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TRADING & TECH
The Klarna lesson for retail banks: find your ‘paper invoice’
The likes of Visa are buying stakes in fintech solution providers to enable them to go direct to market while banks risk being cut off from both sides
July 5, 2017: Klarna is an e-commerce company whose retail payments solution allows customers to ‘buy now, pay later’. Their model cuts out the cumbersome card payment process for those purchasing goods online from sites who use the Klarna solution.
The testimonials of their big clients, such as wish.com, Arcadia and Hype, say that allowing customers aninvoice functionality has increased their sales by an impressive 40 per cent. This almost guaranteed increase in sales means these customers are willing to (and do) pay Klarna a higher margin (than they pay card companies) for every sale. Customer experience and the resulting increased conversion for businesses is a powerful thing.
On June 19 came the announcement that the Sweden-based company had been granted a full banking licence. They are the largest European fintech company to get this licence. Their chief executive and founder, Sebastian Siemiatkowski, openly said of the announcement that he wanted Klarna to play a large part in disrupting and reshaping the retail banking industry.
At the time, I came out and said this was the worst possible news for retail banks and card companies, alike. I even told Business Insider that I believed this meant Klarna was on track to becoming the next Visa. This is because with more than 60 million customers and, post PSD2, direct access to all European bank accounts, they are certainly well-positioned to become a favoured credit provider. Not just for bigger ticket items, but also for everyday household goods, that are increasingly being purchased online.
The difference between Klarna and a big card company like Visa is, of course, the fact that money is offered to people as a direct line of credit. The bank who ordinarily provided this service behind a credit card is no longer relevant in more and more situations. So as cards become more and more irrelevant and the strong relationship between banks and consumers is challenged, distribution of cards, and thus Visa’s products, will drop.
Was it something I said?
A week after this original announcement, there came another announcement. Visa had now taken an undisclosed stake in the payments technology company.
Despite Klarna’s chief commercial officer, Michael Rouse, admitting to being “somewhat enemies in the past in terms of competing”, the deal confirms that Visa is (rightly) looking to strengthen their alternative payments technology. In fact, a quick Google of Visa (or Mastercard, etc.) + partnership sees the most recent news results return a string of similar announcements about partnerships with various fintechs who will help them to safeguard their future.
That’s all good for card companies, but what about banks?
For almost two years, retail banks in Europe have been (or should have been) conscious of the second payments services directive (PSD2). Its most pertinent article directing that they must be able to comply, via API access, with requests from licensed third-parties to access customer account information.
The European Commission introduced the new directive in an attempt to create a safer payments system and foster innovation in an industry that has remained relatively dormant in this area for some time. Those most affected by the directive — that is, European retail banks — have, for the most part, missed the innovation memo. The exception to this is Scandinavia, where retail banks enjoy the highest percentage of bank-issued mobile payments users in the world, per capita.
Right now, banks are mainly relying on partnerships or trying to build their own NFC-based wallets (which are all doomed). One of the biggest bank/tech company partnerships most are familiar with is the partnership many banks have with Apple. But what happens when Apple can drop the required partnerships once PSD2 gives them direct access to their customers' bank accounts? The same question applies to similar situations with Facebook and Google.
Further, the most popular mobile wallet solutions, outside of the EU, are all owned and operated by non-banks. Think Venmo in the US, and Alipay and WeChat Pay in China.
So whilst Visa is in a tough situation, compared to many retail banks, it’s nothing
They (the likes of Visa, for example) are busy buying up stakes in solutions like Klarna to enable them to go direct to market with Visa-branded solutions. Banks, however, risk being cut off from both sides. Their allies — the card companies — will likely join their growing list of competitors. The likes of Visa are in a position to buy companies or stakes in companies to help them pivot their strategy and stay relevant.
I predict that Visa will go direct to consumers as banks struggle to stay relevant and thus become negligible distribution channels for Visa, compared to Klarna, for example. Klarna is, in fact, a bank for all intents and purposes, but a new breed. Traditional banks are then left in the middle with competition from all angles.
Why aren’t banks doing anything?
Right now, banks are still extremely profitable. It’s hard to change when you’re riding the (albeit final) waves of success. Another reason for a lack of action amongst many is the use of extremely old infrastructure and legacy systems.
However, banks mustn’t let legacy systems overshadow their need to get ready for PSD2 and the shift toward a new way of banking and personal finance management any more than they should let current success hamper a shift to prevent disruption.
The entire point of PSD2 is: change. What has worked, in many ways, for the preceding decades isn’t cutting it anymore. Banks who come out the other end of PSD2 — in say, a year or two — will look very different from the traditional retail banks of today. For consumers, personal banking will be easier and there will be a great deal more choice — not only from the major banks but from tech companies who people might previously have just thought of as a social media site or a search engine.
So, what can banks do now?
In a nutshell? Accept that change is coming and that it will have a massive impact. It’s this acceptance that then will lead to the deep disruption that is needed to weather the PSD2 storm. The big disruption case studies we all know — the likes of Kodak or Blockbuster — had plenty of time to change their core business. This is especially evident in hindsight. I am certain that the same will be said of the many retail banks who fail to do what it takes to stay relevant.
So, my advice is: be bold, take risks and create customer-centric solutions — like Klarna did. While banks pushed cards, they saw the need for a simple yet powerful solution — by sending out invoices, on paper! There are millions of problems waiting to be solved.To stay relevant, banks must find their own paper invoice, fast.
Daniel Döderlein, CEO and founder of Auka
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