The award of a banking license to the Swedish payments platform will be viewed wistfully by challenger banks envious of Klarna’s 60 million customers and 70,000 merchants in the European Union.
Sanjeev Kumar, research director at fintech researcher Burnmark, says Klarna has a huge advantage, given that customer acquisition remains the biggest challenge for such digital challengers, particularly in the UK, where upstarts often seek market by offering generous interest rates on deposit accounts. “In some cases, customer acquisition cost (CAC) is so high it takes years for challenger banks to recover the CAC. For example, Metro Bank took almost seven years to register the first profitable quarter, despite witnessing quick growth in terms of the number of customers.”
Nordic and German challenger banks, by contrast, often partner with incumbents to expand their portfolio of services. “It will be much easier to convince the customers and merchants to cross-buy the new products launched by Klarna than to ask customers to switch from their existing banks,” says Kumar. “In the UK, despite the current account-switching policy being in place since 2013, only a meager 3% of consumers have opted to use the service and a big share of that has gone to traditional banks, such as Santander.”
The trend will continue for fintechs with substantial customer bases aiming to get banking licenses or expanding to other product lines, as they realize the advantage of their current customer base. Kumar lists SoFi (a student lending company) acquiring Zenbanx to offer banking products; TransferWise offering borderless accounts; Revolut (a UK payments player) offering current accounts; Wealthfront (a robo-adviser) launching lending products to investors; and Zopa (a peer-to-peer lender) applying for a banking license.
While UK challenger banks, such as Atom, Monzo and Tandem, need to fight for customers by offering better rates for current and savings accounts before introducing credit products, Kumar believes Klarna will follow the low-cost and scalable model taken by Germany’s N26 to acquire customers, by offering credit products in partnership with other banks and fintechs. “N26 makes money through card transactions—interchange fees from merchants, overdraft interest and foreign exchange fees—in partnership with Transferwise. Klarna is expected to follow the same strategy by focusing on credit-related products to expand its current portfolio.”