Latest / The Payments Shed / Ep. 66 - LIVE from FTT Payments with Klarna: Why Payment Flexibility is Becoming a Consumer Expectation, Not a Perk

Transcript

Ep. 66 - LIVE from FTT Payments with Klarna: Why Payment Flexibility is Becoming a Consumer Expectation, Not a Perk · The Payments Shed

• 0:05
  Welcome to The Payment Ship. Today we're joined with Mark O
• 0:08
  Fahey from Klarna. You're the country manager
• 0:12
  currently for I as Auk and for Ireland.
• 0:16
  And to kick things off a little bit, could you give us a little
• 0:19
  bit of an overview of your current role at Klarna?
• 0:22
  What are you focused on at the moment?
• 0:24
  Yes. So as you mentioned, country
• 0:26
  manager for UK and Ireland, I've been a coroner for five years,
• 0:29
  been in this role for about 6 months.
• 0:31
  So the role of the country manager is twofold. 1 is to look
• 0:34
  after our merchants, so both are managed and unmanaged.
• 0:38
  The second is to look after our customers as well.
• 0:41
  So we have 12 million active shoppers in the UK.
• 0:44
  So the plan is grow merchants and grow shoppers at the same
• 0:47
  time. So Klarna has traditionally been
• 0:50
  associated with retail, but we're now seeing expansion into
• 0:54
  travel services and everyday spent.
• 0:57
  What has been the reason behind the the shift all of a sudden?
• 1:01
  Yeah. I think what we see in Klarna is
• 1:03
  we have a lot of touch points and a lot of customer data.
• 1:06
  So as I mentioned, we have 12 million active shoppers.
• 1:08
  We see them on average 12 * a year.
• 1:11
  And then we have the Klarna app where we see people almost every
• 1:13
  week. So we have a lot of customer
• 1:15
  data and what we see is that customers, both their browsing
• 1:18
  behaviour and their purchase behaviour, they're really
• 1:20
  pushing more and more towards travel services and everyday
• 1:24
  expenditure. When I say travel's obviously
• 1:26
  self-explanatory when we talk about services, it's those
• 1:30
  veterinary dental DIY jobs. If your boiler breaks down,
• 1:34
  that's really when you need buy now, pay later or your either
• 1:37
  cockaboo goes to the vet once every three months with a dodgy
• 1:40
  year. That's really where you want
• 1:42
  that buy now, pay later flexibility and that's where
• 1:44
  customers are crying out for it. And then an everyday
• 1:46
  expenditure, there was a significant cohort of our
• 1:49
  shoppers who would use Klarna for absolutely everything if
• 1:51
  they could. And that's where the Klarna
• 1:53
  card, which is a physical plastic card came in.
• 1:55
  So that's the that's the three areas that we're seeing the most
• 1:58
  growth in. So we're trying to lean into
• 1:59
  that and obviously help help our customers.
• 2:01
  Why do you think those other sectors kind of traditionally
• 2:03
  lacked those flexible payment methods?
• 2:07
  Yeah, it's a good question. I was thinking about this and I
• 2:09
  think it's tricky unless you have that data, unless you're
• 2:12
  very confident any sort of intangible goods, it's very easy
• 2:15
  to lose your shirt as a provider, both in terms of
• 2:18
  unpaid rates and fraud after a flight has taken place, very
• 2:21
  hard to chase someone up and get the flight back.
• 2:24
  So it really benefits Clarina that we've been around for 20
• 2:27
  years as a bank. We know so much about the
• 2:29
  customers. We're at a point now where
• 2:31
  people will will always pay Clarina back because they don't
• 2:33
  want to lose the Clarina as a service.
• 2:35
  So I think it's traditionally been there's very few point
• 2:38
  players in that space because it's it's risky, right?
• 2:40
  Intangible goods travel very risky.
• 2:44
  I think it's also a bit more difficult selling shoes and
• 2:48
  selling T-shirts quite simple. You can kind of see A to B
• 2:51
  travel. As we all know, the technology
• 2:53
  behind it is a lot more complicated intangible goods,
• 2:57
  similar technology challenges. And I think in services it's
• 3:01
  also been disintermediated for the longest time.
