The $100B Niches Hiding Inside Payments

0:00The card payment interface is the singular best user interface ever created. It is the world's largest market by any stretch imagination. And there are no niches and payments that are smaller than $100 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 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 renegotiations, because AI's already there. It's just that you haven't yet trusted your agent to do as good a job as you would. There's something else that you're surprised has not happened yet. I went to some cryptography, really a conference, and presented a new idea in digital payments and was literally boot off stage. Because, certainly not anonymous, and the big innovation of PayPal was, what if we don't care about anonymity at all?

1:01And in that sense, Payments may be one of the oldest categories in tech, but Max Lebchent argues there are still no small markets inside it. In this episode, I sit down with A16z General Partner Alex Rampell and a firm co-founder and CEO Max Lebchent to look back at how payments evolved over the last 25 years, and where the next major shifts may come from. They revisit the early days of PayPal and the origins of a firm, including the pajama problem, the first experiments with paying using identity, and the moment the team realized financing wasn't just another checkout option, but a way to materially change conversion. They also discuss why the credit card remains such a durable interface. How 0% financing can hide very different economics, and what happens when AI agents begin participating in commerce? Max is skeptical that we'll hand over every shopping decision to AI anytime soon, but he thinks the payment itself may finally be ready for reinvention.

2:01So you guys go way back, having go about a deferment. Well before then, you guys are pioneers in FinTech. You've been thinking about the space, trying to make sense of the present, think about where the future is going for 20 plus years, 25 years, maybe even more. And I'm curious, given so much time as past as you first got into the space, what is most surprised you about what has happened, what hasn't happened, what did you expect to happen in the early 2000s of how the space would play out? That was what I'm going to start. I think the rise of Apple Pay and Google Pay and 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 Mag Stripes were so easy to replicate, that you probably noticed a while ago, your new cards had a little chip on them, and you had to dip the chip, and then the machine would be like, don't remove, don't remove, they remove, remove, right? That's because the chip was being rewritten. It was much more secure than a Mag Stripe, and basically, if he's in MasterCard,

3:02and then the Euro Pay, that's what the E is for. What is E-C-M for an EMV? Euro-Pay? Card? Euro-Card? No, the Europeans somehow got their savings. They always do. They insert their card to the only electronic. It's a Euro-something MasterCard Visa. It was called the EMV switch. All of these machines, if you did not want to be liable, I could go to Best Buy by TV, and then get home, use my TV and say, no, never bought the TV. If I was using my Mag Stripe, and Best Buy didn't have 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 effect. Everybody had to get a new machine, and then it turned out that those new machines had a little contactless 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. 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,

4:04I mean, you obviously did, because the confidate was Palm Pilot sending money. So you were 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 consumer behavior. You ubiquitous new merchant payment terminal, plus you ubiquitous mobile telephony, and that's certainly one thing that has changed the world a lot. How about you, Max? You were dreaming about what the future of money would look like a long time ago, but it would 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 sort of further illustrate Alex's point. One of the things that's really amazing and subtle about Apple Pay, slash Google Pay, and its interaction with the Visa Mastercard networks is, we did a Mastercard have a hard 2.5 second limit on interaction between the network-bishring bank and the merchant and the acquiring bank.

5:05The whole thing has to happen to 10.5 seconds, where the transaction gets retried or maybe just canceled out. Really, these very little broom for any kind of clever innovation. Online, you can play games. If you're doing e-commerce, you're like, well, guess 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 reduce volatility. But offline, once your card is presented, 2.5 seconds, that's all you got. And Google and Apple Pay have singularly time-shifted 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 start to Visa Mastercard. Maybe the shocking thing is that Visa Mastercard have not yet introduced some new standard saying, actually, I don't have to be 2.5 seconds at all, it could be 15 seconds while we go and get a bunch of issues to bid on a better credit quality terms for you or any other type of innovation, but these hard-written rules of Dehok are more or less intact, and that's not 30 years. That's more 60 years. So I think that's probably a critical or more criticizing take on what happened.

