Klarna lands banking licence – where to next?

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.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Hive ICO – the first crypto currency invoice financing platform for SMEs

@hiveproject_netOn Sunday evening I caught up with a friend who spends his time immersed in the crypto currency space. I’d bumped into him a few days earlier and said I’d shout him a drink or two if he’d be so kind as to devote an hour or so of his time to helping me get across the latest ICO craze sweeping the startup world.

And while I was lucky enough to get a master class in person, if you haven’t yet got your head around tokens and ICO, these articles are worth a read:

Bernard also wrote an excellent article on crypto back in May

Once you do understand what’s going on, it’s fun to start thinking of two sided network problems you could solve via a token model. My first modest attempt was to use an ICO to build a community of trusted financial advisors, who were remunerated for providing non-conflicted financial advice to consumers on the network who paid a monthly access fee.

To seed my community, the idea was to open my ICO to accredited financial planners. Let’s call this token $ADV (for Advice). Financial planners could buy $ADV in my initial ICO, and for every question successfully answered in the network, could generate a return on of 0.0000X% (or something similar) of the network’s monthly access fee, per $ADV held.

Questions that were answered well and stood the test of time could receive up votes from the community – another possible way for $ADV holders to generate income. And of course $ADV could be sold to a new financial planner – similar to how financial planners sell their practices and clients today. The value of $ADV would increase as the number of consumers using the network increased. Think Quora mashed up with Augur.

If you think about it, a modern day financial planner could build an entire client base and business using this model. In fact, it’s not hard to imagine that consumers in this network could start specifically asking certain planners to answer their questions, rather than throwing it out into the wild. The trick of course would be to make the network’s compensation model attractive enough compared to dealer groups – a source of conflicted advice and frustration for many consumers. And the cost and quality of advice received by consumers, would need to be better than going to a financial planner directly.

Small Business Invoice Financing ICO – Hive

Ideas aside, in terms of the small business space, I did come across the following ICO, which if you’re hungry for a slice of the ICO action, looks like there’s still time to get in on.

Hive claims it will be the first crypto currency invoice financing platform for SMEs, with its ICO opening in 4 days and closing at the end of July.

From what I can gather – and I’d say you’re best to verify this yourself – Hive tokens give holders the right to participate in the network and generate a return by funding invoices. The carrot for small business owners is the speed of execution of the financing element.

Decentralisation is certainly the flavour of the year, with ICO’s leading the charge. No doubt there will be some disasters, just as there are in the traditional venture capital and investment space. But the principles underpinning the concept certainly seem to have the legs to run the distance. And, I’m sure our new author on Monday’s, Ilias Louis Hatzis, will have plenty more to say about that on a weekly basis!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

SME to consumer p2p payments – the next big (Western) payment behavioural shift?

This week the web was a buzz with the news Apple would be launching peer to peer payments. And while it’s hardly novel from an innovation perspective, the network effects of Apple could be the tipping point for mainstream mobile payments adoption.

While consumer innovations in the p2p space are surging ahead, one area that feels like it is well in truly in the dark ages – in Australasia anyway – is peer to peer payments between businesses and customers.

There are many dynamics at play that discourage innovation in this sector. One of those is the rich river of fees flowing from small businesses to banks in the form of interchange fees.

Unlike Europe, Australian regulators have been far more generous over the years when it comes to caps on weighted interchange fees. But, as of July of this year, the party will be well and truly over. Interchange fees will be limited to a maximum of 0.8 percent – a far cry from the giddy heights of 2.2 percent and above that some premium credit cards were able to garner.

But what if you could design a new system that removed interchange fees altogether? In fact, what if it removed merchant service fees altogether? Well, for a start, small businesses would love you – because they are the ones that face the brunt of these costs on a monthly basis.

That’s exactly what New Zealand entrepreneur Ben Lynch has set out to do with his payments prototype Jude. I caught up with Ben in Sydney yesterday and he took me through the app. And honestly, it seems like a no brainer.

