Disruptors
Emerging Payments

Max Levchin's Mobile Startup Affirm Shakes Industry Expectations

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Affirm, the new mobile payments company that counts PayPal co-founder Max Levchin among its own founders, is already drawing buzz—and some head-scratching over certain aspects of its business model.

Affirm executes mobile-commerce payments in a two-tap process—first to initiate a payment and next to confirm the order. First-time users would go through additional steps such as logging into Facebook to verify their identities with an Affirm application.  

"It's an interesting concept, the one or two tap payments for mobile. A mobile device can be cumbersome to use for payments, and merchants are looking for a way to reduce friction and use mobile devices for quick payments," says Jordan McKee, an associate analyst for the Yankee Group.

Affirm works like a charge card—it requires consumers to pay bills within approximately 30 days and guarantees payments to merchants. In various news reports, the company mentioned it would use "other data" for risk management, but did not elaborate and did not return a request for comment by deadline. Many payment companies use a mix of public data that tracks payment history—and some social network and behavioral analysis—to vet the creditworthiness of potential consumers.

The use of Facebook for authentication is not unheard of, but it is nevertheless a source of potential controversy. "I'm not convinced on Facebook authentication, but that's more a personal bias. There are already concerns about data privacy with them already," says Gareth Lodge, a senior analyst for Celent.

Other financial startups have faced criticism for using Facebook to identify users, and the social network's penchant for stirring up privacy worries—real or imagined—could make the Facebook method a challenge for Affirm.

Despite the privacy concerns associated with Facebook, "it makes common sense that this rapidly expanding and now searchable information base will be used in this way," says Mary Monahan, a research director for Javelin Strategy & Research.  "The merchant will be paying a fee to Affirm for this authentication and risk check."

The use of Facebook should also make accessing the site easier. "Facebook would provide a significant mass market opportunity. So many people have those [Facebook accounts], and it makes it easier to make a payment," says Rick Oglesby, a senior analyst for Aite Group.

Other payment companies already use Facebook for authentication. Braintree, an online and mobile payments company, offers use of Twitter and Facebook for authentication when downloading a payment app, but not for each payment.

For verifying each payment, Braintree uses device fingerprinting—or a method of identifying a user's device by measuring its hardware, software and network attributes. This method offers a more seamless experience, says Bill Ready, Braintree's CEO. "We want make sure that you don't have a context switch at the checkout line when you are paying," he says.

Beyond Facebook authentication, Affirm's "charge card" model will place a lot of pressure on its risk management, McKee says. "What if the consumer doesn't pay? How are they going to chase them down?" McKee says.

Affirm has publically disclosed only one merchant partner thus far, 1800Flowers.com, which is already a user of Visa's V.me mobile wallet, and the mobile commerce version of Google Wallet.

"[Affirm] has quite an uphill battle to climb," Monahan says. "But there is a huge need in the space for solutions to this problem. We are only at the tip of the iceberg. Last year $20 billion was purchased using mobile, but as more consumers turn to this medium, the need will become more intense."

The 38-year old Levchin—who was born in the Soviet Union and moved to the U.S. under political asylum, founded PayPal in 1998 along with Peter Thiel and Elon Musk. Levchin served as chief technology officer at PayPal for a number of years, and was a driving force behind the company's anti-fraud strategy. Levchin founded Slide, a media sharing service for social networking sites, in 2004, and later helped start Yelp.

"He's had success in payments and technology, he's a smart guy. I wouldn't write him off," McKee says. 

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