once. I'm I'm not I'm not sure I I can handicap that. Well, the reason people don't So, there's plenty of people who live in this somewhat murky world of sometimes I have money, sometimes I have time. And it has more to do than anything with the price and the degree of care you put into. I mean, I don't always just buy bike parts.

56:19 Sometimes I buy milk and milk is built. Where are my bike parts? I mostly buy parts. but the I I think what really happens for a lot of people, it's just like, well, yeah, I'll I'll get the I'll find the cheapest price, but then I'm not sure how to handicap the probability of that item actually showing up at my door at the time of my desired outcome. Even if I'm okay buying a some bike part from some far away land and it's sold from three different retailers, I'm going to go with the most reputable one versus the one that's got profit promising me the cheapest or sometimes the fastest. And so I think we're probably a few steps away from AI grasping both the preferences but also handicapping how these preferences would change based on the input which may in fact maybe AI is already there. is just that you haven't yet trusted your agent to do as good a job as you would. Like you can eyeball a side be like that looks like it was edited in the 90s. I'm just not quite sure that I'm going to spend $1,000 for a new cassette or $600, whatever the cassettes go for these days in bike cassettes, the rear assembly.

57:33 >> Well, Bike Closet is the site that I'm thinking about that looks like it was made in the 1990s that will sell you a very cheap cassette. >> exactly. But do you know if they were used by by someone you know true teeth rubbed off and all? >> yeah. So I I think I think we are in that difficult period where we're still figuring out. The other thing that you know just sort of maybe end on a positive note. The thing that's really true that no one seems to be celebrating just yet is grocery shopping is 100% agentic. Like for anyone who uses Instacart like you tell your Instacart shopper go bring me milk. you don't think twice when they say, "Oh, yeah, you wanted whole milk from Organic Valley, but I found some other brand and here it is." And you're like, "Oh, of course, like makes sense."

58:18 Like, and so the AI inside that shopper's head is maybe not even as good as Gemini or ChadB is these days, but you just sort of say, "I you just you go through Trader Joe's or Whole Foods or whatever you're shopping and you figure it out and it shows up and 99.9% of the time it is exactly what you want it or better." And so we are already conditioned to allow some of these purchases to be fully outsourced, payments and shopping and everything else. And so we're definitely going to get there. It's just a question of how soon will we work through the quirks of like well returning of this wrongly purchased bike part or waiting for it forever and not really knowing what's going to happen to it because it's in transit but we don't know where it is. I that may be protracted more protracted people think.

59:01 >> That's a good note to end on. We'll have to get a part two at some point when we talk more about the future. Max, Alex, thanks so much for