• 3:05
  You had your local vet, your local dentist, your local boiler
• 3:08
  repair guy. That's now starting to to merge
• 3:10
  together a little bit more so as the with the VC funds and V
• 3:14
  funds coming in there so. How much work have you guys had
• 3:17
  to do in the background to get accessibility into those more
• 3:21
  educated sectors? But you talked about risk there
• 3:23
  as an example, right? Like there's obviously work that
• 3:25
  you guys have to do in the background, I presume to make
• 3:27
  yourselves comfortable when you're going into a travel or
• 3:30
  medical or you know, longer fulfillment times, etcetera,
• 3:33
  right? Yeah, I think there's a lot more
• 3:35
  due diligence on our side, a lot more underwriting.
• 3:37
  So we underwrite all of our merchants just like we
• 3:40
  underwrite our transactions with customers.
• 3:42
  So a lot more goes into that to make sure that the the risk
• 3:44
  profile's not, not, not too onerous on Clara.
• 3:47
  Now we are a fully licensed bank, so the risk team is quite
• 3:50
  active at all times to make sure we're not overly exposed.
• 3:53
  If we become a travel buy net pay later only, that would
• 3:56
  drastically change our risk profile.
• 3:58
  So I think by having a million merchants already signed up to
• 4:02
  Clara and that gives us a lot of safe relationships that allow us
• 4:06
  to then branch into these, I suppose, more traditionally more
• 4:08
  riskier sectors. You just mentioned already that
• 4:11
  you've been operating of course as a bank for over 20 years and
• 4:16
  one of course associated with buy now, pay later, really the
• 4:19
  leader in that space. But now you're also looking at
• 4:22
  long term financing as well. What's causing that change in in
• 4:27
  the in the rapid? I think it's a bit of a chicken
• 4:29
  and egg. Once you sign up with, once
• 4:32
  Airbnb signs up with clarinet or booking.com, you do reach that
• 4:35
  point where customers are looking for 612 month payment
• 4:38
  cycles. In particular, we're seeing our
• 4:40
  financing is the fastest growing.
• 4:42
  So in our Q1 earnings it was growing at over 100% year on
• 4:45
  year. So the customers are really
• 4:46
  taking to it. As he mentioned, clarinet is
• 4:49
  really associated in the UK with five paying three in the US with
• 4:52
  paying 4. But as soon as you sign up in
• 4:55
  Airbnb, people say I'd really like to pay this over a little
• 4:57
  bit more time. I've got to big family holiday
• 4:59
  coming up or big group holiday bookings.
• 5:01
  So I think it's a chicken and egg where the customers are
• 5:03
  looking for it. And also we we have the
• 5:06
  possibility to do it in the UK. We've had financing for about 6
• 5:09
  or 7 years. It's obviously fully regulated
• 5:11
  with the SCA. So there's a lot of work on in
• 5:12
  there. But it's more the customer
• 5:14
  appetite has really accelerated in the last, I suppose, two
• 5:17
  years. Do you think there's an
• 5:18
  affordability element to that as well with higher ticket purchase
• 5:23
  items? And you guys saw there, you
• 5:25
  know, there's some very legacy, I don't want to call out brands,
• 5:28
  but there's some really legacy players in that space that have
• 5:30
  been there for a long time, probably unchallenged.
• 5:32
  And everyone knows Carla, you have this huge reach talk about,
• 5:35
  you know, the billions, you know, the customer footprint is,
• 5:37
  is phenomenal now, but you guys are are asked to see a market
• 5:41
  where people can't necessarily afford those goods, right?
• 5:43
  I think Carla is, is obviously convenience, but for a lot of
• 5:46
  people as well, you pay them free.
• 5:47
  You're not, you're not thinking about that, that longer risk
• 5:49
  profile and that higher value purchase item.
