The average American carries 2.6 credit cards, but averages can be a bit misleading.
For example, that figure includes a full 30 percent of Americans who don’t carry or use a credit card at all. Exclude those folks, and the figure looks very different. The average credit card-wielding American carries about four different cards (3.7 to be exact).
But using that more accurate-seeming figure obscures another imbalance: The “average” changes very much by demographic of American. Among older consumers — age 65 and above — 70 percent report having at least one card.
Among millennials, that number drops below 30 percent.
And while there are a variety of reasons to explain that rather dramatic dropoff in credit card ownership among younger consumers — a favored one being millennial consumers have been scared off by debt and the experience of coming of age during the Great Recession — Sezzle CEO Charlie Youakim and Chief Business Development Officer Paul Paradis pointed out that there is a far less psychological explanation as well.
Millennials don’t have credit cards because they don’t have FICO scores, or at least not the kind of FICO scores that inspire issuers.
“If you look at the stats, one in every three adults under 30 doesn’t have a [FICO] score at all,” Youakim explained, “and of those who are scorable, almost two-thirds have a subprime or nonprime score.”
Structurally, they noted, that’s not a huge surprise, given that one of the factors that goes into determining a credit score is the age of an account. Since the Credit Card Accountability Responsibility and Disclosure Act passed in 2009, Paradis and Youakim said, credit card companies are legally prohibited from marketing to college students with no credit history.
“The days of, ‘Sign-up for a card and get a free t-shirt,’ on college campuses has long since passed,” Paradis said, adding that it limits a convenient way for millennials to have been given access to credit. Paradis thinks that’s bad for millennials — many don’t agree — and the merchants who want their business.
The Sezzle Experience
Paradis and Youakim said that they didn’t start Sezzle as a consumer financing platform — quite the contrary. Sezzle started life as a platform to lower the cost of acceptance to merchants by enabling bank-based payments. It was during the course of those conversations that they observed three things.
Observation 1: Merchants weren’t falling all over themselves to enable a new form of payment just to save on interchange, particuarly when consumers were pretty happy paying them with the plastic cards they had in their wallets.
Observation 2: Companies like Affirm were crushing it by offering an alternative way to pay via point-of-sale (POS) financing for larger-ticket items.
Observation 3: No one was doing it for lower dollar / higher frequency / lower overall basket size payment items in the $100–$500 range.
So, that’s where Sezzle decided to go.
The platform allows consumers a chance to finance their purchases — even if they’ve had issues in the past with credit — because Sezzle doesn’t tap a customer’s FICO score to evaluate them. Instead, it looks at information from a customer’s bank statement (e.g. monthly in and outflows) to get an idea of what level of purchases the consumer can actually afford to pay off over a few installments.
When a customer is approved, Sezzle pays the bill in full to the merchant and the product ships to the customer. The customer must pay 25 percent of the purchase cost upfront. The remaining 75 percent is paid over three monthly payments. There is no interest charged on the loan. The customer pays the purchase price divided by four.
“We think historical cash flow data is a much better predictor of credit risk,” Youakim said, “Especially when you are talking about the ability to pay off $200 in two months.”
A Better Deal for Merchants
Not charging interest for lending out money sounds like a losing proposition for a company focused on consumer finance. But Sezzle — despite its installment loan-type product — is not actually a lender.
“We do not operate as a lender,” Paradis explained. “Because we don’t charge the consumer any interest and because we split the payment into only four installments, we do not qualify as a lender under Reg Z. Therefore, we do not need any state lending licenses, banking partners, etc.”
Instead, he said they charge the merchant a fee. The standard is 6 percent, though there are “volume-based discounts to larger retailers,” Paradis explained.
And though that is higher than the fee merchants are used to paying, from their earliest days as a payments processing firm, it’s been clear to the Sezzle team that merchants care far less about the fees they pay than about the conversions they get.
By design, Sezzle is built for more than just bringing about conversions for merchants. It’s also meant to encourage millennials and consumers who wouldn’t have spent money in the first place due to a lack of credit.