The Fintech world is constantly changing and surely the ongoing pandemic has accelerated the need to digitalize every aspects of our life in order to adapt to our new “socially distanced” routine. It’s not a coincidence that in a letter[1] addressed to the Canadian Prime Minister J. Trudeau on April 15th 2020, the National Crowdfunding and Fintech Association (NCFA) suggested that cooperation between the government and online lending Fintech firms would facilitate the distribution of small business loans to SMEs in a quicker and more cost-efficient way.
In the United Kingdom, the British Business Bank involved, in addition to the already authorized intermediaries, four fintech companies for the implementation of measures to support the economy.
The Covid-19 sanitary crisis has allowed certain types of business models, based on a digital market, to gain traction during this period by taking advantage of the few opportunities the pandemic provides.
One of these business models has been pioneered by Klarna, a Swedish firm that is now officially Europe’s highest valued private fintech.
Klarna was founded by Sebastian Siemiatkowski, Niklas Adalberth and Victor Jacobsson in 2005 in Sweden and today it counts more than 12 million monthly active users worldwide, with 55 thousand daily downloads.
In March 2021, Klarna announced a $1.0 billion funding round closing at a post money valuation of $31.0 billion, making it the highest valuable unlisted private fintech in Europe and the second highest worldwide, next to companies like Robinhood or Stripe. Notable investors into the company include Dragoneer Investment Group, DST Global, Silver Lake Partners, BlackRock, General Atlantic, Ant Group, and many more.
Klarna represents a new revolutionary way of banking. Even though Klarna is a registered bank (Klarna Bank AB) under the supervision of the Swedish Financial Supervisory Authority (Sw. Finansinspektionen), it does not provide any credit card to its customers but provides payment services which allow consumers to try out products before they pay for them and collaborates with the retailers to manage the payment process on their behalf.
As stated on Klarna’s Annual Report (2019): “The uniqueness of Klarna’s consumer offering, providing a healthier, simpler and smarter alternative to credit cards, is driving consumer adoption and loyalty across markets”[2] and additionally: “Klarna’s core mission is to give consumers an engaging shopping experience that helps them discover and purchase goods and services in a meaningful and smart way. Klarna offers consumers a range of flexible payment options including card payments and direct banking, as well as Klarna's proprietary payment options, which include Pay in 14 days or Pay in 30 days, purchase financing (Financing), as well as immediate settlement option (Pay now). Klarna’s Installments product, available in the UK and the US, offers consumers a short-term (60 days or six weeks) installment plan with no interest. The frictionless checkout experience saves consumers’ purchase preferences and they can also always feel safe with Klarna’s Buyer’s Protection”[2].
Put simply, the revenues of Klarna come from fees paid by its e-commerce partners and from interests on overdue payments made by customers.
Retailers sign up for both the “Checkout” and “Payment” service by contacting the firm by email or telephone. Once signed up they can manage their account online via the Klarna website.
The options available to consumers on a particular website will depend on the services and conditions the seller has selected. The option to “Pay After Delivery” is available to all customers that pass the instantaneous affordability assessment, but the option to take out a Klarna “Buy Now, Pay Later” credit line is available only if the retailer has opted for this service.
For example, for its Instant Shopping solution, which allows customers to check out within a matter of a few clicks, Klarna charges its partners:
• A $30 monthly product fee
• A fixed $0.30 transaction fee
• Variable fees up to 3.29% for onsite and 3.79% for offsite sales
So, the question is why do retailers accept these unfavorable conditions? The reason is that allowing customers to pay with Klarna boosts a firm’s attractiveness and “convinces” consumers to spend more. Klarna’s promises are not smoke and mirrors, indeed according to a CNN report 3, a few months after the partnership with Klarna, the sports goods retailer Gymshark has seen the average order value increase by 33%, and a similar pattern emerged for other partners.
Another big advantage for the affiliates is the fact that whether or not the customer ends up paying, Klarna already transfers the money for the transaction.
Furthermore, Klarna also offers its partners a set of tools to increase sales, such us Business Insights and on-site messaging.
The biggest part of Klarna’s “revolution” is its ease of use: customers are not required to register or to present guarantees. In most cases Klarna asks to provide little data (i.e.: just the name, address, date of birth and email) and in a few seconds, the company is able to carry out a "soft credit check”, thanks to the use of machine learning algorithms.
Obviously, Klarna is subject to a number of different risks, including credit risk, market risk, liquidity risk, business risk and operational risk.
Klarna reports “This year, the demand for Klarna’s offering by consumers, merchants and partners across markets has continued to steadily increase”[2]. So, the pandemic has actually been beneficial for the Swedish fintech firm: the app has 85 million users and in the first half of 2020 retail goods for $22 billion were sold through Klarna, a 44% increase compared to the same period last year.
Klarna’s strategy is to invest the newly acquired liquidity thanks to the previously mentioned founding round to further develop its business and increase its presence globally, especially in the USA, where over 9 million people have “payed later with Klarna” so far.
Klarna’s 2019 Report 2 counts total net operating revenues increased by 31% year-on-year resulting in $753 million at period-end but the net income is in loss, with a loss of $216k. There’s to count an equity injections in 2019 in order to strengthen capital adequacy and to allow the ongoing investment phase that will consent to grow by entering multiple new markets.
At first glance Klarna's valuation could appear to be in contrast from the economic results registered during the last two years. Analysts wonder how Klarna is able to combine net losses triplicated during the last year with the fame of being the most valued European Fintech. Klarna’s CEO has an answer for these "counter-intuitive" results: the expansionary strategy. As a matter of fact, Siemiatkowski’s statement is supported by the incredible growth rate (37% in 2019) that has accompanied the net losses. Specifically, Klarna registered a 550% growth in terms of new users in the USA (Klarna's app was the most downloaded in September 2019) and a 300% increase of new affiliated SMEs over the previous year. As S. Siemiatkowski stated, the origin of the losses is to be found in the aggressive "expansionist policy" that Klarna is carrying out, in order to reach as many markets as possible. Klarna’s latest targets for this year are New Zealand and Australia. Australia could represent a stumbling block since Klarna’s progress could be slowed down by the presence of a fierce competitor: Afterpay. Afterpay is another Unicorn Fintech that is performing similarly to Klarna in terms of growth rate and net losses. Is this a coincidence?
During the first six months of 2020 Klarna recorded others net losses of $60.6 million even if, according to the company, this loss is due to investments made to finance the expansion abroad and only minimally to unpaid debts.
It’s not a secret anymore that Klarna is still setting its sights on an IPO even after its latest funding round. “Over time, with the amount of shareholders we have, it’s probably going to be the natural evolution” Sebastian Siemiatkowski (CEO) recently said "We have not taken a formal decision of listing, but Klarna is approaching a situation where I think we are more ready to list the company"[4].
Bocconi Students Fintech Society
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References:
[1] https://ncfacanada.org/open-letter-government-should-collaborate-with-fintechs-during-the-covid-19-pandemic-to-give-startups-and-smes-a-fighting-chance/
[2] https://www.klarna.com/assets/2020/04/Klarna_Bank_AB_publ_Annual_Report_2019_EN.pdf
[3] https://edition.cnn.com/2019/09/23/business/klarna-fintech-buy-now-pay-later/index.html