6:11But 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, innovate and always turn out to be a hundred billion dollar. There are no niches and payments that are smaller than a hundred billion dollars, and so that's probably the most surprising thing I've seen. Yeah. Although it's interesting, once you go really big, the numbers get small, which is strange. If I send a $1 trillion wire, the United States just announced we are $40 trillion in debt. Let's just say that Elon's Mars colony is worth $40 trillion and Rowconn decides to tax in $40 trillion and he needs to send a wire. That wire is not going to be very... 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, all of the QSR, the quick serve restaurant, the payment opportunity there,

7:11that's massive. That's why Starbucks invented Starbucks pay, because they wanted to stop having to pay. They only have to pay one time. You put $50 on your Starbucks account. Well, they only have to pay these at Mastercard and everybody else one time, as opposed to every successive time. So what's surprising about payment area under the curve, if you will, is that the bigger the dollars, like the smaller the rate, which I guess makes sense, because you're not going to get 2% of that $40 trillion payment. But everybody goes after B2B payments. Everybody has a clever idea for B2B payments, and that's the only one that is probably the exception of the role. 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, tell me more about this Bill Me Later thing, because I was working on something else while you were watching PayPal buying Bill Me Later

8:13and you said, it's really long elaborate. So here's exactly what it is. And all these ideas around it, and we then view it off into this ping pong or emails around, Bill Me Later for business. And conclude that it's actually a dumb business. There is an opportunity. It's funny, you mentioned it. I bought the domain Pay Me Sooner. As a result. So it's like, oh, Bill Me Later was a good idea. Pay Me Sooner would be an even better idea. Actually, the idea there, it's still a terrible. Because it's not payments, it's lending. So they give it this way. Imagine that big companies beat up small companies all the time to get better payment terms. Better payment terms for them. So if I'm GE and you're Eric Torrenberg and you're a little guy, I'm a 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? They're just like, yeah, we're going to charge you 15%.

9:13Meanwhile, GE can issue bonds at whatever, so for 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 GE'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 eugurious. That's very, very expensive. Actually, it's not eugurious because credit laws don't apply. You're selling a receivable. But I always thought that Pay Me Sooner was an interesting idea because the whole economy runs in the fact that my business is waiting on payments from you. The reason why I have to borrow money is because I don't pay you sooner. And yeah, we didn't pursue that. There's some healthy businesses these days in both accounts, pay both financing and accounts receivable, 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

10:13and there are plenty of players that will offer you a slightly cheaper chart, which is also the red origin of why a $40 trillion wire to Rokana is going to be not very profitable. Yes. So whoever process it, yes. 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 an obvious opportunity here. And for whatever, you know, completion of reasons just hasn't happened yet or to use, you know, Mark's quote, there are no bad ideas, only early ideas. 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. And yet, like we're still paying with chips, the card payment interface is the singular best user interface ever created. And 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

11:19refueling station networks produces thing we can just like weave this wand next to gas station and payment is secured. And you can fuel your car and when I saw it on like, oh my god, this is obviously going to take over credit cards. And it didn't. And it's actually there in Liza really interesting lesson in payments innovation in general. There's some unobvious of priority, but clear office area version of critical mass. And if you don't reach it, you're going to fail. But there's not really a okay outcomes and 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 end of the panel of time. And this is a fine example of a thing that actually made a lot of sense. Like of course you want to have a little wand on your car keys just to 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 keep on waiting for some completely different way of authenticating the pair to the device.

