The Big Story

The new credit card

Klarna has raised $1 billion more in funding at a $31 billion valuation this week, the latest sign of growth in the "buy now, pay later" sector. The deal makes Klarna Europe's most highly-valued private fintech company, and second globally behind Stripe. The company is also aggressively moving into the U.S. and other markets.

Driving the explosive growth in the "buy now, pay later" sector, besides the pandemic? Many consumers, especially younger ones, prefer not to use credit cards, Klarna's U.S. head David Sykes said.

• When consumers sign up for Klarna, they have to link an underlying card, and 85% of consumers link a debit card, not a credit card. "That really tells the story," he said.
• Even traditional retailers such as Macy's and Gap are now trying it out. And bigger players have also jumped in: PayPal in August launched its own interest-free Pay in 4 option; Shopify is using Affirm to power Shop Pay Installments in the U.S.; and Discover launched a "buy now, pay later" option for merchants through a deal with Sezzle.

The growth of Klarna could crowd out smaller competitors, but a number of startups are instead targeting specific niches in the "buy now, pay later" sector.

• Uplift provides "buy now, pay later" for travel. Wisetack offers "buy now, pay later" for in-person purchases such as plumbing or electrical repair. Meanwhile, Italy's Scalapay recently raised $48 million for luxury goods and France's Alma raised $59 million for a more general offering.
• In other words, the "buy now, pay later" business model could be incorporated into a number of different sectors, outside of just paying for goods. Thought it's still unclear whether the model can work for all consumers and not just affluent ones.

But Klarna and its big rivals have a grander vision, and are looking to expand beyond providing point-of-sale credit and into other financial services.

• Klarna, which did $53 billion in volume and $1 billion in revenue last year, is already licensed as a bank in Europe and offers bank accounts and debit cards in Germany and savings accounts in Sweden. It's also building a network of merchants — it says it has 250,000 so far.
• And Affirm last week announced a "buy now, pay later" debit card. Like other big fintech companies, the likes of Klarna and Affirm would love to be an all-in-one fintech app.
• I asked Sykes in January if Klarna would pursue banking in the U.S. His response: "It's not on the roadmap today. We want to sit at the intersection of shopping, payments and banking."

The risk: What if people buy now, but don't ... pay later? With concerns that consumers could pile themselves into debt, just as they do with credit cards, the U.K. recently announced plans to regulate "buy now, pay later" companies. Such companies are currently not covered by the U.K.'s Financial Conduct Authority, but regulation could make this form of credit harder to obtain.

• Sykes told me that the company's risk is relatively low because Klarna's average U.S. order size is $150. But other companies are happy to target larger orders: Affirm's biggest partner has been Peloton, for example.
• The larger question: Does it make sense for your main banking app to also be the app where you are spending your money? And might such an app have an inherent conflict between saving and spending?

A MESSAGE FROM BROADRIDGE

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most. We can help.

Overheard

• "As more Brits turn to influencers for financial guidance, it's never been more important to drive true clarity on advertising standards so that consumers fully understand how to manage their money." —AJ Coyne, Head of U.K. Marketing at Klarna, on why the "buy now, pay later" company launched a new "influencer council" to make sure influencers in financial services don't "unwittingly fall foul of the regulations."
• "Bitcoin: A new digital currency. Instant. International. No transaction fees." —That's from Coinbase's slide deck for its Y Combinator pitch in 2012.
• "We're sending a clear message to the entire industry that you either play by the rules or we will shut you down." —New York Attorney General Letitia James warned investors and the cryptocurrency industry about the dangers of cryptocurrencies.

More from Protocol

Mastercard's scramble to back the right fintechs. Linda Kirkpatrick, Mastercard's president for U.S. operations, told Ben Pimentel: "We want to partner with as many companies as we can, because we don't know what consumers will ultimately choose as their preferred form of payment."

WhatsApp thinks business chat is the future. But from privacy policy screw-ups to UI questions, can it crack the super-app riddle? David Pierce tried to find out.

Three Questions With...

Jon Schlossberg, co-founder of Even

What fintech trend are you most worried about?

We're incentivizing entrepreneurs to take the easy path and build something that doesn't actually solve people's problems. Insane valuations for fintech businesses that generate a lot of revenue (because interchange is an amazing way to extract value) despite incremental, mediocre products. Products that are identical to what incumbents offer with a little lipstick, and that will regress further towards the mean as their customer acquisition cost climbs. If your objective is to just make a bunch of money in an IPO or some nice secondary rounds and have minimal impact, sure, good on you. But that's just not that interesting to me.

What in fintech do you think needs to be fixed?

The business model. Fintech is primarily a value extraction market today. Companies that find a way to distribute value creation into markets dominated by extractors almost always win huge market share. And I'm seeing a new generation of companies making the same mistakes the incumbents did: making money at the expense of their customers. Selling customers' data, profiting from their struggle (like charging a transaction fee every time someone needs to withdraw from an ATM or get an advance on their pay), encouraging them to spend money they don't have on things they don't need, etc. They think their start-up culture will save them from turning into the bad guy, and they're wrong. Incentives eat culture for breakfast.

What was your biggest blunder and what did you learn from it?

I didn't let people help as much as I should have. I decided to build a fintech that sells to and integrates with employers to get a more complete picture of our users' financial lives and the ability to move money in real time as it's earned, thinking those advantages were the only way to make a differentiated product that would actually help people. I was right about that, but I completely underestimated how hard enterprise is versus direct-to-consumer, and didn't make the hires we needed as soon as we needed. We've just about figured out the go-to-market half now, but man, did it take too long! I didn't use the expertise around me — my board, advisors, mentors, etc. — to help me make those hires.

Need to Know

• Robinhood is in talks with FINRA to pay a fine related to its options trading operations as well as outages in March 2020.
• Square's bank has begun operating after clearance from the FDIC and the Utah Department of Financial Institutions, the company said. The wholly-owned entity, Square Financial Services, offers business loans and deposit products, starting with business loans for Square Capital's existing lending service.
• Treasury Prime formed an alliance with Marqeta. The banking-as-a-service company said it is integrating with Marqeta's card issuing platform.
• First Boulevard raised a $5 million seed round. Investors in the neobank, which is focused on the Black community, include Barclays and Anthemis. First Boulevard plans to expand its platform to offer fee-free debit cards and a Black business marketplace.
• Greensill Capital is facing restructuring and could face insolvency, after Credit Suisse suspended $10 billion of the SoftBank-backed supply-chain finance company's investment funds.
• Goldman Sachs is restarting its crypto trading desk, and will start with bitcoin futures next week.
• Oscar Health increased the price range of its expected IPO which would increase the expected valuation to $7.49 billion, up from $6.7 billion for the digital health insurance company.
• Stori has raised $32.5 million, led by Lightspeed Venture Partners, to continue its efforts providing credit cards to Mexico's middle class.
• 35% of consumers have more than one checking account, including 42% of millennials, according to a report by FICO.

Making Moves

• The head of Goldman's Marcus will lead Walmart's fintech startup. Omer Ismail, a Goldman partner who leads the bank's digital bank, will run the retail giant's big fintech push. Another Goldman exec, David Stark, is also joining Ismail to help build Walmart's new fintech subsidiary.
• Former Mastercard Europe President Javier Perez has raised more than $100 million to invest in European payment startups.

A MESSAGE FROM BROADRIDGE

The future is positively digital. Ready? Consumers, investors and shareholders are savvier than ever. Everyone needs to create more engaging experiences that keep pace with today's new expectations. See how you can stay ahead with next-gen technologies that deliver on what matters most. We can help.