• 5:52
  Again, you're probably going back to risk and underwriting
• 5:53
  and how that changes for you guys.
• 5:55
  But you're also probably getting into that, that broader credit
• 5:58
  conversation of like I've seen this like football season
• 6:01
  tickets cost 1500 LB. They're fulfilled over nine
• 6:03
  months or your holidays six months.
• 6:06
  So furniture's another big one where you've got players that
• 6:10
  have generally done three-year financing options, right?
• 6:12
  It's a lot of different moving parts for you guys to think
• 6:15
  about moving into those high ticket items.
• 6:17
  Yeah. And this is where our
• 6:19
  underwriting team do unbelievable work.
• 6:21
  So we underwrite every single transaction.
• 6:23
  If you're buying something for £20 from boots.com, we will
• 6:26
  underwrite that just the same as if you're buying something for
• 6:29
  thousands of pounds. So it's probably overkill at the
• 6:31
  at the lower end, but it's definitely needed.
• 6:33
  As we go into more higher ticket items, there is that balance
• 6:36
  between creditworthiness. Yes, I am worthy of a £3000
• 6:41
  loan, but the affordability kicks in over what period of
• 6:44
  time? And I think that's where being
• 6:46
  able to go to 6/12/24 means that we can keep people in that, you
• 6:49
  know, safe zone of affordability.
• 6:52
  So we underwrite everything, both using Clarina data but also
• 6:56
  Experian. And then most recently, it's
• 6:58
  interesting, we're starting to see more adoption to open
• 7:00
  banking. So we might say we're not going
• 7:02
  to accept you for a loan. However, if you give U.S.
• 7:04
  Open banking access, we might be able to review that once again
• 7:08
  so we can look at people's current accounts over the last
• 7:10
  90 days. So like the technology there is
• 7:12
  there to make us a lot more comfortable going into higher
• 7:16
  ticket items and and longer. Purchases around the uptake on
• 7:18
  that because we've talked on the show previously, I guess like
• 7:21
  quite commonplace in places like Australia for mortgages and and
• 7:25
  loans that open banking has been part of their system for a long
• 7:27
  time. But there's a bit of a British
• 7:29
  fear factor in particular in the UK around last.
• 7:32
  You want to see my bank account detail for three months, right?
• 7:34
  Like I'd love to know what like the take up of that has been
• 7:37
  because, you know, ultimately if someone wants that loan and
• 7:39
  you're saying, well, you've got to give us this, then, then
• 7:41
  surely they're going to take that option.
• 7:42
  But I don't know if drop out exists as well at that point.
• 7:45
  There's definitely a drop out there and I it's, it was
• 7:48
  interesting. We had a conversation internally
• 7:50
  about payment methods. So in Germany, direct bank
• 7:52
  transfers are most popular payment methods the Germans, but
• 7:55
  they would never put in their debit or credit card into a
• 7:58
  website. Like for them that's a step too
• 7:59
  far. It's the exact opposite in the
• 8:01
  UK. We will hand over debit and
• 8:03
  credit card details all day, but as soon as you want to touch my
• 8:05
  bank, like what? Who are you?
• 8:07
  What do you want? So it's so funny to see the
• 8:09
  difference in terms, but the fact that we're saying you've
• 8:14
  been rejected unless you give us access.
• 8:16
  That's that's where the take up is a lot of the time people you
• 8:19
  don't like to see it, but people do chance their arm.
• 8:21
  Let's see if I wouldn't get approved and they kind of know
• 8:23
  themselves that they should never be taking.
• 8:25
  You know, maybe now is not the time for a 5000 LB racing bike.
• 8:28
  So there are certainly people who who do chance at that way,
• 8:32
  which I suppose the open banking gives us that chance to make
• 8:35
  sure we're making the the right decision.
• 8:37
  Particularly for those people with a, a, you know, a thin
• 8:40
  credit file or they're disadvantaged because they
• 8:43
  haven't been driving a credit card debt for 10 years.
• 8:45
  They've been living at home or they've been renting and that
• 8:47
  doesn't show up at all in your credit file.
