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Tracking fintech, banking & financial services innovations since 1994
We don’t know if Klarna’s decision to obtain a banking license played a role in Visa’s decision to invest an undisclosed amount in the Swedish payments innovator. But the announcement today that Visa has bought a small stake in Klarna is a big vote of confidence in the company’s apparent determination to diversify its business into other areas, such as card services.
For Visa, the Klarna investment is part of its strategy to open up its ecosystem and support companies that are innovating to make the payment experience more rewarding for consumers around the world. Visa EVP for Innovation and Strategic Partnerships, Jim McCarthy praised Klarna’s proven “expertise in consumer credit and online purchasing” and said the two companies “share a vision for how today’s online and mobile commerce experiences can be as simple as they are in the real world.” Klarna CEO Sebastian Siemiatkowski called the partnership a “natural fit” and added that it would enable Klarna to bolster its “global presence and product portfolio.”
The funding for Klarna is the third investment in the company this year. Earlier this month, Klarna announced that Brightfolk, a firm held by Anders Holch Povlsen, owner of European fashion giant, BESTSELLER, had acquired a strategic stake in the company. The 10% equity investment was valued at $225 million given Klarna’s valuation of $2.25 billion. And in March, the company raised $5 million (KR46 million) from Nordic early-stage, venture capital firm Creandum. Klarna has raised more than $375 million in total funding.
Founded in 2005 in Stockholm, Sweden and now headquartered in Columbus, Ohio, Klarna demonstrated its technology at FinovateSpring 2012. The company serves more than 60 million customers and 70,000 retailers in Europe and North America. TechCrunch’s coverage of today’s Visa investment notes that as of 2016 Klarna was processing 400,000 transactions daily, and generated revenues of $318 million in 2015. TechCrunch also reports that Klarna’s transaction growth is up 50% year-over-year in 2016, and that 17,000 new merchants were added in the last quarter.
Visa demonstrated its technology at FinovateSpring 2010. In 2014, the company’s Visa Developers Program presentedThe Future of Commerce, a look at how to connect with Visa’s networking using open APIs and SDKs, and led workshops on API-less web, Android SDK, and Apple Pay integration.
PayPalEVP and COO Bill Ready recently reminisced how, in 1998, the company launched its first product, one that allowed users to beam money from one Palm Pilot to another. While the hardware has changed, the “beaming money” idea remains the same. In this race to real-time payments, the San Jose-based company announced this week that it has leveraged the partnerships it formed last year with Visa and Mastercard to offer users faster payments.
The new service will allow PayPal and Venmo users to send funds in minutes instead of the two-to-three day timeframe that is typical with most ACH transfers. Expediting funds will come at a cost, however. Users can expect to pay $0.25 per transaction if they want to send funds in real-time (or up to 30 minutes in some cases). The functionality is already available for select PayPal users and will be available for all U.S. PayPal users with eligible Visa and Mastercard debit cards “over the coming weeks and months” and available to Venmo users later this summer.
When compared to Zelle, which runs on its former namesake, the clearXchange network, PayPal’s instant payment option is certainly more expensive than Zelle’s free option. PayPal’s advantage over Zelle is that it offers a standalone mobile and web app, while Zelle– as a bank-owned payments app– is more confined. While there are rumors Zelle plans to launch a standalone app, for now it must be hosted within a bank’s website or mobile app. It is worth noting, however, that PayPal’s model isn’t the same as Zelle’s, which is strictly a payment rails network among a group of banks.
Because of this, it is more fitting to compare PayPal’s offering to Square cash, which offers P2P money transfers and holds a user’s balance until they “cash out” or transfer it back into their checking account. Square also offers an instant money transfer feature, for which it charges a one percent fee.
It is also worth watching Amazon in this space. The online retail giant made a move earlier this month to encourage its Prime members to hold a balance in their prepaid Amazon account by offering 2 percent cash back on purchases using their Amazon account balance. Similar to PayPal and Square Cash, Amazon does not pay interest on users’ balances, and thus stands to profit from the cash (which, by the way, cannot be transferred back to a user’s account– it must be used on an Amazon purchase). Of course, Amazon’s balance option is just a glorified gift card (for now). However, if enough users are compelled by the 2% cash back offer, we can expect to see the online retailer debut more banking features, stepping on banks’ toes and into territory PayPal has held for almost 20 years.
PayPal’s Braintree recently presented at FinDEVr New York 2016. The company also showcased its Instant Account Creation feature at FinovateFall 2012. Mastercard and Visa both presented at the first FinDEVr, held in San Francisco in 2014, where Mastercard showed off its Developer Zone and Visa demonstrated its API-less web integration and SDK web integration.
That said, IBM distinguishes itself from Microsoft’s efforts by being fairly IBM-centric in its offering. Jerry Cuomo, IBM VP of blockchain technology, told CoinDesk: “What we’re doing is we’re picking a specific fabric and a specific point of view. We’re not interested in any fabric,” Cuomo explained, “we’re interested in one that can support business applications. We’re a bit more opinionated on what fabric is needed.”
International Business Machines, indeed.
And when it comes to ascertaining the appetite for blockchain, IBM has done its homework. In a survey of 200 banks, IBM learned that 65% of respondents “plan to have projects in production” in the next three years. Areas of focus include clearing and settlement, wholesale payments, equity and debt issuance, and reference data. Respondents to a different survey of 200 global FIs revealed that 14% planned to deploy commercial blockchain products in 2017.
