Payments Divided and Conquered
To our Valued Investors:
The Manusmṛiti was first translated to English, by British philologist Sir William Jones, around the time of the signing of the American Declaration of Independence. Already estimated at the time to be nearly two millennia old, the ancient text was viewed as the written foundation of Hindu law and an effective blueprint for a well-functioning society. It set forth many standards intended to govern a fair and peaceful way of life. Part of the code prohibited the practice of deceptive or predatory mortgage lending practices. Talk about visionary thinking. Where were these guys in 2008?
Clearly, the concept of borrowing money to purchase a home or property has been around for a very long time. References in various religious texts and in classic literature to well-funded lenders suggest that over time, even some of history’s greatest thinkers and theologians have found themselves burned by disadvantageous interest rates. God condemns money lending in Jewish law. In Dante’s Inferno, moneylenders had their very own special place in the seventh circle of hell. Perhaps, though, this kind of condemnation doesn’t need to be universal. After all, millions of families throughout history have been able to buy their dream homes only because of the availability of a loan that could be paid out for years to come. Since the late 1930’s, the American mortgage industry has grown to be so commonplace that many perceive it to be the only way to afford the right residence. During this time, the nation’s mortgage debt to income ratio went from under 20% to about 75% today. As more automobiles rolled onto our roads, the idea translated nicely in the form of car financing loans. For an agreed-upon price, lenders can sell instant gratification by making available things that couldn’t otherwise be afforded. This is not to disparage the borrowers or those providing the funds. Many young professionals need that initial boost, and it’s hard to blame the banks for taking advantage of an opportunity to generate revenue.
Neither the Old Testament nor the Manusmṛiti mentions anything about whether or not it’s okay to score a designer leather handbag or an expensive bottle of perfume and pay for it over time rather than right away, so we can safely assume that Stockholm’s Klarna Bank AB is in the clear. Founded in 2005 and serving the United States, Australia, and a wide swath of Western Europe, Klarna applies a variation on the mortgage lending or auto financing theme to a much smaller scale. A fast-growing list of retailers across a wide array of specialties like electronics, clothing, home décor, and many others have caught on to the idea of making their products more accessible to consumers through Klarna’s platform. For instance, if a shopper on a tight budget falls in love with a stylish coffeemaker priced at $250, but payday isn’t until next week, the sale can still take place. After an upfront payment of $62.50, the machine is sold. A new installment is then withdrawn from the shopper’s account every other week until, after six weeks of caffeine-fueled euphoria, the debt is satisfied. While it may seem inconsequential to some, the ability to absorb an expense in smaller bites can quite often make the difference between pulling the trigger and settling for browsing with a closed wallet.
The sceptic’s initial reaction might be to suggest that the last thing we need is another opportunity for consumers to build debt. Klarna, though, has measures in place designed to deter small-scale credit issues. The six-week installment plans come without interest, but delinquent payments incur a $7 late fee and a freeze on future purchases until the account is squared. It is these charges applied only to those who stray from the terms, in addition to fees that merchants pay for the privilege of offering Klarna as a payment option, that make money for the company. Vendors, in fact, typically shell out higher processing fees for each pay-over-time transaction like the ones Klarna offers, to the tune of about 6% as opposed to the 3% for most credit card transactions. By agreeing to assume the collection responsibilities, Klarna makes merchandise seem more attainable, and those selling that merchandise are willing to pay for the increase in sales. While Klarna also offers more conventional interest-based financing plans for bigger ticket items, it is the flagship four-payment idea that has attracted the most attention and promotes a higher level of fiscal responsibility for its users.
Highlighting the less punitive approach to buying now and paying later, Klarna CEO Sebastian Siemiatkowski said on CNBC’s Worldwide Exchange: “The old [credit] products were built in an intransparent way in order to lure customers into financial decisions that are counterproductive. [Klarna’s] products offer you the availability of credit, but in a way that’s actually good for your economy because it doesn’t cost you an interest rate.” Simply put, buyers can make a purchase with Klarna over smaller installments for the same amount of money as they would upfront, without paying for the convenience of immediacy.
Retailers apparently recognize the value, perhaps psychological, of their customers knowing that they can leave the store with a shiny new object and 75% of its value still at the hip. That is likely a large part of the reason why Klarna’s visibility has grown so quickly in the US. One unmistakable sign of reaching critical mass is exposure during the Super Bowl, which you might have witnessed earlier this month in Klarna’s “old west”-themed promo aired during the Saints / Bucs matchup. On this topic, Siemiatkowski commented, “We now have the coverage in the US. We’re live at Macy’s. We’re live at Etsy. We’re live at Sephora. We’re live at Lululemon, Pandora, Saks 5th, et cetera. So we are all there, but the brand is just on the verge of creating that, you know, customer awareness and we see the Super Bowl as an amazing opportunity to kind of bring it to people’s attention, and the second you’ve seen it on that Super Bowl ad, you’re gonna see it in every merchant because we have been able and have been so fortunate to get so many great partners to work with in the last six to twelve months.” The numbers, on that account, don’t lie. Klarna’s active user count is approaching 100 million, nearly quadrupling the figure since 2015. The sector that has expanded the most dramatically, in percentage terms, has been ringing American cash registers. Gross merchandise volume for Klarna grew year-over-year in the last quarter of 2020 by 118% worldwide, but the same YoY growth figure for the United States was a whopping 296%. As Klarna’s true end customer is the retailer, and the product they offer (to put it bluntly) is the consumer, capturing American spenders is a game-changing accomplishment.
Klarna, impressively, occupied the #5 spot on the 2020 CNBC Disruptor 50 List. That placed this innovative fintech ahead of such formidable contenders as Snowflake, AirBnB, Ripple Labs, and DoorDash. With few exceptions, that annual roster of pre-IPO powerhouses has served as a great predictor of what companies will proceed into a lucrative existence in the public markets. For now, though, Klarna remains privately held. Almost without exception, its shares are not yet available to the investing public. Today, access to Klarna shares is generally limited to deep-pocketed early-stage VC outfits and company insiders. That said, your friends at Iron Edge VC can put a piece of this robustly inventive company squarely in your hands before the masses have their chance at driving the ticker price upward. If you would like to learn more, or if you know of anybody else who would, do not hesitate to contact us by clicking “Get in Touch” below.
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Paul Maguire, Managing Partner and The Iron Edge Team