Last month, a new funding round gave buy-now-pay-later (BNPL) fintech Klarna a headline valuation of $10.65bn. At a stroke, Klarna became the most valuable fintech in Europe – more than double the value of Revolut and almost 10 times more than Monzo.
Why, in the middle of a pandemic, has Klarna inspired such investor confidence? At a time when many “neobanks” are struggling to fulfil their potential, how has this low-profile Scandi brand blindsided more famous rivals?
Klarna chief executive Sebastian Siemiatkowski suggests it is because society is at “a true inflection point in both retail and finance”. An alternative analysis is that Klarna’s BNPL business model represents a more successful fintech strategy for the pandemic era than the neobanks. There are three reasons for this.
First, Klarna focused on monetisation from day one. Klarna allows online shoppers to postpone paying for products or to pay in instalments, providing them with an interest-free loan. For shouldering this risk, Klarna charges retailers every time it is used.
In a virus-afflicted world, with investors exhibiting post-WeWork scepticism, fintechs that take a cut of transactions look more resilient than businesses built on the promise of future revenue.
Pre-Covid, neobanks were obsessed with user growth, believing they could monetise their customer base at a later stage. Last June, Monzo’s chief executive Tom Blomfield said the business was prioritising delivering value to customers over profitability.
Now neobanks are scrambling to monetise: Monzo and Starling have both introduced fees for some current account features, having previously offered these services for free.
Second, user growth is built into Klarna’s business model, whereas neobanks have to spend cash to acquire customers before they can even think about monetising them with products. For example, each account costs Monzo £20-£30 to provide — an approach which can be prohibitively expensive.
As market saturation is reached, the cost of acquisition rises because neobanks are forced to prise customers away from the incumbents (an issue exacerbated by rising digital advertising costs).
By contrast, when Klarna onboards a new merchant, they potentially acquire all their customers. And Klarna’s growth is looking healthy: globally, they have over 200,000 merchant partners and 85m customers.
Third, Klarna repackages financial services with a modern lens
Many neobanks are simply a digital version of legacy banks. Apart from savvy marketing and good UX, they haven’t radically changed the current account offer, and incumbents are closing the lead, fast.
By contrast, Klarna represents a fundamental rethink of financial services. By coupling payments with a BNPL, it provides a solution for customers and resolves a payment headache for merchants — Klarna claims to increase conversion rates by 30 per cent. It’s also tied into ecommerce at a time when the sector has scored a decisive blow over the high street.
So what’s gone wrong with the neobanks’ business model? The shift in investor sentiment away from future potential to nearer-term profitability is a key factor.
Many neobanks engaged in an expensive race to acquire customers. But with the focus shifting to more immediate profits, it is apparent that they have failed to convert sign-ups into loyal primary account holders with big balances or to sell them products which make money.
This is partly down to the distraction of customer acquisition, but it also suggests that they have not innovated effectively since their initial launch features. One reason for this is that regulators require neobanks to hold money in reserve, limiting the cash available for product R&D.
Despite these restrictions, Klarna’s valuation clearly signals a need for neobanks to adopt more visionary thinking around financial products. And working out how to integrate these seamlessly into other sectors such as retail will be central to developing winning strategies going forward.
Main image credit: Getty