Bernard Lunn

Klarna is Primary Fintech Innovation from Nordics

Primary innovation is doing something that has never been done before.

Most primary innovation is ridiculous and fails without anybody noticing.

Very, very rarely, primary innovation changes the world and the company that creates the innovation becomes a Unicorn.

Secondary innovation wins by giving a twist to that primary innovation. The two simple twists are:

  • Apply the primary innovation to a different country aka “concept arbitrage”. A lot of European and Asian Fintech falls into this category. This is more viable in Fintech because “bits don’t stop at borders, but money has to show its passport” (meaning that regulation is a barrier to entry).
  • Apply the primary innovation to a different domain aka the xx of yy (e.g. the “Uber or AiBnB of..). A lot of “subprime VC” goes to fund this type of secondary innovation.

Secondary innovation is a perfectly sensible way to make money. It is just not as interesting as primary innovation. It is hard to imagine creating a Unicorn with secondary innovation (but very easy to get headline valuations over $1 billion for secondary innovation).

The number of primary innovations is really limited. Maybe there are 10 in Fintech. Historically, almost all primary innovation has come from Silicon Valley.

Occasionally what appears to be secondary innovation – the small twist – is actually the game-changing innovation. For example, Angel List Syndicates could look like a small twist to the equity crowdfunding concept. I think Angel List Syndicates is actually the innovation that changes the whole asset management business.

I think Klarna is one of those few primary innovations. The fact that this primary innovation comes from Europe is significant.

The Klarna story has some “straws in the wind” that indicate something big such as:

  • The investors are top tier. Sequoia Capital has the best track record of spotting primary innovation early and Michael Moritz (who led Sequoia Capital in it’s current incarnation) chose Klarna as the only European Board to join. General Atlantic (who came in after Sequoia Capital) only buy when the financial metrics are strong. So while I don’t have access to Klarna’s financials, I assume they are strong.

So much for the straws, what about the wind?

In my book Mindshare to Marketshare (shameless promotion here), I describe turning “secret sauce” into “unfair advantage”.

Secret sauce is the primary innovation. It has to be solving a big problem/filling a real need (aka “value proposition”). In Klarna’s case, that is:

Less time/hassle buying on a mobile phone (consumer)

Less mobile shopping cart abandonment (merchant).

What Klarna offers is actually very old fashioned – buy now, we will collect money after you have the goods. It is what you do in the physical world (pay the barista only after you have your coffee). Doing that digitally means managing fraud and deadbeats (which is really what the Credit Card industry does). Klarna’s secret sauce was simply to track the user via their confirmed national identity. This is easy in a small homogenous country like Sweden. It turns out it also works in Germany (thus the Sofort experience) and I know it works in Switzerland where I live.

America is not fundamentally different, even though “homogenous” is not a normal descriptor. Social Security works as ID. ID theft is a big issue; it will be interesting to see how Klarna navigates that issue.

It is easy to conclude that the Rest (every other than Europe, America, Japan) is different. Klarna has its hands full in Europe and America for now, but they will soon have to tackle Asia. This where the Unique Identification Authority of India is significant.

Could this be the first European primary innovation that launches concept arbitrage in America? Affirm looks like a candidate. I don’t think concept arbitrage will work in this market because Klarna already has top tier American investors.

So, does this make Stockholm the Fintech Capital of the World? No, but Nordic Fintech is also well represented in Saxo Bank.

This will be my last post for this week. Happy Holidays.

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