12:20And like other than the mobile phone, we haven't done better. Amazon actually just discontinued the whole thumb payment. I love foods. It's not a thumb thing. It's a pound. The palm. I loved it. I would literally go to Whole Foods next to whatever hotel I'd be staying in. I was sad that I think I rid of it. I know I used to use it too. It's actually, it's not even faster. It's just fun. I know. It's probably slower. It is slower. It's like tell me why fortune and these grapes. The fortune is you owe me money. Yes. That is the only fortune that you ever get. Well, that was, I mean, I think I called it thumb by accident just given the almost, almost a name of a firm. That's right. When the crypto industry was becoming popular when some of the major projects were starting in the space, did that, were there parts of that that seemed exciting to you or a realization of a long held sort of dream or did it feel like orthogonal or just not really? I'm frequently late to trends.

13:21I'm not the world's early set up chair of majority of things that 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. Quite different from PayPal that operated on very low power chips. To do that, I needed to work out how to make cryptographic primitives work on a very, very low power chip. We did. Then we probably 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 lead to payments, which is how PayPal came about. Right before all of that began, I went to the WIND down, Slash Bankruptcy Party for Digicash, which was the original grandaddy of all digital payments. It was service on Barfair. It was on Stanford University grounds, and there was pouring out of the 40s and a bunch of very sad looking cyberpunk telling each other how the each of digital payments is not upon us.

14:31In that sense, we were very late when we were listening to these people talk, whose idea was crushed. It was blind signatures, and David Chome was somewhere, you actually not present, but he was roaming the streets of Powell to respond. Because his brilliant idea, and the truly brilliant one, was basically being proven to be not having a product market fit. Then we promptly, soon thereafter, started PayPal, and I went to some cryptography, really a conference, and presented a new idea in digital payments, and was literally boot off stage. It was not nearly as secure, and it was certainly not anonymous. The big innovation of PayPal was, what if we don't care about it at an immediate all? In fact, people don't, they just need to pay for their coffees. Online versus, and in that sense, I feel like we were, again, very late to that game. That game had played out, like all the enthusiasts had left the building. So, cryptocurrency, not to be confused with cryptography.

15:31So I read the original Bitcoin paper and thought, wow, that's a really clever way of solving the Byzantine general problem, as old the math slash cryptography nerds was impressed with the approach. But I don't think for a second, it would become a currency or a payment method, etc. 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 become a thing and more and more of a thing, the use cases are coming out now. You know, stablecoins 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, it most important, I would argue, use case for old forms of payments.

16:32So as currencies go, as store value goes, fascinating. You know, what is the last time you spend 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 it's the most important, the buying and coffee is the most important metric because of just the volume of it, because the frequency of the bank account doesn't. There's always an opportunity to use another form of payment delivery device to satisfy 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 fast way, the cheap way, etc. If you're passing through your nearby bagel shop and you need a cup of coffee, if you're cryptocurrency wallet, passphrases 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. And so user interface as the payment amount diminishes, it takes over costs, takes over everything.

17:34Basically convenience just trumps everything else as the total amount you're trying to send goes down. I want you to take us both back to memory lane, is the beginning of a firm, and how you guys navigated the IDMAs of what would eventually become a firm. Hopefully our story's match. Yeah, we put some questions for like, yeah, separate room. This is like the prisoner's dilemma, right? It's just like asking if our story's 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. Who would do such a thing? But you're buying coins in farm value, 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 to value to Geico, you don't like care if you use progressive or Geico.

18:36Ooh, I can get farm-zoil coins if I switched to Geico or get a credit card or sign up for Netflix. So that's what we did. And I was somewhat persuasive in 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 was like the first week of March. My son was born March 28th 2009, but her due date was March 16th. So I'm like, I'm not going to go to this conference. And then the Allen guys were like, this is a very good conference. You should really go. I was like, my wife's very pregnant. She's like, you should go to the conference. She goes into labor, we'll fly you back. It's 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. 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 Gemnier, you know,

19:39you know, Chatsheepetida, write this probably somewhat riddled with grammatical flaws, Russian note. Actually, that probably would have given it a way of not being Chatsheepetida. It wouldn't have passed, it would have passed pan-gram. But I took Russian 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. And then we just became friendly. I think you sold to Google so I could not ever convince slides to become a client of trial pay, sadly. But I seem to recall you had like a tweet. Like I'm looking for something to do, any idea. And I was like, by reason to reach out. And I think 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. Statute of limitations. I can't really really hold my secret. Yeah, it's exactly because I know how much you love Vic. So we had coffee there. And then that's where this, yeah, we were talking about Bill Bill 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.