The secret to how Jude works is that it eliminates cards altogether. After all, why do we really need them, if a small business’s bank account and a consumer’s can just talk to one another? Cards are the equivalent of a 90s middleman.

And if we can get two bank accounts to talk to each other, without breaking any banking T&Cs, even better.

So, at prototype stage, the Jude experience for a customer and a business looks like this. When in range of the store, the customer places an order on their Jude App. They then appear on Ben’s custom made point of sale tablet, perched on the merchant’s counter. The shop owner sees the order and the customer’s details, and prepares the order. The customer collects their order, and just walks out. No cards, no mobiles being waved in front of terminals. Beacons placed in the store register all the comings and goings.

And while we’ve seen PayPal and other industry players attempt to create a similar experience, more often than not, they’ve always been linked to an expensive payment transaction – that the merchant needs to foot. But with Jude, like the best things in life, the entire experience is free.

To replace plastic for p2p payments is a behavioural shift for consumers. But if those with the biggest pain point to solve – small business owners – help drive and facilitate this because it saves them a huge amount of money, then that is a golden channel to market. Not to mention the value add for a point of sale vendor as an upgrade feature within their subscription. And while Jude might not generate money from the transaction itself, the data stream of payments coupled with SKU data is a monetisation opportunity in itself.

You can read more about Ben and Jude’s journey here.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Is RIP Global another death knell for small business bookkeeping?

If there is one traditional profession being heavily disrupted right now by fintech technology in the small business space, it would have to be bookkeeping. Data entry, expense tracking, invoicing and payroll – tasks traditionally associated with the profession – are becoming increasingly automated by cloud accounting platforms and their add-on partners. As a result, many bookkeepers face death by a thousand cuts, or must move up the advisory value chain to remain relevant.

There are many opportunities to do this – especially in the realm of process efficiency technology advisory – but to do this means disrupting the very own work they previously billed clients for. The old adage ‘disruption rarely comes from within’ signals that this will be a tough, if not an impossible transformation for many in the industry.

And it would seem the latest innovation in bookkeeping out of New Zealand, RIP Global, heralds another tolling bell for the death of the sector.

Forget scanning receipts and all that flash fintech bookkeeping app wizardry. RIP simply starts its expense tracking and reconciling journey the minute the purchase is made. It first sends a copy of the invoice into it’s ‘lockbox’ in the cloud, then reconciles direct with bank account statement data. How it does this last piece isn’t entirely clear – either scraping or a direct data feed. Given banks reluctance to do the latter, my guess is the former, but I could be wrong.

Companies like Receipt Bank and Xero do this together today. But the key differences seem to be bypassing the need to physically scan a receipt using your phone and use an accounting system to complete the reconciliation (this is where the bank feed data usually ends up currently). Some point of sale systems, like Vend, also push invoice data direct into cloud accounting systems, which suits larger retailers with continuous stock orders and who are looking to drive efficiencies.

And while it might seem unusual to bypass the accounting system altogether, to quote founder Mel Gollan from a recent news article, it would seem there is a ready and viable market who wouldn’t really mind this at all. “Fifty per cent of SMEs don’t use any accounting software but still need to retain and process invoices receipts and bank statements for tax compliance,” she says. “They don’t use it because they just don’t want to do it – and neither did I so I designed a solution which just gets rid of it.”

The company claims it has secured patent protection for the product and is looking for partners to help it deliver the solution ‘on a global scale’.

Seems like a good fit for the micro end of the SME market, solving a simple pain point without heavyweight accounting software. And whoever thought we’d call cloud accounting heavyweight! While not a chatbot, to me it seems like it seeks to solve a similar problem the Sage product Pegg tried to do when it launched. Could startups like this disrupt cloud accounting? That could be a tough one, but with the rise of the gig economy, it’s possible there is room in the market for the most basic of financial products for side-hustlers.

The pace of disruption is certainly picking up. Seems you can’t even get to incumbent status these days before someone is after a slice of your market.

