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Technology-Driven Innovation in Fixed Income

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November 3rd, 2021




Alexander Antic

The pandemic changed the face of e-commerce. People shopped online in ever greater numbers. Especially young people increasingly adopted the buy-now-pay-later (BNPL) credit model as a simple, interest-free way to spread the cost of a purchase over time. It enabled consumers to spend without applying for credit cards (or worrying if they even qualified) during a period of economic insecurity. Brands offering BNPL services include PayPal, Afterpay, Affirm, and the Swedish Fintech, Klarna. Investing in a company before they list publicly can deliver exciting results and boost an investor’s existing portfolio. Klarna is a market leader that is predicted to go public next year. It could well be one of those late-stage, high-quality opportunities with an established concept. Join us as we take a deeper look. The Most Valuable Private Fintech In Europe There are currently 26 businesses in Europe with decacorn status (worth USD10 billion), and Klarna is one. Launched by three business-school friends in 2005, Klarna achieved decacorn status in September 2020 after a USD650 million funding round, making it the most valuable private Fintech in Europe. In March 2021, it raised an enormous USD1 billion, enabling it to retain its highest-valued private European fintech status. Klarna states that its mission is “to become the world’s favorite way to shop through convenience, inspiration and perks”.[1] The business boasts: 90 million consumers 250,000 merchants 17 countries 2 million daily transactions CEO and co-founder Sebastian Siemiatkowski believes “Klarna’s solution is a better solution for people because it is free of interest, it doesn’t have additional late fees, it is not trying to make money that way, and so it is better for the consumer using this”.[2] BNPL ADOPTION DRIVES KLARNA’S SUCCESS The financial landscape changed during the pandemic and credit-wary consumers have turned to BNPL services, boosted by increasing digitalization and an expanding portfolio of brands offering new point-of-sale (POS) financial services. In the US, approximately 60% of consumers state they are likely to use POS financing in the next 6 to 12 months. Forbes research confirms that 36% of US Gen-Z-ers used a BNPL service during 2021 – a six-fold increase since 2019.[3] Millennials’ use of BNPL has doubled, while Gen-Z-ers’ has tripled. Innovative fintech businesses are capturing almost all the new value being created here. McKinsey’s Consumer Lending Pools estimate that fintechs have diverted between USD8-USD10 billion in annual revenues away from the traditional banks.[4]

The Klarna E-Commerce Payment Platform Klarna is an integrated consumer shopping app with a presence across Europe, the UK and the US. Klarna offers simplified financing at the point of sale but, significantly, it provides an app-based shopping platform that engages consumers throughout their complete purchasing journey. The Klarna product can be used either directly through the Klarna app or on participating stores’ websites. This innovative approach embeds Klarna into the consumer’s experience and makes it more difficult for traditional banks to imitate their business model. In addition, shopping from within Klarna’s app allows the user to use a BNPL function even when Klarna would not be ordinarily available for that brand. Klarna is not available on, for example, but it can be used for Amazon purchases when shopping on the Klarna app. Klarna can also be used to turn a big purchase into a pay-in-4 installment purchase. This is possible at any store that accepts credit cards. A virtual card is created within the Klarna app, allowing you to pay off your first installment immediately, then three further payments every two weeks. No interest is charged, provided the payments are made on time. Longer-term financing with charges and interest is also available. And Klarna also generates revenue through late payment charges. Taking The Traditional Merchant Model To A New Level Klarna generates revenue by charging the merchant a fixed transaction fee and a variable percentage of the customer’s transaction (broadly in line with merchant credit card charges). Klarna provides simple, fast integration with retailers’ existing websites and payment partners. It removes all the retailer’s credit and fraud risks. It can also deliver consumer insights and referrer schemes that enable merchants to improve their customer acquisition efforts. Retailers in the past had been wary of BNPL programs for fear of cannibalizing their own private-label credit card businesses. However, this has changed, with merchants getting behind BNPL brands, benefitting from reduced financial exposure, customer behavior data, and enhanced customer experiences. In addition, merchants enjoy the positive consumer associations generated by Klarna’s uniquely tailored service, with NPS scores of 72 in the US and 65 overall. This compares very favorably to the banks’ average scores of no more than 34. As a result, More than 250,000 retailers currently use Klarna – more than Klarna’s two main competitors combined (Affirm in the US and Australia’s Afterpay). Furthermore, Fintech Magazine confirms that the number of sites featuring Klarna installation climbed by 100,000 in 12 months during the pandemic.[5] Klarna’s Plans For The Future Klarna looks set to evolve into a shopping destination in itself. New-era point of sale payment brands don’t just deliver financing at the end of the purchasing process: they are there in the beginning, influencing the products consumers buy. Klarna’s remit is clearly moving beyond traditional e-commerce, and they are now managing payments for public transport, media and bricks-and-mortar stores. Klarna continues to launch complementary financial products, including a BNPL card (for which is there is currently a 400,000-person (!) waitlist in the UK [6]) and a Chrome extension for browsers in the UK, US, France and Germany to enable consumers to use Klarna facilities on non-Klarna-affiliate sites. Economic uncertainty has made people more cautious about traditional credit. Klarna has recognized this and, as well as operating a transparent product, it now also offers financial wellbeing advice and educational facilities through its app. Klarna Is Well-placed To Leverage Sector Growth According to Bloomberg, the number of people who have tried a BNPL service in the US has climbed 300% every year since 2018.[7] More mainstream adoption looks set to continue, with the global BNPL market predicted to grow from EUR4 billion in 2020 to EUR18 billion in 2028. Klarna is well-placed to leverage this explosive growth as a sector pioneer and the market leader. The business is testing a debit card, preparing to expand its banking services into new markets, and continues to extend its offering with new partnerships and acquisitions. Siemiatkowski has been open about Klarna’s intention to go public, preferring a traditional IPO or direct listing approach to a SPAC. He has stated, “I’m happy to kill these SPAC rumors as I feel that’s very, very unlikely. No one has yet convinced me about why that would be a preferential route”.[8] Investing in a company before they list publicly can be an opportunity to reap significant returns before the scramble of an IPO. Investors like SoftBank Vision Fund, BlackRock, Sequoia Capital (and even US rapper Snoop Dogg[9]) have all seen Klarna’s appeal, providing funding in previous rounds. It looks likely that Klarna will continue to retain savvy investors’ attention for some time to come. Contact Stableton Or Sign Up To Explore Our Investment Opportunities In the past, accessing the opportunities such as Klarna meant seeking early access through venture capital funds (which, once well-established, might not even be interested in your commitment). In addition, it involved high investment minimums, cumbersome paperwork, scarce information (often not even knowing what you will be investing in), and long holding periods. Today, there is an alternative. Accessing promising businesses via late-stage investment and pre-IPO investments is increasingly popular. For one, investors know the name of the company they are investing in. Secondly, as in the case of Klarna as the market leader in the buy-now-pay-later segment and a Fintech decacorn, the product-market fit has already been established, and the path to profitability is clear. To hop on an investment at this stage means a lot of upside potential, while the risk level stays relatively moderate. Stableton is Switzerland’s leading provider for access to late-stage venture capital & pre-IPO Investments to smaller qualified investors. Our mission is to help investors get access to the otherwise secluded private investment market. With a minimum of CHF 10’000, this type of investing should be considered as part of a portfolio. This article only scratches the surface of the opportunities late-stage VC and pre-IPO investing present. Contact your Stableton representative now to learn more and find out about opportunities that exist right now.

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