Amazon, Klarna, And The 'Creative Destruction' Of The Banking System

Includes: IYF, VFH
by: John M. Mason


Payments systems, like that offered by the Swedish company Klarna, are growing, are profitable and are encroaching more and more on the traditional banking systems.

Amazon has also positioned itself to move, more and more, into this space, cementing its payments platform well within the retail business space.

The payments system, the "transmission" mechanism, is at the heart of banking because so much flows around it and is dependent upon it, and Amazon and Klarna have the platform.

Paul Wilmott and David Orrell, in their newly released book "The Money Formula," write about Scottish economist John Law, a banker, gambler, and social climber. Law, the son of a Scottish goldsmith, argued "money was just a 'Sign of Transmission,' like a casino chip, and not a store of real wealth." (Page 2)

In other words, money is just a piece of information; and in today's work, rather than focusing just on paper currency, as Law did, we focus on the fact that most of what we define as money is just zeros and ones, 0s and 1s.

And, this leads to the fact that the major transition taking place in the finance industry right now is the "Transmission" mechanism, how this money, this bit of information, is "transmissioned" from one place to another, from one person to another.

In my last post on this, "Amazon and the Future of FinTech: Part II," I mentioned the name of Sebastian Siemiatkowski, one of the founders of the Swedish company Klarna, which is reported to be "the biggest FinTech in Europe."

The major news about Klarna this week was that it had received a banking license which means that rather than just a company providing a payments system to the economy, Klarna can become a real bank.

The payments system that Klarna provides is based on invoicing: it offers "an online payments system that is simpler for customers and better for merchants, with fewer dropped transactions caused by people balking at filling in too much information. Instead, customers pay for online goods after they receive them, and Klarna takes the credit risk from sellers in return for a cut."

As a consequence, Klarna has become "one of the most highly valued technology groups in Europe. A round of fundraising in 2015 valued it at $2.25 billion. And it is solidly profitable."

So now that Klarna has a banking license, what is it going to do?

Well, the plan just to offer bank cards and salary accounts. Note: the basic salary account is an account opened for an employee by an employer so that the employer can credit a salary right into the account and there is no minimum balance required and no interest is paid. In some cases, there are other facilities provided on the account such as a higher limit to debit cards, while some banks offer loans. If the employee does not use the account, say for three months, a minimum balance may be required.

Mr. Siemiatkowski says that there are no plans to offer mortgages, savings products or share dealing. Basically, he wants to keep Klarna just providing transactions services.

Furthermore, Mr. Siemiatkowski wants to spread to the United States and the United Kingdom, moving on beyond just Germany and the Nordics. Klarna currently has roughly 60 million users.

The crucial thing here is that Mr. Siemiatkowski wants Klarna to stay focused. He believes that other innovative FinTech organizations will fill in the rest of the financial landscape. That is, banking will be done by numerous FinTech companies moving at the speed of technology innovation, not at the speed of ordinary banks.

There is the possibility, he admits, that in some cases several FinTech companies that specialize in different banking spaces might "loosely" join together to provide the full bank offering.

This ability to stay separate is where I have some difficulty. Three reasons come directly into mind.

First, there is so much to be gained from creating a network or a platform that is more inclusive than separate "specialists" joining together to create "full bank offering." It would seem that a uniform platform would be much more efficient and cost effective than many separate, independent organizations coming "loosely" together to produce the "full bank offering." Scale is important.

Second, there is the issue of regulation. Banks are heavily regulated. When and how are the government and the regulators going to engage the successful FinTech organizations… or the successful FinTech combinations?

Also, how are the FinTech companies or FinTech combinations going to react to being heavily regulated? Technology people are usually pretty independent.

Third, it is hard to imagine that the bigger banks are going to let this thing go. A company valued at $2.25 billion is pocket change for some of the larger banks. The more successful these FinTech companies become, the more likely it is that one of the larger banks will sweep them up. And, the bigger banks already have the working knowledge of the regulators to deal with the regulatory issues. And, this is often what happens when new technology gains bigger and bigger inroads into an established industry.

Here is where the Amazon (AMZN) situation becomes interesting, if only because Amazon already has scale.

Amazon is trying to spread the platform it has created into more and more spaces. Amazon is a large company now with a growing platform that it is spreading to more and more markets. Its "transmission mechanism," its payments system, seems to be one of the major driving forces in this expansion.

Whereas in the case of John Law's father, being a goldsmith, a person that stored the wealth of other people, was just the beginning of the process of issuing currency, making loans and helping to eventually create banks - establishing a transmission or transactions platform is just the beginning of establishing banks, in one form or another.

What Mr. Bezos of and Mr. Siemiatkowski of Klarna seem to be doing is reinventing banking on the basis of a payments platform that can serve many purposes. The "creative destruction" of the banking system as we know it appears to be just beginning.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.