Some payments require credit – prepaid accounts and cards are not fit for purpose. For poor people, it might be for low value purchases when their cash has run dry. This is the world of payday lending, high APR % cards and pawnshops. For people with more cash it might be high value purchases such as furniture. These are the customers that banks want to service via credit cards.
To see what the world looks like when payment is disconnected from the bank credit card rails, look at Klarna, which we have been tracking since 2014.
Klarna is clearly doing well, scaling globally and backed by top tier investors.
Klarna is a credit play. The proposition to consumers is buy now, we will collect money after you have the goods. The merchants get paid instantly, just like they do with credit cards. Doing that digitally at scale 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 Klarna’s acquisition of Sofort). Today Klarna operates in 9 countries, including USA.
America is not fundamentally different, even though “homogenous” is not a normal descriptor. Social Security works as ID in America. Klarna has competition from Affirm in America which is also backed by top tier investors.
Identity theft (when your personal information is stolen and then used by criminals to open bank accounts, take out credit cards and loans or apply for government benefits and documents in your name without your knowledge) is a big issue for both Klarna and Affirm who are highly motivated to beat the criminals (who are are relentlessly cunning in finding new ways to steal your identity).
Most countries have some form of Digital Identity. For example, India has the Unique Identification Authority of India or Aardhaar. So there is no fundamental obstacle to Klarna and Affirm talking the model global.
Klarna and Affirm are a real threat to the card networks and their bank rails. Once that chain is broken the capital markets will gladly take over the job of supplying credit at the time of sale.
End of this 4-part transmission. See here for Part 1.
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