20:39We should have a way of solving the pajama problem of your upstairs and your pajamas. You want to buy something, your credit card is downstairs. How do you pay? Meanwhile, not just our 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. And it's like, you shop 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. 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 greeter, they have no idea who you are. You can't do the general store thing. But if you have five-grit friends on Facebook, this was wrong, by the way. But if you have five-grit 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.

21:39So 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 was kind of how I remembered it. Yeah, I think 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 five years a company in social media that I had no business running. Like I worked very hard, had a financially very positive outcome for a lot of people. But ultimately it never sort of scratched these sort of entrepreneurial itch that I thought I was scratching.

22:41And so one of the things that happened during that year, I spent a lot of time soul searching like, what am I supposed to do next with my, I was going to start a company, but maybe maybe 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 when you nearly died or we nearly died she was there as well. Those were the days when you looked exhausted, but you actually were obviously very happy. And you know, she was telling me, I know you swore off doing financial services. I know you were never going to touch payments again, but just this once give it a chance. And that actually had some influence as to my responsiveness to because you were a care and a payments company. And part of my reluctance to deal with trial pay was like, I can't handle another near payments company. I wanted to social media for a reason. I don't want anything to do with this stuff. And so as I was slowly getting real back into working on payments, we started talking about this.

23:45The sort of a social BML was one of the sort of shorthands we used discussing what it would be. The general sort analogy was interesting because at the same time, I don't actually remember which one of us knew this because you also speak Japanese. And this could be the thing you told me, but I remember reading about social credit and different economies. There's a notion of just pain you later or pain me next time in Israeli grocery stores, which is still common today. If you're checking out an Israel parent laying a small enough town, you can just show your bag to the cashier and 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 both you bought on the back of it and that was your total. And the notion of, I just put it on my tab is a thing that's obviously fairly American concept and so on. And so we were converging on this. I was talking to a startup at the time as couch 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 the credit.

24:55And so we were swirling around this idea of humans 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. There's just really cool ad back in the day when people had advertisements in between things in TV. And I really won the thing that was promised to me at the price that 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's the kind of the the swirling origin story. A lot of it. I think the two of us had a slightly different version of what would be fun. 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 good and well, but wasn't really what I was meant to do.

25:59And lasting 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 would take your payments like lending payments had 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 dreams of data we had access to at PayPal. We could maybe get some data. Maybe you could buy some data. We can mind Facebook for data. And both trying to get in touch with Mark Zuckerberg to see if you 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 maybe if there's any difference between the motivations you were much more motivated by let's go find a merchant. But the similar motivation was like, you know, try all pay. I think we were in the throes of selling to PayPal, but then they left me at the altar. Not your pay call. I'll be the many many generations later. And I was like, I never want to start a company yet. This is so painful. And then you you had been in that in the throes 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.

27:08And we kind of formally incorporated. But I also think the other thing that I distinctly remember. And you'll you remember this in a very negative light. He says PHP. But we had a meeting. This is I kind of think of the origin of being the Allen and Cup rate conference in 2012. Yeah. I don't know. I don't find it a negative thing. No, I know. It was funny. So we have this meeting like so we're going through the list with a song. 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 one hundred flowers or one hundred 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's like 200 person conference. Anybody can be with anybody. But it's like, hey, why don't we have breakfast. And I pulled like an all nighter making this demo in PHP. I basically like cloned. It's just fun. Like, hey, I can do this in five seconds now. But I cloned one eight hundred flowers site. And then made a whole like pay with your identity. So you do it. Check out like I add the dozen roses to make up for the bad stuff that I did sending it to my wife. Click pay. Oh, she don't have my my payment card with me. I can pay.

