This week e-commerce payments platform Klarna announced it had secured a full banking licence from the Swedish Financial Supervisory Authority. This is a huge achievement, and will allow Klarna to deepen its hold on its existing customer base.
Why is this big news in small business banking terms?
Klarna currently has an installed base of 70,000 merchants and it has facilitated online purchases for 60 million customers across 18 markets.
As a merchant payments provider, it has primed its base to feel comfortable making non-bank initiated financial transactions across its network. This ‘trust bank’ will allow Klarna to easily move deeper into the banking value chain for SMEs, providing traditional bank accounts. By essentially ‘damming’ the river of payments each business receives it will gain access to a lower cost of funding for its credit products.
With its consumer credit options, Klarna already helps businesses reduce their working capital needs by pre-funding purchases to merchants immediately, however it’s not hard to imagine the business using its licence to develop richer and more sophisticated merchant cash-advance products. If these help the retailer grow or add new product lines, the Klarna business benefits as a result – a highly virtuous cycle.
What could this mean for consumers shopping with small businesses in the Klarna network?
Klarna has already been acting like a quasi-bank, by providing credit at the online point of sale. Extending this for use offline by Klarna merchants seems a logical next step. In Australia the likes of Afterpay and zipMoney are making forays into the ‘buy now pay later’ game in the bricks and mortar space, to complement their online offerings.
What else could be next?
One area that seems relatively untouched by fintech is the gift card space. In 2015 consumers spend $130 billion on gift cards, up from $118 billion in 2014. Some research bodies estimate as much as $1 billion in gift cards go unused each year. While this is money for jam for retailers, it’s not so great for consumers. Unsurprisingly a crop of startups have emerged in this space to try to address this problem, helping consumers trade gift cards online. Zeek and Raise are worth checking out.
Given Klarna operates a two sided market – consumers and retailers – it could potentially develop a novel solution that incorporates issuance and a post-issuance marketplace. It’s just another flavour of store credit.
It also seems like a Klarna digital currency could be a possible play. With its network of stores across global market places, making it easier to transact and manage forex would be a winner for consumers and merchants. And if they can do it for less within a closed system, compared to the forex charges merchants and consumers are stung with by credit card companies and remittance businesses, then there is a natural network effect that could be taken advantage of.
If buying Klarna dollars could get me better discounts on products within the network of merchants, then it’s the ultimate loyalty/dollar hybrid, that unlike store points, doesn’t lock me into a specific merchant. The loyalty game is definitely changing, and Klarna is well positioned to reinvent this through its banking offering.