Lee Schafer
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People younger than 35 are far less likely than older Americans to pay for something with a bank-issued credit card.

It could be that these young people, as a group often called the millennials, have figured out that credit cards can be hazardous to their financial health. If so that’s great, as millennials don’t usually get much credit from their parents’ generation for being savvy with their money.

The reality, though, turns out to be more complicated. Most people need to borrow money, at least occasionally, but many of these young adults can’t borrow money the way their parents do. That’s because they were turned down for a credit card.

This finding by a young Minneapolis financial services company called Sezzle helps explain what has long been puzzling ­­— and helps explain how so many entrepreneurs can see a great opportunity when American Express Co., U.S. Bancorp, Fidelity Investments and Wells Fargo Home Mortgage are all still very much in business.

Sezzle is part of a boomlet of financial technology startups since the Great Recession, with nearly 650 of them just in the narrow market segment of alternative payments, according to a report last year from the global accounting and consulting firm Deloitte. There are more than a few “fintech” firms besides Sezzle in the Twin Cities.

The founders of Sezzle, Charlie Youakim, Killian Brackey and Paul Paradis, got going in early 2016. They had studied the credit habits of millennials, and at first even they didn’t quite get the problem. They thought young consumers were staying away from credit cards because they didn’t want them.

Credit cards, for most people, are a genuinely inspired financial innovation, enabling people to borrow money from their bank to pay for things all over the world, right on the spot. But the money can be expensive, because you are not exactly getting charged the prime rate.

Then, if you take your eye off the ball come monthly bill-paying time, you can get a big fee along with a monthly interest charge. Hit a financial pothole, and fees and interest from credit cards can quickly turn a small hole into a big one.

Sezzle’s first product, launched about a year ago, was a cash rewards program for buying online using Sezzle’s digital debit payment program, because accumulating rewards such as airline miles can be one big reason people use credit cards. But the product didn’t catch on.

“The more we dug at the data, we really found out it was less of a preference and more to do with lack of access to credit,” co-founder Paul Paradis said. “Credit card applications are at record rates, but denials are at record rates.”

Paradis thinks lower card usage is one outcome of Great Recession-era legislation that more or less banned marketing credit cards on college campuses.

“Those laws, coupled with tightening credit standards after the Great Recession, have made it quite difficult,” he said. “If they do get them, they have extremely low credit limits and are almost unusable, maybe a $200 or $300 limit.”

Getting turned down for a credit card isn’t the end of the world, of course, but not having a credit card makes it harder to build much of a credit record. If the credit score doesn’t go up, applying for a credit card again might lead to another denial.

“About 30 percent of people under 30 don’t have a credit score,” Paradis said. “No score at all.”

In our economy that’s like living underground. As essayist Samantha Irby wrote in her funny book from last year, “We Are Never Meeting in Real Life,” when she finally got around to applying for a Discover card, the credit reporting agency Experian thought she might be dead.

Having finally grasped this problem, Sezzle ditched its rewards program and instead got into the business of offering a form of installment payment plan, at no cost to consumers.

Sezzle’s target customer is an online retailer, with Sezzle’s service first making its appearance right on the product page. Retailers that have signed on might offer a dress on their site for $100, “or four interest-free payments of $25 with Sezzle.”

Click on Sezzle for the first time, and the consumer has to fill out a short profile including bank account information. More clicks, and Sezzle starts to analyze the creditworthiness of the consumer based only on the bank account, cash flowing in and out, fees charged and so on.

If approved, the purchase goes through, Sezzle schedules four automatic payments spread over two weeks from the shopper’s bank account, and the merchant gets charged a fee.

Why would retailers sign up for that? It’s because of a problem called cart abandonment, when shoppers create a shopping cart of items and never quite click the order button. Sometimes shoppers might just be using the shopping cart as a comparison-shopping tool, but it could be that they decided at the end that they couldn’t pay for it all at once. Sezzle solves that problem.

Most applications are quickly approved, Paradis said. Return users get approved within seconds, not the two or three minutes it might take to grind through the bank data the first time around.

Sezzle now works with about 700 retailers, mostly specialty apparel merchants so far. The company plans to eventually have its service working for sellers of event tickets, travel and other consumer purchases a little too big to comfortably fund just from that day’s checking balance.

So far, Paradis said, Sezzle has collected more than 50,000 users for its service, and last week about half of the orders were placed by repeat users.

Because the process works with an analysis of the bank accounts, Paradis said, a conventional credit score — prime, subprime or nonexistent — is irrelevant. But the Sezzle team knows a credit score can matter to consumers who will someday want to finance a car or even secure a home mortgage, so it’s planning to work with the credit reporting firms to educate them on how to fairly evaluate the history of Sezzle users.

That will also help these consumers get a credit card someday, too, although it’s becoming less and less clear why they would want one.

lee.schafer@startribune.com 612-673-4302