28:16I can pay with Facebook. What does that do? It does Facebook connect and make sure that I have over five hundred friends that 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. Hopefully with 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 Jim became like, this is great. Let's do it. So I Two other colorful points from that. So it was a good breakfast. And then In the middle of it goes, oh, yeah, we stood exactly this thing back in a 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's fine. Like, you know, so thank you for your service. We'll we'll just get you on the next one. And he intuitively grok this idea that like you can absolutely post pay a thing if you have enough trust. And we were basically there raising our hands

29:21saying, we'll take the responsibility for you know, they don't pay you. It's okay. We're going to eat it. And so he was like instantly smitten. He had been a Great proponent of the product and like a supportive, you know, person slash presence in my professional life ever since that breakfast. And He had absolutely no reason to trust us other than like he is some degree of sense who we were and it was like, you guys are great. You seem like you're You know, what are you doing? He was so excited. We have no idea. Well, then we got handed to you. This was his name. He actually now runs a successful startup. The guy that was his omit. Yes, omit Shaw. Yes. Yeah. So omit took over. We implemented. He was very, very excited. But and I remember I came up in Microsoft. I think I did this in Microsoft order. So like here's our pricing sheet is me the pricing sheet. And I was like, why don't we charge 7% Like so the 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. You're advancing in the cash right now. You're not collecting until later. So call it a 7% merchant

30:28discount 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. But then nobody like I showed this to somebody. I think it was Rob Fyfe Or actually before we had like a real finance employee. Yeah. But I I showed him this is like, oh, 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 a great demo. Free flowers. Just generally very smart. But very cynical guy. So we were not going to be perturbed by some cynicism. I love Rob. His sister used to work for me. So I remember interviewing him in the context of a firm. Although I think at the time he was still expedite. Yeah, it briefly bumped around as expedite. Yeah. And then we finally renamed it. It was it was incorporated as expedite software ink. Yeah. That's right. And so how did the idea evolve as you, you know, went from there? When did it start to really get Product Marketfader? How did this place play out of the way that every startup

31:31Has the 40 years in a desert like it's just a given like if it's worth talking about exposed. I mean sometimes I was people just like quit too early or You know something happens 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 Swimming away. 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 one of our fliers we had a sort of a non-stop interactions with said omit who was never happy with the conversion rates 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 Financial perspective and he was definitely not gonna pay 7% And so We were sort of limping through that we're generating a little bit of volume, but

32:31Among other things the notion of hey you can pay us later Show it up After you selected the flowers and so he would say look you guys are cannibalizing my credit card volume If I charged if I were charging nothing for it Of course I send you more transactions, but you're charging me more than credit card So it's a dumb idea. I got to want to pay anything for it at all You know you guys ought to be ashamed 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 was it was going nowhere fast And then we had another friend who Somebody named Nils for an accommodate called beauty leash, which is kind of still around but they were selling online Cosmetics and beauty products and the only difference that beauty leash Did as they implemented expedite I think by then it may have already I think was named the firm by then

33:33was that They told their Upfundal basically as they were selecting their shampoos and perfumes That you could pay In Three installments or 30 days later 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 small-ish Brands Primarily direct to consumers who could not care whether we charge them 1% 5% or 12% 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

34:34It was transformative and so I would literally get these love letters from merchant CEOs saying and I'm so friends with a lot of them Like early adopters most of these people have now either shoulder businesses or the business failed or they've gone on to do something else But I soon run into people who were like there's this woman named Tracy from tradesy tradesy.com was it oh Yeah, yeah, I just saw I remember her. Yes. 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 effects Here's a 35% pop you guys cost for me like please do well There was a solution to the pajama problem and then it was also all the mattress companies. Oh, yes That was those 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 I was 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 shows sufficient value to the merchant the highest MDRs