“The continued growth of the Ripple network represents a major endorsement of our open approach to connecting the world’s bank and their customers,” Ripple co-founder and former CEO Chris Larsen said. Larsen, who will transition to the role of Ripple chairman of the board at the beginning of 2017, added: “Together we are building a modern payments system to enable new economic opportunities and the seamless flow of value around the world.”
R3: Are Blockchain-Curious Banks Stronger Together?
One way to measure the progress of blockchain technology is by keeping track of the comings (and goings) of members of R3, the world’s largest blockchain-based cooperative. Founded in 2014 and with more than 70 of the world’s largest FIs onboard, R3 is designed to conduct research on and promote the use of blockchain technology in financial services. R3’s biggest contribution to date is Corda, an open-source distributed ledger platform that, while maintaining many of the characteristics of blockchain technology, is not – technically speaking – a blockchain.
Unfortunately, many of the headlines R3 made in 2016 involved a handful of founding members – including Morgan Stanley, Santander, and Goldman Sachs – leaving the cooperative. Specific reasons for leaving the group were typically not provided, though each bank made it clear that the decision was not a reflection on their interest in blockchain technology. Many observers have speculated that the timing of the departures was related to issues surrounding R3’s fundraising efforts, as well as concerns about the growth of the cooperative itself (currently at more than 70 members). Speaking to the departures at Disrupt London in December, R3 founder and CEO David Rutter pointed to the difficulty of “meet(ing) everyone’s criteria” in an organization the size of R3. To the fundraising concerns, Rutter affirmed R3’s “very good progress” toward completing a $150 million funding round.
Beyond the Banks: Card Companies, Payments and Blockchain
One interesting place to keep an eye on for blockchain-related developments in 2017 is among non-bank financial players like the card companies. Visa (FD14), for example, unveiled a blockchain based payments platform, Visa B2B Connect, in partnership with Chain (FD15) in 2016. The technology, designed to provide “near real-time transactions” for high value international payments, will undergo testing this year.
Is a Bull Market in Bitcoin a Boon for the Blockchain?
With bitcoin closing 2016 with a return to its highest level in years, it is little surprise the cryptocurrency is finding its way into the hearts and minds of investors seeking uncorrelated assets to diversify their portfolios. In “Bitcoin Investing: Where Wall Street and Silicon Valley Meet,” Chris Burniske and Adam White make the case for bitcoin as an asset class for long-term investors based on the currency’s declining volatility, reward-vs-risk, and lack of correlation with most other markets including gold, U.S. real estate, and U.S. equities since 2011. Whether growing interest in bitcoin ends up contributing to (or at least correlating with) increased interest in the technology that makes the digital currency possible will be one of the big questions of 2017, as well.
To its credit, Deloitte is aware of the “old-is-new-again” aspect of regtech. The report notes that “while the name is new, the marriage of technology and regulation to address regulatory challenges has existed for some time with varying degrees of success.”
Indeed. Consider companies like Gremln (F14), which demonstrated a social media platform specifically for regulated industries, and Finect (F13), which unveiled a compliant communication platform for financial professionals. Qumram (F16) provides software that helps ensure complaint communication by recording digital interactions from web, social, and mobile channels.
My Virtual Strongbox (F14) introduced the kind of secure document-storage technology that can help FIs better manage customer documentation. Global Debt Registry, another F14 presenter, provides compliance and risk-management solutions to the account-management industry. OutsideIQ (F16) enables FIs to uncover regulatory risk using a combination of machine learning and human analysis. FundAmerica (F15), arguably one of the most explicitly regtech companies to demo at Finovate, provides crowdfunding platforms with APIs for a wide variety of “mission-critical, back-end regulatory requirements.”
Additionally, there are a sizeable number of credit risk analysis innovators such as QCR (F15), CreditHQ (F16), and FICO (FD16); companies like Avalara (FD15) that help merchants recognize and satisfy sales-tax requirements (or by that token, even a VATBox (F15) that helps recover VAT fees for international travelers); and cloud-based auditing technologies like those available from Auvenir (F16), whose identity as a fintech company was a topic of our deliberations.
And all of this is to say nothing of the even larger number of security and authentication specialists whose technologies—at least by Deloitte’s definition—can be considered regtech. Note that Deloitte’s Ireland-based rundown of regtech companies includes Finovate alum Trustev (F14), whose online ID-verification technology is very much in the same category as dozens of other security, authentication, verification, anti-fraud innovators.
The question as to whether regtech as a “thing” (as the millennials say) can be separated from the broader fintech discussion is likely more of a marketing decision than anything else. Clearly regtech has the ranks; the issue is to what degree does distinguishing them as a type of innovator apart from the larger fintech world make it easier for these companies to attract top talent, develop necessary solutions, and raise the capital to drive and grow their businesses. From the perspective of fintech in general—and Finovate/FinDEVr in specific—we’re happier having regtech innovating from “inside the tent,” as opposed to being outside the tent trying to find a way in.
Two more major players jumped on the blockchain bandwagon. IBM (FD16) showed its Hyperledger at FinDEVr last week and Visa (FD14) announced its cross-border payment system built on blockchain-like distributed ledgers, an apparent challenge to Swift. The technology is powered by Chain (FD15) which counts Visa, Capital One (FD15) and Citibank as investors. According to Javelin Strategy, banks will invest $1 billion this year in blockchain initiatives.
Mobile payments gets another huge player
Speaking of IBM, one of the more surprising announcements at Money2020 was the launch of IBM Pay, a private-label mobile payments and POS system. Details are sketchy, but in the IBM video below, it appears to be a Starbucks-like QR code system. It’s part of IBM’s Watson Commerce initiative.