From: acquiredfm
The payments landscape is a dynamic and evolving industry, characterized by both established players and disruptive innovators. This article delves into the structure of the payments value chain, the strategic evolution of companies like Klarna, and the fierce competition driving innovation and market shifts.
The Payments Value Chain [00:00:53]
The payments industry can be broadly understood through three main components:
- Issuing Side: This refers to the banks that provide consumers with credit cards, granting access to a credit line or positive balance [00:01:19].
- Networks: Companies like Visa and Mastercard operate as intermediaries, setting standards for financial information exchange and transaction settlement. They also provide brand recognition, ensuring cards are accepted in various locations [00:01:28].
- Acquirers and Payment Service Providers (PSPs): These entities partner with merchants to enable payment acceptance, offering terminals for physical stores or checkout experiences for online businesses [00:01:44].
Beyond these core components, other companies circulate in the industry, specializing in fraud recognition, underwriting, or offering integrated fintech solutions, such as Shopify’s financial services [00:02:00].
Klarna’s Origins and the Rise of Buy Now, Pay Later (BNPL)
Klarna, co-founded by Sebastian Siemiatkowski, began 19 years ago in Stockholm [00:00:27]. The initial insight for Klarna stemmed from observations in the account receivables factoring and collection industry in 2003 [00:03:34]. Online merchants, in the early days of e-commerce, faced challenges with payment acceptance beyond traditional card payments [00:05:05].
Inspired by traditional mail-order businesses that offered a “bill me” option, Klarna developed a service allowing consumers to receive products and inspect them before paying [00:05:44]. This “open invoice” payment method, which later evolved into “buy now, pay later,” addressed consumer concerns about online security and trust, especially in a country like Sweden where debit cards were prevalent and credit cards were often viewed as “dangerous” [00:06:17]. This core product, allowing individuals to pay later, quickly found market fit [00:08:34].
Klarna’s Unique Cash Flow Model [00:11:10]
Initially, Klarna leveraged a unique factoring model that resulted in positive cash flow [00:13:07]. Merchants were more concerned with avoiding the risk of non-payment and administrative burdens than with immediate cash flow [00:12:20]. Klarna would buy account receivables, take on the risk and administration, but wouldn’t pay the merchant until three weeks later [00:12:54]. Combined with consumers often paying instantly, this enabled Klarna to become profitable within six months on only $30,000 of initial investment [00:09:50]. This allowed Klarna to scale using customer funds, a rare feat for a factoring business [00:13:44].
Global Expansion and Market Adaptation
Klarna’s initial expansion followed merchant demand into neighboring Nordic countries, then Germany and the Netherlands, where there was a strong tradition of invoice-based payments [00:16:07]. However, Klarna initially believed the US and UK markets had no need for their product due to the prevalence of credit cards [00:16:46].
Cracking the UK and US Markets [00:17:10]
A small team in the UK, against management’s initial directive to focus on high-ticket financing, identified a significant opportunity in small-ticket fashion items [00:18:04]. They recognized a new generation of card users (from 2007-2017) who largely used debit cards and either lacked access to credit cards or disliked using them [00:19:32]. This segment, identified by McKinsey in 2014 as “self-aware avoiders,” desired simple, transparent fees and structured payment plans, making BNPL highly attractive [00:21:40]. The US market effectively became similar to the Swedish market’s initial conditions, allowing Klarna to thrive [00:19:50].
Competition with Credit Card Incumbents [00:23:45]
The BNPL model presents an innovator’s dilemma for traditional banks, as it is a model that makes less money from its users, making it better for consumers but less attractive for credit card issuers relying on revolving debt [00:24:37]. Klarna’s approach prioritizes transparent, structured payment plans, in contrast to traditional credit card tactics designed to encourage over-indebtedness and maximize interest payments [00:27:08]. Klarna aims to reintroduce options like “pay now” (debit) and “pay later” (credit) for each transaction, which banks had removed to drive more revolving credit [00:31:43]. Currently, debit payments account for 35% of Klarna’s volume outside the US, with an ambition to reach 50/50 online and 80/20 in-store [00:32:23].
Competition with New-Age PSPs (Stripe, Adyen) [00:33:50]
Around 2010, Klarna attempted to “close the loop” by becoming both a merchant acquirer and PSP with “Klarna Checkout” [00:33:10]. This put them in direct competition with emerging players like Stripe and Adyen [00:34:10]. While Klarna Checkout was highly successful in the Nordics, processing over 50% of online transactions at one point, it struggled with international expansion due to the pace of execution by competitors [00:35:30]. A turning point was Adyen signing Spotify in 2015, signaling Klarna’s inability to compete effectively on the merchant acquiring side globally [00:35:58]. This led to a strategic pivot towards focusing on the consumer side of the business [00:36:40].
The Consumer-Centric Pivot and Skew-Level Data
The decision to focus on the consumer was driven by a long-term vision of financial services evolving towards a “digital financial assistant” model [00:40:01]. In this future, success would depend on global scale and extensive data [00:42:42]. Klarna recognized its unique advantage: skew-level data. As an open invoice business from its inception, Klarna collected detailed item-level information on every purchase, unlike traditional card networks [00:43:46]. This deep transaction data allows Klarna to offer more personalized advice and services to consumers [00:43:10].
Klarna’s pivot was also influenced by the intense competition in the US market, particularly with Afterpay [00:49:00]. Afterpay’s early success with major US retailers like Urban Outfitters created a “don’t get fired for choosing IBM” dilemma for merchants [00:51:00]. To counter this, Klarna implemented a strategy to win on the consumer side, creating a perception of winning without initially having the most merchant integrations [00:52:02].
Klarna launched a browser within its app that allows users to generate one-time virtual Visa cards to shop with Klarna at any online retailer, even where Klarna isn’t directly integrated [00:53:18]. This “browser hack” also enabled Klarna to collect skew-level data from these transactions, giving them a data advantage over competitors [00:53:51]. By demonstrating higher app downloads and broader consumer reach, Klarna was able to sign major US retailers like Sephora and Macy’s [00:54:03].
The Future: AI and “Tigers” in Financial Services
Klarna’s long-term vision aligns with the emergence of a “digital financial assistant” [00:40:40]. This future will lead to the end of excess profits in banking as consumers more easily switch between providers, enabled by software and AI [00:41:58]. Klarna expects competition from Big Tech (Apple, Amazon, Google), FinTechs (Revolut, Chime), and traditional banks (Goldman Sachs) [00:46:43].
Klarna is actively using AI to drive efficiency and reduce costs. A notable example is its application of AI in customer service, where a new AI model dramatically reduced the number of customer service interactions handled by humans by two-thirds, while maintaining customer satisfaction [01:13:21]. This real-life business implementation of AI demonstrates its potential to significantly improve productivity [01:15:03].
Sebastian Siemiatkowski predicts the rise of “Tigers” – companies that deeply integrate AI into their core operations, achieving significantly higher revenue per employee than historical benchmarks [01:16:22]. These AI-powered companies will be faster, better, and smarter, accelerating innovation and product development [01:17:07]. This shift will likely lead to a “massive Revival of fintech,” as traditional, slow-moving institutions with outdated technology stacks struggle to compete [01:18:20]. The future of financial services will be highly competitive and driven by technological prowess and consumer-centric innovation [01:18:47].