35:36Or actually for profit education institutions So some of them are like 50 really I mean I don't like these guys in particular, but like university of Phoenix So there's the private equity from 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 gross margins are so high Is it's an online course? They're like okay, you could take 50% right but 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. He said 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 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 so It's a 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

36:44Nobody wants like you're in your pajamas on your uncomfortable mattress You don't want to spend $1200 on a mattress But if it's like 30 like it once you subdivided it just has a massive increase of conversion rate Yeah, there's a couple of other sort of technical things that are probably worth Tapping into and 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 payments 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 degrees worth nothing like why did I sign up for this ridiculous thing? And so we were to go back to sort of you know things like

37:44Oh What is it called general assemblies out there? Oh, yeah Yeah, yeah, yeah, yeah, yeah, yeah, yeah, we will teach you how to code another pre-eI thing like or how to code Just that's a GPT 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 college for it. You just want to take a six week course There were plenty of the Sir University of Phoenix clones that had me yeah, there's all the all these guys and We saw that trend thought oh my god like these people are willing to subsidize education We're just cool and omission for us and yet the Lost rates to consumer dissatisfaction were so high we lasted like a half a year in that space, but back to mattresses so The things really powerful about direct to consumer war you can think of them as vertically integrated businesses So there's some factory in Brooklyn presumably or who knows where China China I thought the mattress guys manufacture locally because oh no, but they're all in Utah Remember that Yeah, I feel like it was like there was like a Utah mattress town or something

38:47But I think they just all originated there Casper is in New York or was no better purple I think this purple and then there were like other purples that were yes, I think one of the weird I asked the manufacturing was actually all consolidated So the ultimately sort of paid very little for these mattresses. They were kind of old the same I mean don't have real and industry secret but never if I was never if I Anyway, and so they their primary value Or the 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 horror business review article That came out right before Casper was found and all these guys always really entrepreneurial people Read the same article which essentially said this people replace mattresses once every seven years If you were 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

39:51But the margins and mattresses even before the sort of the foam and the everything else are like 80% or some some eye popping number and so suddenly four or five companies were born from that article basically saying like oh my god So if we just forgot how to market a mattress That you will either shorten your replacement cycle so you buy the next mattress six 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 result in a saturation of mattress industry obviously, but more to the point it Created this enormous premium on I will just come tell you to buy a mattress by any means that's so 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 the multiple events like this in a firm History where we saw An opportunity for the merchant to

40:52significantly contribute to the mdr Which allowed us to eliminate the apr in other words consumer got a true zero percent loan The backdrop to this is actually really really important to understand it one of my sort of you know things that I rage against Have and will continue to until it's made illegal or eliminated by by other means is the fake zero percent load 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 zero percent apr There's an asterisk next to zero which says something going lines of Assuming you make a purchase for the next 12 months or 24 months If you're penny short or a day late paying your principal the interest accrues retroactively to the beginning of time Basically the day you got that card you swipe the for a thousand dollars you wake up and you owe three thousand dollars to your slayer So this is called a deferred interest credit card And a huge opportunity we tapped into

41:54You Directly from that rage was this idea below our zero percent is going to be a real zero when you goes by the inflatable mattress or the mattress for a box You're going to get a zero percent 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 will never be an asterisk on a firm zero that that is the origin story of why we don't charge late fees We don't do deferred interest all the sort of gimmicks and gotchas to the industry loves to throw at people 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'll never be surprised to the negative And so that that was another sort of big balance up point and then then every mattress company It was like oh wow like these guys are doing it. Hope we should do the same thing Because if fast forwarding a bit a lot of people hear a firm today and you know one quick thing I think is you know buy now pay later What is this not fully encapsulated? What does this miss about the company today? It's fucking this entire you one of the Things in the email thread that I just reread in the origin origin of a firm