You can see a live demo of the product here, or watch their explainer video.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Fintech Zuper to tap into $2 trillion superannuation opportunity in Australia

This week I’m deviating from my usual small business themed post to bring you exciting news about a new fintech venture I’ve joined.

After 6+ amazing years working at Australia’s flagship fintech Tyro, across business development, marketing and product, I’ve decided to jump into startup land, taking on the role of co-founder and CEO at a superannuation startup called Zuper.

What is superannuation?

For those of you further afield than Australia, superannuation is the equivalent of the UK’s pension scheme, or 401K in the US. Since it’s inception in 1992, the industry has amassed a phenomenal $2 trillion under management. I say ‘under management’, because despite growing evidence passive investment strategies, not active, are possibly the cheapest and most effective mechanism for long term investing for the masses, not many Australian super funds (or their armies of well paid fund managers) seem to agree.

As early as 2015, Sunsuper was one of the few super funds to buck the active trend, partnering with Vanguard to reduce its reliance on stock pickers. A more recent blow to active managers across the broader funds management industry was an announcement in May this year by the Future Fund, Australia’s biggest investor, that it too would rejig its portfolio towards passive vehicles.

The opportunity and problems to solve

We think superannuation as we know it in Australia needs to be retired. Alongside a massive digital overhaul, we want to use Zuper to empower Australians to align their values with how their money is invested, for a future they care about. We’ll also be using passive investment vehicles to do this.

To give you some idea of the opportunity in the space, here are a few startling superannuation stats.

High costs for little real value 

  • According to the Productivity Commission, in 2014-15, Australians paid about $12 billion in fees to APRA-regulated funds. Just over $2 billion of this is attributed to investment fees alone.
  • For FY14, a Rice Warner report estimated fees averaged out for members across the industry at 1.10% (110 bps). And while fees should never be looked at in isolation from performance and value, the lack of product differentiation across the sector makes for slim pickings on the value front.
  • According to the Association of Superannuation Funds of Australia (ASFA) March 2017 Superannuation Statistics report, the average 5 year investment return for the industry is 5.2 percent. Compare that with the Vanguard Australian Shares Index ETF, which tracks the S&P/ASX 300 Index, and managed to return just over double that, 10.61 percent, over a similar period for 14 bps. As a result, the industry is facing churn from members with $250K balances and above into Self Managed Super Funds (SMSFs) that invest in products like this.

Systemic implementation problems make it hard for average Australians to build wealth

  • According to the Productivity Commission report, 40 percent of Australians hold more than one super fund, paying multiple sets of investment fees and insurance premiums (life insurance, income protection and total permanent disability insurance is often wrapped into superannuation products). This dramatically reduces the effect of compounding. There has been a lack of will and coordination by the industry as a whole to tackle this consolidation problem.
  • Despite it being 2017, Australian women retire with half the balance of men. In 2013/2014 men, on average, retired with $292,500 while women ended up with $138,150. This can be attributed in part to a gender pay gap of 16%, time out of the workforce to raise children, and no superannuation payments on the unpaid portion of maternity leave. The disparity exists today for younger Australians, suggesting the trend will continue without intervention. Oh, and need I remind you women live longer than men? Double whammy.
  • Of the 176 retail and super funds, roughly 10 have a mobile app, resulting in disengagement and apathy.
  • Each year an estimated $3.6 billion in superannuation payments aren’t even made by employers (mainly small businesses), leaving 30 percent of the Australian workforce out of pocket to the tune of $1,489 each year.

Housing used to be most Australians retirement stop gap. But even in a low interest rate environment owning a home in Australia’s major cities is now almost completely out of reach for the millennial generation . The median house price in most centres is over $1M.

And, due to over-leverage during an individual’s working life, many retirees will be forced to use their super to actually finish paying off their mortgage. Those who own no property at retirement will also still need to pay rent. Deloitte estimates that the projected retirement balances of millennials of $1.1M will fall short by around $500-$600K – with rental added this could be even higher.

