How Provenir’s collaboration with Klarna improves shopping cart abandonment

Some of the greatest innovations stem from unbundling old processes and rebundling them in a way that best suits the end user.

Uber unbundled taxi companies into drivers and the rebundled them as a service to the user in one convenient app. iTunes unbundled music albums and rebundled the songs. Netflix did the same to cable TV.

Now, thanks to a collaboration between payments solution Klarna and credit risk analytics provider, Provenir, credit scoring, loan origination, and payments are being unbundled and then rebundled together at the point of sale in big ecommerce websites.

The process is seamless, so the customer might not even be aware of what is happening.

In essence, Klarna buys a product for customers and then instantly offers them a line of credit. The customer pays Klarna later. The company allows ecommerce customers to complete their purchase before entering payment information, solving the big pain of cart abandonment for online retailers.

Provenir’s risk analytics is the engine behind Klarna’s speed.  

Though Provenir has the term “loan origination” front and center on its website, Provenir’s managing director, Paul Thomas loathes it. “The word ‘loan origination’ is tied to the archaic world of core banking,” he said, explaining that his firm supports traditional businesses, but is more excited to work with innovators such as Klarna.

“Klarna separated the transaction from the payment,” Thomas said. “It is real time, instant, credit decisioning.”

Klarna takes into account about 1000 different variables about a customer when making its credit decision, Mikael Hussain, vice president of credit at Klarna told Finextra.

“Provenir supports and is the core of our underwriting and decisioning platform. They enable our analysts and data scientists to deal with all the complexity that is needed to make good risk decisioning,” he said.

Using a drag and drop interface, Provenir’s ecommerce customers can create rules and automate credit decisioning. Easy integrations are a big part of the firm’s value proposition, as they allow the customer to access public and private data sources like alternative credit ratings companies or advanced analytics services. Earlier this month, Provenir announced it had integrated its platform with alternative credit bureau, FactorTrust.

Among Provenir’s main competitors is Experian, though decisioning analytics only accounts for 13 percent of the group’s $4.8 billion revenue.

High 5! The five fintech stories we’re following this week

5 trends we're tracking in finance

1. TIAA acquires MyVest

Another large financial services firm has acquired a roboadvisor.

TIAA acquired MyVest last week, providing customers the option of using a roboadvisor for investment and retirement account management. With the acquisition, TIAA joins the ranks of other financial services firms with robos, including Vanguard, Schwab, Fidelity, and Blackrock.

Although MyVest has provided B2B services to TIAA since 2009, the acquisition clouds the future of MyVest. Will MyVest become an exclusive product to TIAA customers, or will TIAA allow MyVest to service other financial firms? Regardless, offering a roboadvisor as part of an investment platform may become required for financial institutions. It appears roboadvisory is looking more and more like a single channel, not a standalone business.

2. JP Morgan launches fintech residency program

JP Morgan CEO Jamie Dimon has never been shy talking about fintech and banking in general. After last week’s news, he’ll have many more opportunities for quotes.

JP Morgan announced a residency program for fintech startups last week. Other banks, like Citi and Barclays, invest in companies, launch accelerators, or have internal fintech teams. With this new program, JPM is doing things a bit different by  bringing fintech companies into its offices for six months. Selected fintech firms will have the chance to work side by side with the largest US bank and have the chance to co-develop products with in-house tech teams.

3. Rise of the social trader

Fintech startups are returning to Communication 101 with social trading platforms, enabling users to follow the real-time trading activities of other investors and mimicking these trades in their own portfolio without leaving the platform.

Wall Street needs all the help it can get in securing millennial investors – a March 2016 Harris poll commissioned by investing app Stash showed that nearly 80% of US millennials aren’t invested in the stock market. Part of the problem is that investing is sometimes baffling – 75% of the women surveyed found investing confusing, though millennial men weren’t far behind, with a considerable 60% bamboozled by investing.

Social trading platforms are positioned to fill the investing information gap when it comes to millennials.

4. Debt financing is the new equity round

After months of reading about hefty equity rounds, financing trends in fintech may be changing. Klarna, a leading European payments upstart, said last week that it had raised 300 million crowns (it’s based in Sweden). But, perhaps a sign of the changing tide in startup land, instead of a big splashy equity financing, this one was done as debt.