• 8:48
  So I do think for those customers, open Banking is a
• 8:51
  great way of it's. A really interesting point
• 8:53
  actually, because there's more younger people living at home
• 8:57
  for longer as well, maybe some undeclared.
• 9:00
  So like that's, that's something I'd not even thought about with
• 9:02
  Wolfana, but their credit file maybe is not as strong or non
• 9:06
  existent. Yeah.
• 9:07
  Student loan essentially or yeah or nothing at all.
• 9:10
  So and even on credit cards, 50% of our millennial customers
• 9:14
  don't have a credit card. So they're not showing up there
• 9:16
  at all. So it's you're basically putting
• 9:18
  it all on their utility bill, whether they paid Vodafone back
• 9:21
  on time that. So you already mentioned it that
• 9:25
  this currently you also have your plastic card for everyday
• 9:29
  spending especially. And of course Kuwana started out
• 9:32
  with the point of sale transaction first online, later
• 9:35
  of course offline or in retail as well.
• 9:39
  And then we just talked about in the credit cards and debit
• 9:41
  cards, do you see that your own card much more as a competition
• 9:46
  to the debit and the credit card or is it just a way to extend
• 9:49
  the the the utility of Klarna in everyday life as well?
• 9:54
  I think it's definitely more of a more of a competitor to both.
• 9:57
  So the Klarna Debit Flex is both a debit card and a credit card.
• 10:01
  So the idea here is you, it's a prepaid debit card.
• 10:03
  You top it up with how much money you want for day-to-day
• 10:06
  expenditures, coffees, lunch, things like that.
• 10:08
  But then before larger purchase, you can flick it to credit.
• 10:12
  So you can choose then say I want to extend this over time.
• 10:15
  It all goes back from our CEO has a desire to go back to the
• 10:19
  days of push one for debit, 2 for credit.
• 10:22
  And I think the reason for that is it was a more responsible
• 10:25
  time where just because I have an American Express card doesn't
• 10:27
  mean I should put my press on on, you know, on the credit
• 10:31
  necessarily. Which if you were given the
• 10:33
  choice, would you would you say, yes, I will put my lunch on
• 10:35
  credit? I think the idea of the card and
• 10:38
  debit flex card is to make it a bit more responsible and give
• 10:40
  people that choice at almost every transaction and decide how
• 10:43
  they want to pay. To overlay that with loyalty
• 10:45
  then, because obviously a lot of the reason why someone might put
• 10:47
  that coffee on an Amex is the loyalty part eventually.
• 10:50
  After 1000 coffees, you might get a flight to the Isle of Man.
• 10:54
  And yeah, it's there is the loyalty element.
• 10:58
  So we do have the the clarinet premium tiers, so you can layer
• 11:01
  on different loyalty aspects where we've got loads of
• 11:03
  partners there. So that is in its, that's
• 11:05
  nascent at the moment in the UK, but it is growing.
• 11:08
  I think that is a key aspect as well.
• 11:09
  So if you love clarinet, get the Clarinet cards and if you love
• 11:12
  the loads you can then add Klein like gold and premium and it.
• 11:16
  Feels like you're going on that journey of you don't need to go
• 11:18
  anywhere else for any of these different things because you're
• 11:20
  bolting more and more features onto Kleiner.
• 11:23
  As a full stack proposition, yes.
• 11:24
  And it's, it's, I suppose that's where the Klein app originally
• 11:27
  started. The idea was it started off just
• 11:29
  being manager payments. Then we got into product
• 11:31
  discovery. Now we're getting into loyalty.
• 11:33
  Now we're getting into added services and things.
• 11:35
  So it's more and more reasons to use client and more and more
• 11:37
  reasons to use the client app. I think for me the, the, the
• 11:39
  most interesting thing that I'm seeing is especially the
• 11:42
  flexibility that's being offered, right.
• 11:44
  We already mentioned it is that you you've gone from that one
• 11:47
  last payment in pay by three now having your own card getting a
• 11:52
  lot more flexibility, not just for big purchases.