Superannuation is an awesome idea. We are incredibly fortunate to have it in Australia. But how it is executed has room for improvement, and only the whole industry can benefit as a result of increased digitally minded competition.

I’ve written more about why I joined Zuper in the post below. I’d love you to read it, share with me your thoughts and if you believe in what my co-founders and I are doing, help us spread the good Zuper word!


 Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Indifi and the $400B SME lending opportunity in India

Just over two weeks ago I had an opportunity to speak with Alok Mittal, CEO and founder of Indian small business lending startup Indifi.

Alok is a veteran of the startup and VC world. After selling his web-based recruitment company JobsAhead.com to Monster.com, he established and led the arm of US venture capital firm Canaan Partners in India. Canaan were an early investor in Lending Club, and Alok saw an opportunity to test a version of the model in India.

“Prior to launching Indifi, we had seen the success Lending Club had been having in the US. But of course we needed to really consider that against the dominant credit themes in the Indian market. Ultimately if we were going to do something similar, we needed to ensure a version of the model would work in this market.”

What Alok and the team saw in Lending Club were two key things: Firstly, retail capital supply in the SME space is typically small, meaning building an institutional platform is a more compelling proposition than a peer to peer one. Secondly, a lot of differentiation in lending businesses comes on the back of the strength of the underwriting model. To succeed, this would be critical to scale.

“Whatever the case,” Alok says, “it was clear an institutional lending platform for SMEs was a thesis worth exploring. The question of course was how, and what were the problems Indifi could solve in a unique and market differentiated way?”

The team quickly realized solving originating at scale and accessing financial data were key to cracking the SME market. Which meant taking a deep approach rather than a broad one.

“Small businesses are not homogenous,” Alok contends. “You need to approach them on a segment by segment basis, capturing data that services underwriting by deeply understanding and connecting into the entire supply chain.”

So rather than a ‘one size fits all approach’, careful segment selection for their first go to market pitch was crucial.

“What we looked for initially were segments that were grossly underserviced by the existing financial system, but segments where you could access data from within a highly organized and centralized supply chain. We realized if we could find the latter, we could win.”

Surprisingly travel agencies in the corporate sector fit that bill. Despite the tail off in the consumer travel market as a result of the rise of self-service portals, in India the segment of the market servicing corporate clients was growing year on year.

Even better, Alok and the team discovered nearly all agencies were served through a centralized electronic supply chain. Thus Indifi’s first working capital product was born.

Today via its platform, Indifi connects small business from four segments (travel agencies, hospitality venues, retailers and ecommerce vendors) with lenders. Along the way the business value-adds by providing underwriting services that leverage its deep understanding of a segment’s supply chain via access to financial data.

The company is plugging an estimated $400B gap in working capital – a phenomenal opportunity in what is a nascent alternative lending market. To date the company has originated over 2000 loans, with an impairment rate of just 1 percent. Loans average out at around US$6500.

While 70 percent of borrowers have a credit footprint, 90 percent of borrowers do not have an unsecured loan. Of course like any small business sector around the world, this is not a marker of lack of demand, but a reticence by larger, risk averse lenders to tackle the space. Of course companies like Indifi, who use state of the art data to model risk, believe they can plug this gap safely.

The ability to design working capital products to suit specific segments and working capital cycles is key for the business. Making a credit product relevant to the customer is a niche approach alternative lenders and platforms can win in. And while the core product has remained the same since inception, the way repayments are integrated into the billing and settlement plans borrowers have with their creditors is continuously enhanced.

Outside of Indifi, Alok is an active participant in the startup scene, having co-founded the Indian Angel Network. As such, his inside view on the fintech space in India is valuable.

“Fintech (in India) is a very interesting space – even beyond what we are doing in lending at Indifi. The main driver of this is what is happening in the ecosystem and by way of public infrastructure.

India is one of the few markets that has invested heavily in financial systems infrastructure. There is a unique identity program that was launched by the government about 5 years back. As a result over 1 billion people have joined that program.