For fintech firms, using straight debt is generally a new phenomenon. Up and coming financial technology firms have a variety of financing options and straight debt may prove to be a smart financial move.

5. VC investments in fintech: Q2 summary

The end of the second quarter of 2016 is upon us and it’s time to review the portfolio moves of some of the top venture capital investors in fintech. By following the money flow, we can find insight into trends and perhaps get a view into what types of companies are being financed with growth capital for the future.We looked at 40 VCs that, in aggregate, made $1.3 billion worth of fintech investments in over the past three months, and identified a few trends that we feel are the most important.

Is debt financing the new big equity round in fintech?

After months of reading about hefty equity rounds, financing trends in fintech may be changing. Klarna, a leading European payments upstart, said on Monday that it had raised 300 million crowns (it’s based in Sweden). The firm is, after all, a major player in Europe, handling about 10 percent of all online transactions, according to Reuters. But, perhaps a sign of the changing tide in startup land, instead of a big splashy equity financing, this one was done as debt.

“Klarna is picking up speed in year-on-year revenue growth because of success of recent product launches and markets expansion,” said Jesper Wigardt, Klarna’s PR manager, in an email to Tradestreaming. “We issued the inaugural capital market loan in order to diversify funding sources and to strengthen the capital base to support continued accelerated global growth.”

Why use debt when you can use equity?

This was Klarna’s first time dipping into debt markets, but other top private technology firms have turned away from equity to finance their operations. Earlier in June, Airbnb announced it had raised $1 billion in debt financing. Though the hospitality marketplace still has $2 billion banked, it turned to straight debt financing to add to its coffers.

For fintech firms, using straight debt is generally a new phenomenon. Up and coming financial technology firms have a variety of financing options and straight debt may prove to be a smart financial move.

“If a company is growing rapidly, and has sufficient cash flow, debt can be a more cost effective financing tool than giving up large percentages of equity,” remarked Kyle Zasky, a partner in fintech merchant bank, SenaHill Partners.

Private fintech firms don’t normally turn to debt markets

Private technology firms are accustomed to using various forms of debt to scale up. The most common, convertible debt, enables a young, upwardly mobile firm to raise money quickly without having to quibble over early-stage valuations. Using convertible debt, which turns into equity at a later financing round, startups and their investors can kick the valuation can down the road to a later-stage investor to set after the company has matured somewhat.

Transportation-on-demand leader, Uber, used convertible debt earlier this year when it closed a $1.6 billion investment round. According to Bloomberg, Uber’s bond, which was sold to Goldman Sachs clients, is a six-year bond and converts into equity at a 20 percent to 30 percent discount to Uber’s valuation at the time of an initial public offering. Convertible debt typically pays a coupon but the intention for all involved is that the debt eventually converts into equity. Facebook raised billions of dollars in convertible debt shortly before its IPO. Big banks frequently use access to late-stage, pre-IPO convertible debt as a way to let favored clients into hot companies at preferential terms when the stock hits public markets.

Online lenders do use debt, but differently

Online lenders have also been using debt to capitalize their businesses. Firms like Affirm, Avant, and Payoff, all which provide online consumer loans and recently closed large investments, use debt facilities to replenish their inventory of cash to loan out to borrowers instead of lending out their own equity. But unlike convertible debt, which is dilutive, these types of fintech investment rounds don’t impact cap tables. Firms like Victory Park Capital, a Chicago-based alternative lender, and other big banks lead large debt rounds for the online lending industry.

“In fintech, there are certain business that lend themselves well to debt, such as lending businesses or companies that just need capital on their balance sheet for regulatory purposes,” said SenaHill’s Zasky.

Using straight debt to finance growing startups isn’t as common, though. Reuters reports that Klarna’s debt comes in the form of 10-year notes with a floating rate based on three-month Swedish interest rate plus 4.5 percent per year, or an initial coupon of about 4 percent.

Klarna claims it’s profitable and Swedish media has reported that the firm fetched a $2.25 billion valuation after Swedish insurer Skandia invested.

So far, Klarna is the first headliner to diversify its funding sources in this way. Time will tell if tapping the debt markets becomes more common and whether it makes its way over to domestic markets, too.

 

Photo credit: markus spiske via Visualhunt / CC BY