How Klarna Used Dynamics to Make Buy-Now-Pay-Later a Global Payment Method

By riding the Waves of Change in the Payment Industry.

When we discuss Strategy, a lot of it can be bottled up into the many complicated ways that we would like to explain, how a company should try to position itself to have a competitive advantage over others in either an emerging or growing industry.

Especially in the world of fintech, the best way to get such a competitive edge is through pure innovation.

But the other way to distinguish yourself from the competition is by exploiting a wave of change. In most cases, these waves of change are mostly external and beyond the control of any specific company.

Despite the credit we sometimes want to give to innovators such as Steve Jobs, Bill Gates, or Elon Musk, neither a person nor a company creates these changes. They are rather the net result of multiple shifts and improvements in technology, costs, competition, politics, and buyer perceptions.

However, the effect that significant waves of change can have, is how they can help companies develop a competitive advantage, which wasn't there before, and ends up disrupting the existing companies who have leveraged their competitive advantages, essentially destroying the old ones, and making room for the new ones.

A company that was able to do just that, was Klarna, who through several waves of change was able to use the dynamics to help them grow globally.

Exploiting a Wave of Change

To exploit a wave of change, a company needs to understand the likely evolution of the landscape, a relatively easy feat in the Payments Industry, as changes are few and far between.

Armed with that understanding, they can channel resources and innovation toward developing technology to create a valuable and defensible position, which they can utilize as the dynamics play out.

For Klarna, those Waves of Change, included;

• The Growth and Globalization of eCommerce

• The Digitization of Pay by Invoice

• Younger Consumers’ Aversion and or Inability to Attain Credit

• Advances in APIs and Machine Learning for Instant Credit Scoring

The growth and globalization of eCommerce as well as the digitization of paying by invoice, were the more visible trends.

The two more obscured shifts were the aversion or inability to attain credit by mostly younger consumers, as well as the advances in APIs and Machine Learning for Credit Scoring.

Let me explain...

The Wave of eCommerce Growth and Globalization

Despite the internet being around since the late 1970's, it wasn't until the mid-1990s that eCommerce marketplaces like Amazon, and eBay, gave consumers the ability to truly shop online. But just as Jeff Bezos figured out that the web was growing at 2300% per year back in 1995, it still took over a decade for eCommerce to mature to a level before it could accelerate that growth and become fully globalized.

A wave for Klarna, which was founded in 2005, came at the perfect time, as the success of Amazon had inspired several European eCommerce companies, with plenty of room to grow, as they didn’t have to compete against Silicon Valley-backed Startups, and were therefore eager to partner with any Payments company who could help them attract more customers, and make paying online easier.

The Wave of Digitization of Pay by Invoice

Additionally, Europe, which despite its unification in politics, still had a very fragmented banking industry, was still struggling to find a way to digitize its payments. Most of the countries were using Acceptgiro and Bank Transfers. Payment methods that allowed European mail-order companies such as Otto and Wehkamp to thrive in the 20th century.

These two payment methods were the basis for Klarna's solution, as they digitized the process, including onboarding consumers and collecting repayments. An innovation, that allowed many of the eCommerce businesses in Europe to transition from the more paper-focused way of having consumers paying for physical products they had ordered online, speeding up shipping, returns, and collections.

The Wave of Young Consumers’ Aversion and or Inability to Attain Credit

Where one would think that the Digitization of Pay by Invoice would attract an older demographic, the real growth came from a cohort of consumers, who normally weren't able to get a Credit Card or had been educated from a young age that Credit was bad.

As most eCommerce Fashion brands were targeting younger consumers, who through Social Media, were able to show their interest by clicking on their ads, and purchasing more frequently, the option to use Klarna to buy products was very appealing.

Klarna unlike banking transfers and legacy Pay by Invoice providers, identified through the data they collected, a market that till that time had not been actively pursued. Mainly because the mail-order businesses weren't appealing to those consumers, and banks used outdated ways of determining who to give credit to, but especially because they never took the time to understand their needs.

The Wave of APIs, Machine Learning, and Instant Credit Scoring

The final wave was the change in technology, where stand-alone APIs offered the ability to create applications that allowed for data from different sources to be combined. Additionally, advances in Risk Scoring using Machine Learning, were becoming more accessible through Cloud-Services such as AWS.

As providing Credit in mainland Europe has traditionally been done through registered systems that register new loans but don't use credit scores, Klarna was able to innovate by leveraging this wave, developing their own internal Scoring Models for Credit Assessments, and monitoring Consumer Repayment Performances, as well as expected losses.

Hindsight is 20/20

As we look back at the key points in Klarna's journey, their growth, which follows the traditional hockey stick, are all points where the next Wave was identified and accelerated their growth.

Their inception up to 2010, was about establishing themselves in the eCommerce environment getting early traction, and launching in similar markets across Europe.

The acquisition of Sofort and BillPay, who were the market leaders in Germany and available in 14 other countries, allowed them to absorb the technology to leverage the Digitization of Pay by Invoice.

Launching in the UK, where young consumers had more challenges attaining Credit, forced them to step up their innovation by developing their systems, and leveraging marketing and apps to reach an audience, who didn’t know that there was an alternative to traditional Credit Cards.

Finally, their launch into the U.S., due to its complexity and far more competitive market required them to start diversifying their offering to include personalization, generating traffic for merchants, and even launching a Debit Card to provide access to stores, that haven’t adopted their payment method yet.

Conclusion

We often can't see the effect, a wave of change has until it has passed, and we realize how an industry has changed. Often time that also means that it is too late to take advantage of it, as well as too late to avoid its impact.

That is why Payments companies need to constantly be on the alert for these waves of change, especially as they are in the early stages of development. Where the challenge is not how to predict them, but rather to understand what has happened before and what is currently happening.

Throughout the years, there are continuously several shifts and adjustments, and many of them provide clues that indicate the presence of a substantial wave of change. By staying on top of them, you can start seeing the patterns, which point to the underlying forces that create them, which you can use to understand their deeper meanings.

Instead of focussing on the clear effects that occur when there is a change, such as the growth in new product types or startups, and the slowing growth of others. Payment companies need to look further than what they can see, and what is causing it, to develop their unique point of view, about what kind of impact this can have in the long term, and how they can capitalize on it, just like Klarna did.

Thank You for Reading, feel free to Like, Comment, Share, or Post on Your Socials, as I appreciate all the feedback I can get.

Dwayne Gefferie