• 11:55
  What does that actually mean for merchants type of platforms and
• 11:57
  how should they be interacting with client?
• 12:00
  Yeah, I think the the conversations we're having a lot
• 12:03
  is every merchant should have every payment option available.
• 12:06
  We find that there's some conversations we have is
• 12:09
  merchants are second guessing, well, nobody would want to use
• 12:11
  financing on this or nobody would ever use pay.
• 12:14
  Now it's just like don't second guess what the customers how
• 12:16
  they want to manage their money. So it's just about giving them
• 12:18
  the choice. And I think that's the main
• 12:20
  message that we give to our merchants about management
• 12:22
  manages give the customers the choice and then interrogate the
• 12:26
  data afterwards. And you'd be surprised some of
• 12:28
  the choices that customers will make.
• 12:29
  But I think people don't give Clark customers enough credit.
• 12:33
  They know what they're doing. They've got access to the, the,
• 12:36
  the budget tools in the app, They've got access to the app
• 12:38
  they and they're, they're really responsible spenders.
• 12:40
  So just giving them the option to pay how they will is is
• 12:43
  normally how you get the most out of Clark and.
• 12:44
  I think because you're in a newer wave of payment providers
• 12:48
  doesn't mean you're a new provider anymore.
• 12:49
  I mean, clan has been around for a long time now, right?
• 12:52
  Yeah. So like that stigma can still
• 12:55
  exist though was as a newer entrant versus the schemes or
• 12:58
  whatever, right. But the reality is you've got
• 13:00
  customers that have been with you for the years potentially
• 13:03
  right as well. Yeah, our customers are growing
• 13:05
  up with us as well. So I used to say five years ago,
• 13:08
  you know, we're the payment option of millennials.
• 13:10
  You know, people enjoy going on nights out and now I realise
• 13:13
  millennials enjoy buying kids clothes and signing kids up for
• 13:17
  nursery. So we are aging with our, with
• 13:20
  our in the in the UK, our median age now 36.
• 13:23
  So which I think surprises everybody.
• 13:25
  I'm like, there's I know. So we are aging with population
• 13:29
  and millennials are as well. I think there was a time when
• 13:31
  millennials for us was cutting eggs.
• 13:32
  They have the height, they're cool.
• 13:33
  And now you realize not just normal people again.
• 13:36
  So I think you can see that with Clarin and with, with our
• 13:39
  shoppers. It's just for becoming, yeah, I
• 13:41
  suppose, a more more serious payment option for almost every
• 13:45
  transaction. I certainly feel that pain.
• 13:47
  Well, Mark, really appreciate you coming on the show today.
• 13:49
  We have a final segment, the Shelf of Shame, where you got to
• 13:52
  nominate something from payments, fintech, business
• 13:54
  leadership that really gives you the ick, as it were, to banish
• 13:58
  forever. What are you nominating for us
• 13:59
  today? Yeah, I think what I would
• 14:02
  banish is confusing fees on consumer credit.
• 14:06
  Drives me insane. So 0% APR but you miss a payment
• 14:10
  now all of a sudden you're on 40%?
• 14:12
  Hate us. If you're making money that way,
• 14:14
  just stop. Do it the right way and customer
• 14:18
  centricity win out in the end. I think we've all been stung by
• 14:22
  that at some point in the in the past.
• 14:24
  Right? The small print APR Yeah.
• 14:26
  And where can people get in touch with you?
• 14:28
  Find out more about, I'd say forward.
• 14:29
  Find out more about Klana. You guys go.
• 14:31
  Everyone knows Klana now. Yeah, definitely klana.com for
• 14:33
  merchants, for customers. Download the app and have a play
• 14:36
  around with this. Really nice to more and more
• 14:39
  features going in there for product discovery and things
• 14:41
  like that. So yeah, Klarna with AK
• 14:44
  socialist spelling. I feel like people.
• 14:45
  Know I think we'll know it now. Thanks for joining us today,
• 14:48
  Mark. Enjoy the rest of the event.