Matt Frankel

I definitely misunderstood some of the key aspects of the buy now, pay later model.

A lot of people still think this, that it's an inherently risky form of lending.

Jason Hall said that yesterday on our show.

As soon as the economy turned sour, we would see a big wave of defaults.

But we got the 2022 bear market and interest rate spike.

That didn't happen, so I decided to look a little closer.

If you look at some of these companies, and Klarna's not alone, but I'm just going to quote their numbers, Klarna's net charge-off rate is 0.44% of their loan volume per year.

That's roughly one-fourth of what Amex has, which is considered generally a top-notch clientele.

The key thing to keep in mind here is, these are short-term loans.

Klarna's typical loan is two months in length.

The for-payment thing is usually split over a two-month period.

They're generally linked to the recipient's bank account, so it's really hard to default on them unless you literally don't have money in your bank account.

It makes the probability of default much lower than you might expect.

Klarna gets a 3% fee.

Most of their loans are no interest.

They get a 3% fee paid by the merchant, which is roughly what the merchant would pay to accept a credit card anyway.

If you extrapolate that over a year of, say, these two-month loans, you're talking about roughly an 18% yield, a 0.44% net charge-off rate, and low-cost deposits funding the business because Klarna is a bank.

It's a recipe for a pretty strong interest margin.

I'm going to talk about one of my familiar favorites, Kinsale Capital Group, KNSL.

The reason I'm bringing this up, even though we've talked about it several times before, is that it's trading at a rare discount.