42:57Was your claim that advertising and payments are converging which was the fees of behind trial pay and these behind a bunch of different things Actually a failed project within paypal go paypal shops where I was trying to personally I built this thing where it's trying to remarket what you just bought that that information should give us a sense for what Or you 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 Satisfied demand so somebody comes in and says look I'm gonna buy this thing but my budget is this big. I won the shoes. 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 time on no interest at all You should get back and the shoes. It's safe But that that is the brand promise of a firm and it works tremendously well, you know tens of billion dollars a year worth That is now becoming more and more about creating a platform from merchants to tell their shoppers

43:59Hey, we are launching and you think 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 growing pretty quickly and so We have shifted to just satisfying demand to helping merchants create or guarantee demand in the convergence of payments and advertising is upon us although 15 years later. That's how it's predicted You're too early to try to pay absurdly too early with 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 is a VC Is that when I see 90% of consumer companies I kind of rather by 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 cack 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 I mean it is paid to acquire a customer and there are there are some companies that you would think they look like this

45:03But 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 is Casper's 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 donening 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? B2B2C 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 zingga game go get Free coins if you sound a forgetco 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 a third email provider Just nobody 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 the patch on the edge. It's incredible

46:04Like it's so hard to do We never see anything like this in the venture land or vet 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 tended to great 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 pay like Zingga didn't want me owning their customer Netflix didn't want me owning their customer. I just connected the two But um affirm the the merchants actually want you to own the customer. It's very You already have a burden of supporting a 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 alone Hey your late or you got a got to make your payment or all the communications that come from your lender

47:06Is just another type of burden that the brand is gonna like I know what affirm you guys can handle this is 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 your products is really built on that 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 industry really there's plenty of competitors who are trying and some some of your success But mostly not really who will go into longer term loans and by longer I don't mean more ditch sir You know 15 plus years, but like three and a half years is a fairly long period of time relative to the average by now pay later, which is like six 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 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

48:09But 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 business has been fueled by these long term products Even though they are probably the most challenging part of payments Yeah We've been covering some a firm history while we're doing a story cup episode I also want to ask a question about paypal history I'll keep us straight And you know, there's been you know the 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 You know pioneer and sort of you know payments and and fintech But also in terms of the the people that came out of it and sort of the it feels like the you know highest concentration

49:12Of a high-hits hit rate of people who go on to do incredible things The only comparable thing I could think of today is it's not even companies is the deal fellowship or I can't think of a comparable company to paypal today because you can Um and you know all with uh 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 about of its impact in the industry uh, you know early was uh and And sort of the people that came out of it if it's something that's underappreciated or you think not quite Groct or any any additions you want to make to how we perceive that the company in that time period So I'm an old answer and a new answer to this question which I might you might expect that answer to twice before So the cononical answer that I gave in the book which by the way is very good So there there've been many much ink spilled on history of paypal the founders actually had very good book Like in part of this because it's well written but part of it's because jimmy the guy who wrote it

50:12Interviewed every single character in the story extensively It's been a lot of times talking to all of us and so it's at the very least crowded 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 in selecting foreign entrepreneurs. We would ask like one of the stock questions I would ask me so what do you get into after paypal and The answer that I welcome the most was oh, this is the last one. I'm gonna start my own afterwards So this there's like oh if you're coming in here to kind of get your final Graduate degree and entrepreneurship of course we'd love to have you like you know 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-sac and after We all dispersed YouTube and yelp and Peter's first major fun and LinkedIn and so it that was not an accident We were 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 at this but

51:16We knew the people in the room into my like we literally you know exchange firmones by hanging out in these sweaty rooms brainstorming screaming at each other and spending a lot of time as white boys and declaring The other person's ideas idiotic and so on We knew the the true version of that person the sort of the extremely I don't know the the ultra philosophical prtil and the You know go all in every time Elon Musk and the These days Gubranis for real David's actually you know all the people like they all have kind of the the present the position 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 headhards 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

