CEO: ‘The true disruption of retail banking is coming’

Aarthi Swaminathan
Finance Writer

The co-founder and CEO of Europe’s biggest fintech startup believes that the world is standing on the precipice of a “true disruption” in retail banking.

“I believe that in the next couple of years, the true disruption of retail banking is coming,” Klarna CEO Sebastian Siemiatkowski said in interview with Yahoo Finance’s On The Move. “What I want to be part of … is transitioning this industry that has forgotten about the customers, that offers non-imaginative products, and really serve the consumers in the financial space.”

The Swedish firm offers buy now, pay later options that allow people with little-to-no credit history to purchase items by borrowing money from the startup at no interest and then slicing up their repayments into four installments.

Offering consumers more options through this digital version of a layaway plan is “the primary goal of what we want to accomplish,” Siemiatkowski added. “And the market is just amazingly large, and there's so much more improvements to do for consumers.”

Microlending is already common in China. (Photo: NICOLAS ASFOURI/AFP/Getty Images)

Underwriting loans for those who aren’t creditworthy

Yahoo Finance first reported the trend in July 2018, noting how the payments space has grown rapidly over the past decade. Earlier this month, Klarna said that it had been valued at $5.5 billion in a funding round in which it raised $460 million.

The company primarily makes money by charging the retailer as opposed to the consumer. One industry expert told Yahoo Finance that there was “untapped” demand in the market. Siemiatkowski concurred.

Many worry that the startup is part of a trend fueling unrestrained borrowing among millennials and Gen Z, who are already under heavy duress in the U.S. given their auto loans and student debt. According to a study by CompareCards, 32% of college students have more than one credit card.

A look at the debt breakdowns of Americans under 40. (Graphic: David Foster/YahooFinance)

Recent Fed data also shows that for young people aged 18 to 29, credit card loans formed a big portion of their debt.

Among those with at least one credit card, 62% said that they don’t pay their bill in full each month, and 52% have worried about their ability to make a payment.

But lending money out to a demographic that has a little to no credit history — a problem that has led the U.S. into trillions of dollars in student debt — isn’t a real concern here, Siemiatkowski asserted.

Unlike how “non-imaginative” banks do it in the U.S., “we don't do a credit check” before lending out money, Siemiatkowski explained. “We ask people to supply their debit card number, and we ask for one-fourth of the payment up front and then the rest every second week.”

Furthermore, he added, “we've learned how to use more data sources to be able to underwrite in a successful way.” (He did not go into detail about what the data sources are).

Klarna's Sebastian Siemiatkowski and Jonathan Shieber during TechCrunch Disrupt London 2015. (Photo by John Phillips/Getty Images for TechCrunch)

Default rate was less than 1%

Whenever a borrower does fall behind on payments, depending on the payment plan a user chooses, Klarna could be charge them a late feeinterest, and in some cases, possibly even hound them with their very own debt collection agent — as evidenced by this employee review on Glassdoor.

Nevertheless, Siemiatkowski confidently said that the default rate was less than 1%.

One explanation for that is that by linking Klarna with users’ debit cards — which the chief suggested is the predominant plastic of choice for young people — the company can simply pull the payment from the user’s account automatically.

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

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