Visa’s Long-Term View On Klarna

Visa’s push into mobile payments continues when late last month it announced its strategic investment in Klarna, the 12-year-old, Sweden-based startup focused on payments and POS financing that counts 70,000 eCommerce sites among its 65 to 70 million customer roster throughout 18 countries.

It’s not the card network’s first — or even second — such move in identifying and then investing in payments players that have built companies with a digital and/or mobile-first focus. In 2011, Visa invested in Square and in 2015, Stripe.

Though the actual terms of the Klarna investment, such as dollar size and the magnitude of the equity ownership stake, remain under wraps, the intent was more clearly shaped in an interview between Karen Webster and Bill Gajda, SVP of Innovation and Strategic Investments at Visa following the announcement.

For starters, the motivation, writ large, is digital. And global. Cards may not be on the way out, but as one warbler sang, the times, they are a changin’ — and it makes strategic sense for firms of the payments firmament to change right alongside the times.

This is Visa, after all, so … think credit — but transactional credit extended at the online point of sale. Think payments, but not just card-based payments, since Klarna today is a pay-by-bank account model. Think cards, but digital ones, accounts issued digitally by the Bank of Klarna.

The cross-pollination between Klarna and Visa may hinge a bit on the fact that Klarna was recently granted a banking license by Finansinspektionen, the Swedish Financial Supervisory Authority, which in turn would let Klarna push into banking services.

Gajda told Webster that initial interest for Visa lies in the fact that the point of sale is where Klarna’s business “got started,” but not where it ends.

Certainly the company is an old hand at POS, first and foremost, and has more than a decade behind it, with experience working with financing options at the POS, too. Expansion regionally has been a focus, with the U.S. as a market entered as late as 2015.

Klarna, Gajda told Webster, is thinking like a bank.

“They really represent, when we think about our own API capabilities, and focus on new token use cases … both a brand and a relationship, and also a platform where several different use case scenarios can be leveraged,” Gajda said. “They’ve essentially built a pretty seamless marketplace that connects and protects consumers and merchants.”

That comes against a backdrop where Klarna’s transactions grew more than 50 percent over 2015 and volume was up 44 percent in Europe, driven by mobile commerce. That momentum has translated into a business that has seen top line growth and black ink at the operating level. TechCrunch cited an investor deck from last year that said the firm had logged roughly $318 million in sales in 2015 and $19 million in pretax income.

It might make sense, then, that the geographic focus for the duo will initially be Europe, as Klarna has a hold on a significant percentage of eCommerce volume in the Nordic countries and holds a commanding presence in Germany and the U.K., according to Gajda. “We know this is a business model that we will extend into other regions as well,” he continued.

Speaking specifically of Europe, broader trends shaping up for payments in that region of course tie in with PSD2, which promotes open banking and mandates new authentication and data sharing practices. Gajda noted those rules will impact Visa and banks operating on the Continent and beyond. Regulations beget new business practices and often beget new business models, which in this case are also going to consider increased compliance efforts and data sharing.

Now that Visa has APIs, he said, the question is one that focuses on “how can Visa be a really good partner to the banks in a post-PSD2 world and potentially partner with Klarna on part of that solution?” In other words, he said, you can call “the future of open banking a theme” that is going to evolve both near term and long.

Gajda also said that another big picture trend is tied to data — specifically how data is driving those models as they change. (You may have heard of the Internet of Things, perhaps?)

As Webster noted, there is indeed an appetite on the part of consumers to use devices to make the shopping experience a bit simpler, and when it comes to data and its security, they trust their banks, above all. Concurred Gajda, when it comes to Europe especially, consumers turn to the trusted, larger FI players, with a desire to make sure that commerce “works the same way it has always worked.”

That’s especially important, Gajda told Webster, in a world in which there is “an increasing ‘merchant-centricity,’” as retail evolves ever further to embrace mobile transactions and connected devices, particularly in emerging markets, where mobile may be the more preferred conduit for commerce — and where there is also a dearth of physical cards. Here local methods transcend global cards (and even global brands) and for Visa, offering an eventual alternative makes sense.

In India, Latin America, the Middle East and elsewhere, Gajda said, “there are a lot of markets, with sizable populations that … are really good opportunities for companies like Klarna and other partners,” offering strategic moves beyond Europe and the U.S. These markets “are digitizing commerce very quickly,” even as the U.S. grapples with EMV and other initiatives.

For Visa, the lure of Klarna is in the opportunity for instant digital issuance, along with secure credentials in a global, digital world, in which Gajda said, Visa can provide a lot of value that local processors may not be able to [offer]. As the transaction moves beyond the plastic card and the relatively anonymous relationship between unknown buyers with sellers, Visa, Gajda continued, has authenticated users “so many ways and so many times that we would only bother you at the moment of payment if something goes wrong,” making commerce via any connected device using any payment method both secure and friction-free for buyer and seller.

Visa’s stake follows a $225 million investment made by Brightfolk, a Swedish firm, implying a valuation many surmise to be well north of the $2.2 billion in 2015, when Klarna raised $80 million.