52:17Is extraordinary And yet you know he's 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 down 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 is just a normal dude I spent a lot of time with him he's normal And he's going for this big of an idea. I should do the same I should I should strive to and so I think the combination of I think these are very ambitious people they all wanted to be entrepreneurs But we also knew each other when we were young and filled without which many I think still are I think that that sort of gives you confidence that it's not all You know better roses. It's it's it's paved with the with with with with book bumpy parts Is there anything we didn't get to that you want to make sure that we get to what what we're here? I'm probably less Optimistic about agenting shopping and I'm very off-resting about the agentic payments. Yeah

53:21I think 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 renegotiations because agents are in fact smarter than pieces of plastic and even piece of plastic with re-writeable chips And so I think that's a A lot of conversation around agentic 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 like I don't want to Like I love buying bike parts and I spend way too much time looking at to slightly different bike parts because I just You know have to participate in purchase But the part of my like okay that one The end right now that one is the beginning where you pull out your wallet or you know, and so I think we We're about to see some interesting innovation in payments user interface So I can I say a question on that so

54:23I mostly agree but I think it depends on there's like the I need a research what to buy Where AI is just yet another tool at your disposal like you ask your friends. That's what I'm 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 The way that I kind of think about agentic 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 100 websites in America That probably nobody with over a hundred thousand dollars a year of income is ever heard of But it's it's a way of saying I know what I want

55:24You're not helping the robot's not telling me what bike part to buy what telling me what's so to buy I know just give it to me at the lowest price But it takes way too much time 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 guess do you think that that form of agentic commerce because it's actually related to agentic payments as well I have nine different cards I don't remember the amazon Chase issued by chase card terms for a non-restaurant purchase of something under 500 dollars in a five use my whatever 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 as well slowly the first time always once I'm not I'm not sure I can handicap that well

56:27The Reason people don't so there's plenty of people who live in this Some would 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 bike bike parts sometimes I buy milk and milk is milk so are my bike parts I mostly bike parts um but uh The I think what really happens for a lot of people it's the sort of 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 faraway land and it's sold from three different retailers I'm gonna 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

57:31Both the preferences, but also handicapping how these preferences would change based on the input which Me 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 aside be like that looks like it was edited in the 90s I'm just not quite sure that I'm gonna spend a thousand dollars for a new cassette or six hundred dollars Because that's go for these days in bite cassettes the rear assembly well By 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 we're used by Yeah, let's get someone they know this is true. He throbed off and all Yeah, so I think I think we are in the Difficult period where we're still figuring out the other thing that you know just sort of maybe end up 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 does instacart like you tell your instacart shopper go bring me milk

58:32You 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, of course like very sunscreen And so the AI inside that shoppers head maybe not even as good as Gemini or catchy Is these days, but do you just sort of say I do just you go through trade of jose or hope was it whenever you're shopping and you figure it out And it shows up and 99.9%. 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 gonna get there It's just a question is how soon will we work through the quirks of like well Returning of this wrongly purchased by part or waiting for a forever and not really knowing what's gonna happen to it because it's in transit But we don't know where it is I think that may be protracted made more protracts it people think That's good note to end on we'll have to get a part two at some point when we talk more about the future Max thanks so much for that. Thank you very much

59:35Thanks for listening to this episode of the a60z podcast If you like this episode be sure to like, comment, subscribe, leave us a rating or review and share it with your friends and family For more episodes go to youtube apple podcast and Spotify follow us on x a a60z and subscribe to our sub stack at a60z.substac.com Thanks again for listening and I'll see you in the next episode As a reminder the content here is for informational purposes only Should not be taken as legal business tax or investment advice or be used to evaluate any investment or security And is not directed at any investors or potential investors in any a60z fund Please note that a60z and its affiliates may also maintain investments in the companies discussed in this podcast For more details including a link to our investments Please see a60z.com forward slash disclosures You