By Roy Urrico
A challenge for credit unions and other traditional financial institutions is from fintechs offering competing or alternative banking services. An example is Klarna, a Swedish fintech company that provides online financial service such as an artificial intelligence (AI)-powered global payments network and shopping assistant.
Klarna recently announced the launch of a new online credit and lending initiative - Wikipink - aimed at “setting new standards for transparency and responsibility in the credit and lending industry.” Also, Klarna commissioned the Harris Poll to conduct a survey among over 2,000 U.S. adults to better understand how today’s consumers are using credit cards.
Klarna explained it proactively publishes data. By revealing comprehensive data on its services, including repayment rates, late fee rates, and consumer age it wants to encourage transparency in the credit industry and help drive meaningful discussions on personal finance based on facts instead of opinions.
“We still see too many of the traditional banks and credit card companies pushing products on consumers with exorbitant interest rates, hidden fees, and revolving debt,” David Sykes, chief commercial officer, Klarna said. He added, “It is very clear that the traditional credit card model does not work in the favor of the vast majority of customers. Wikipink is not just a showcase of Klarna's achievements, but a call to action for the entire financial industry to prioritize consumer well-being. By sharing our data and practices openly, we aim to inspire a shift towards more ethical, transparent, and consumer-friendly credit options.”
Considering the Credit Problem
Klarna pointed to credit card debt hitting a new record high of $1.13 trillion in 2023, according to the Federal Reserve Bank of New York, with credit card interest rates peaking as high as 36%. Additionally, the Klarna/Harris Poll survey revealed that 41% of American credit card users are revolving month-to-month, with approximately one quarter of credit card users (23%) saying they have paid their credit card late and incurred a late fee or had a credit card payment go into debt collection over the last year.
Other Klarna/Harris Poll findings:
BNPL/credit card consumer spending. More than one-third of Americans utilize buy now, pay later (BNPL) services. A significant proportion (69%) of BNPL users have a household income of $75,000 or higher; and Gen Z and millennials show higher adoption rates of BNPL compared to Gen X and baby boomers.
Credit card usage and payments. Two-fifths of respondents do not pay off their credit cards in full each month, indicating widespread credit card debt even among affluent households. Across generations, a significant portion carries credit card debt and pays late fees, with Gen Z and millennials showing higher rates compared to older generations.
Understanding credit card bills. Approximately 1 in 8 American credit card users (13%) admit they are unclear on all the different payment amounts listed on their credit card bill and how they accrue interest.
Frequency of credit card usage. Over 4 in 5 Americans (83%) use credit cards, with more than half (55%) using them weekly or more frequently, and around 1 in 10 (13%) using them daily. Gen Z is the least likely to report using credit cards weekly or more frequently compared to older generations.
Consumers require more education. Fifty-five percent of credit card users say they do not know their credit cards' annual percentage rate (APR), suggesting some level of lack of awareness among a significant portion of users, and 13% of credit card users admitting they are not clear on all of the different payment amounts listed on their credit card bill and how they each accrue interest.
Debt collection. Ten percent of credit card users have had a credit card payment go into debt collection over the last 12 months, with younger generations more likely to have a payment go into debt collections (21% of Gen Z, 16% millennials vs. 6% Gen X, 3% boomers).
Klarna Says Its Different
Thirty-one percent of consumers using Klarna’s Pay in 4, which allows consumers to split a purchase into four interest-free biweekly payments, paid their bills early, according to Klarna. Another 65% paid on time, and only 4% incurred late fees in 2023. Klarna noted its global default rate stands at less than 1%, significantly lower than the delinquency rates associated with credit cards, and 99% of payments are repaid.
Klarna pointed out it proactively encourages customers towards punctual payments by sending personalized notifications and follow-up reminders for any missed installments. However, in cases where payments remain overdue, they may apply a late fee of $7 or 25% of the total amount - significantly lower than the industry norm.
More than 500,000 global retailers integrate Klarna’s technology and marketing solutions including H&M, Saks, Sephora, Macy’s, Ikea, Expedia Group, Nike and Airbnb. The survey was conducted online within the U.S. by the Harris Poll on behalf of Klarna between March 14-18, 2024 among 2,066 adults ages 18-plus, among whom 1,689 were credit card users.