Rather than offer a line of credit, they give loans for specific purchases, to be repaid in pre-agreed instalments
$1.1trn of revolving consumer debt—bills racked up on credit cards—was outstanding in America at the end of August. It is a dangerous type of debt. High interest rates and low minimum repayments mean balances can quickly balloon. But a group of fintech firms are growing fast by offering consumers an alternative.
The model for such firms was Klarna, which was founded in Stockholm in 2005 and became a bank in 2017. Like Affirm, it offers medum-term loans repaid monthly. But it also allows consumers to split small purchases, like clothing, into three to four fortnightly zero-interest payments. Afterpay, founded in Melbourne in 2014, also splits payments into four. Both charge late fees, but cap the total.
They are a particular hit with younger customers, who tell pollsters that they fear credit cards. Affirm says half of its customers are millennials or younger. The average age of a Klarna customer is 32. A quarter of millennials in Australia have used Afterpay, compared with 16% of adults. In their latest iteration, such firms seem to approach the territory of credit cards. But Mr Levchin insists that they retain the crucial distinction that makes them a better bet for customers: pre-arranged repayment schedules for each purchase, which cap the amount they will pay.
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