How Klarna’s Attack on the Payments System Could Impact Banking

Why is the world's top 'Buy Now, Pay Later' provider going 180 degrees the other way? Possibly the long-term plan wasn't just about reinventing the old layaway programs retailers used for decades, but engineering parallel payments and banking networks.

As players increasingly leap over what fences remain in the financial services businesses — especially in the payments and financing areas — typecasting any one firm as a “card company” or “BNPL company” may become misleading.

Having sold a growing number of Americans on its options for short-term interest-free “buy now, pay later” purchase plans, Klarna is flipping things around, bringing its “pay now” service and its Klarna charge card to the U.S. in time for the holiday shopping season. The leader in spreading payments out is now offering payments in one immediate shot.

The moves bring payments options to Americans that consumers in many other Klarna markets already tap, and is another example of payment providers moving into each other’s specialties. While elements of what’s been introduced are offered by other BNPL players, a key point is that Klarna is the top provider of the service, as ranked in the November monthly listing by (the ranking is based on usage as well as other factors).

As more U.S. banks and other traditional payments providers introduce or explore of buy now, pay later financing models, companies like Klarna are moving in the other direction, introducing new variations on traditional retail credit options. Meanwhile PayPal is in all camps, offerings its P2P service and Venmo accounts, which are increasingly being used for retail purchases; its PayPal credit card; and its pay in four BNPL service.

More and More Ways to Pay:

Go to any ecommerce site and the options becoming available to pay for purchases are astounding. Logos for credit cards are being dwarfed by clickable banners for nontraditional services. Seeing buttons for multiple BNPL providers at checkout is becoming normal.

The new Klarna options come on the heels of massive growth in the U.S., where it had over 21 million consumers registered as of late November 2021. The company reported that it had seen active app users increase 167% in 2021 over 2020. By the third quarter of 2021 gross merchandise volume sold using Klarna financing in the U.S. increased by over 300%.

The latest moves underscore the genuine threat that newcomers like Klarna represent to banks in the payments space. One commentator, believes the industry is seeing the “war of the pay buttons” ramp up.

How Klarna’s Offerings Stack Up to Other Players’ Options

Klarna’s announcement regarding a ‘pay now’ service was short on details but in the other countries where the company already offers this service the card is tied to consumers’ bank accounts, in a way that safeguards account information. For U.S. financial institutions this would represent yet another service that draws on accounts that they maintain, almost as unpaid wholesalers.

The Klarna card, as introduced in other markets, is a physical Visa card that can be used online or at the point of sale, with repayment being due within 30 days. (The cards are linked to the consumer’s bank account and the Klarna app reminds the user when payments are due.) Klarna cardholders who pay on time earn rewards through Klarna’s Vibe program, which provides special deals and discounts. The card is positioned as a payments vehicle that maximizes payment choices and avoids any element of revolving payments. In Europe the card constitutes about half of Klarna’s payments volume, according to TechCrunch.

Other card-based alternatives among BNPL companies vary in design. A sampling:

  • Affirm offers a similar service through its Debit+ cards, which permit users to pay via their bank account or to start payment plans with qualifying purchases made on the card.
  • Afterpay, now part of Square, which is a bank, offers a virtual card that can be loaded in mobile wallets.
  • Sezzle offers a virtual card.
  • Zip, formerly operating in the U.S. as Quadpay, which it acquired, is offering its plans through a physical card introduced in partnership with WebBank in November 2021.
  • Splitit offers buy now, pay later plans that originate with consumers’ existing Visa and Mastercard cards, tying the purchase into Splitit’s retail partner’s checkout systems.

Klarna already allowed users of its app to generate one-time virtual credit cards that enabled them to obtain the benefits of BNPL financing at merchants who didn’t engage directly with Klarna. This option helps Klarna compete with similar card-based offerings like Plan It from American Express and My Chase Plan from JPMorgan Chase.

The options also follow closely on the U.S. introduction of Klarna’s own super app, launched in November 2021. The app is as much a shopping app as it is a payments and financing app. Among the features: help in finding favorite purchase possibilities and an element of “personal shopper” through curated collections; the opportunity to tap “pay in four” financing; package tracking for online purchases; returns assistance; and rewards earning and tracking. Additional features are planned. Emarketer suggests that PriceRunner, a price-comparison site acquired by Klarna in the fall, could be integrated into the app.

The super app many have been watching since its unveiling is PayPal’s, which includes “More ways to PayPal — all in one place,” according to the firm’s marketing. This ranges from paying with PayPal’s traditional services to using its pay in four option to paying retail charges by tapping a PayPal crypto account. The super app offers the ability to receive paychecks up to two days early and manage bills and can also function as a digital wallet for accounts with other providers. In app shopping earns rewards and PayPal has also indicated that a savings product is coming for the super app.

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It’s ‘The War of the Pay Buttons’

In Simon Taylor’s “Fintech Brain Food” newsletter, he said Klarna’s latest announcement had very little to do with BNPL.

“For me,” he wrote in his Nov. 28 edition, “this is not about BNPL, it’s about the war of the pay buttons. Klarna could be building an alternative payment and loyalty network, and the BNPL feature is just one component of that. Conversion at checkout is the key battleground for payments. BNPL is just one way to increase that checkout conversion. BNPL is a great wedge into creating a payment network.”

This continues an erosion of traditional payment companies’ fiefdom that has been going on for decades but that has been accelerated by the growing role of ecommerce and younger generations’ willingness to try new forms of credit and payments. The recent deals by Amazon to accept Venmo and eventually PayPal, and Amazon’s refusal to accept Visa credit cards in the U.K. are all of a piece with this change.

Taylor suggests that the more convenient “BNPL” players can make their options, the more of a challenge they will present to traditional card companies. And to the degree that they can craft more financially attractive deals for merchants, the greater the threat they represent. As experts have pointed out, while merchants hate fees, ultimately their goal is maximizing sales.

“Not everyone wants to split a payment,” says Taylor, “but they may have a brand affinity for Klarna (or other BNPL providers). I think this is true of the payment buttons too.”

Of course, Mastercard and Visa and other traditional payments companies don’t lack for capital, research and development and competitive zeal. The War of the Payments Buttons could very well be the first battle of a longer conflict.

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