This has facilitated a number of other services, like electronic signatures and API based data access. Parts of the financial lifecycle can now be truly automated thanks to the work of government agencies.

Payment infrastructure in India is also ahead of many developed countries. There is interoperability between multiple wallets, banks, non-banks and others. Alongside this there is a pretty radical tax infrastructure change happening in relation to the goods and services tax. So all of this combined is creating an environment in which real innovation can take place in.”

I asked Alok about how he sees this innovation opportunity being realized by global players. India after all is a populous and attractive market.

“Global companies have done a great job in integrating into the Indian market. The business and regulatory environment is open for foreign companies. One of the things we have started to see is global talent coming in to start companies in India. They are seeing the opportunity and bringing their intellect and insights into the market. India really is an open market for entrepreneurs.”

But what about Indifi – is it looking beyond its borders in the same way?

“At this point we are focused on the Indian market. The small business financing gap is huge and we don’t think we need to go out and hunt for other markets at this stage. Having said that, plenty of Indian companies are thinking global, and that is exciting to see.”

So, last of all it seemed only fair to get some final investment gems from this seasoned entrepreneur and investor. Had payments as a sector peaked for example?

“There is a lot of buzz around the payments space, but even when I go out into the market place today, the way consumers and businesses are transacting in India suggests these technologies are still very nascent. So I would say there is still immense opportunity. We look at companies in 3 – 4 subspaces, with several in each space that hold promise.”

  • Payments – Paytm, MobiKwik, Razorpay
  • Alternate lending space  – Lendingkart
  • Consumer financing space – Finomena
  • Personal finance management space – Moneyview

And finally, where is Indifi heading in the next 6, to 12, to 18 months?

“There are two tracks we are trying to run in parallel. First is to achieve an order of magnitude better in terms of growth in our existing and maturing segments. The second track is to continue to experiment in new segments. We think ultimately we’ll have  8 -10 segments in the SME lending space within a few years.”

Indifi is a great success story to date – and one that will surely only continue to get better. One thing is for sure – India’s SMEs will be there cheering them on.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Becoming a bank in Australia just got easier

This week saw the release of the Australian Government’s 2017-2018 Budget.

And looking at the number of pro-fintech initiatives, it would seem the increased scrutiny from the public, opposition and industry watchdogs on the banking sector is starting to be felt.

And while many extremists may argue the proposed initiatives don’t go far enough in encouraging competition, it is a positive signal to startups looking to compete in the space.

For starters, the holy grail of fintech – becoming a bank – is slated to get a whole lot easier thanks to a relaxation in ownership and capital requirements.

Following in the footsteps of the UK, the budget proposes authorised deposit taking institutions (ADIs) with less than $50M in capital now be able to call themselves a bank, benefiting from the reputational halo this word endows.

The 15 percent ownership cap for any one shareholder will also be relaxed. Challenger banks who had previously looked to meet this requirement by listing may now find not going public far more appealing.

Will more established challenger banks passport into the market? Quite possibly. The announcement surely has some revisiting their APAC strategies.

In other news pertinent to SMEs, comprehensive credit reporting will be mandated by the close of the year – voluntary participation has been rather disastrous as a whole. And while many focus on the positives of this, one should not forget negative reporting also falls under ‘comprehensive’. There is still a broad question yet to be answered as to whether more information on credit applicants – especially small businesses – increases or decreases access to credit.

As with anything, the real magic is in what you do with the data you have, and whether the models you are using to price risk match the reality of that risk.

Finally, as if they needed more headaches, big banks in Australia will now be subject to a $6.2B levy, which will go towards supporting a disability insurance scheme. With the opposition pledging support, it seems likely to pass.

For a full break down on all the budget’s fintech measures, Fintech Australia has produced a handy fact sheet. Among those described above, the government is proposing an expansion of the regulatory sandbox, the introduction of open financial data come 2018, an equity crowd funding expansion and reforms on digital currency.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.