Affirm and Klarna Bounce Back
By Alex Johnson
3 FINTECH NEWS STORIES
#1: Sell Compliance Tech to Incumbents!
A fintech infrastructure provider raised a seed round:
Greenlite, a startup that vets bank and fintech customers using generative A.I., raised $4.8 million in seed funding led by Greylock and Y Combinator.
Greenlite acts as a co-pilot for compliance analysts at banks and fintechs, helping them determine whether a “risky” customer can be banked.
Using public databases and customer information the financial services firm has collected, Greenlite makes recommendations on that customer. A human at the bank or fintech makes the final call.
This is a use case for generative AI that I can get behind. There is a lot of manual, low-value work that goes on behind the scenes with financial crime prevention and anti-money laundering compliance (parsing documents, scanning websites, summarizing investigations, etc.) that can likely be done, at least as a first pass, by Inexperienced-Overeager-Tireless-Never-Bored-Intern-as-a-Service (IOTNBIaaS).
Two quick observations:
- It appears (from scanning Greenlite’s website) that most of its current customers are fintech companies and not banks. Not surprising given that Greenlite is a seed-stage startup and selling to banks is an arduous and expensive process. However, long term, I think this type of offering is a better fit for banks and other market incumbents than it is for startups. Using technology to scale human compliance resources is generally a safer proposition if your primary motivation for doing that is cost reduction (which is what incumbents will use it for) rather than growth (which is what startups will use it for).
- We have a naming problem in fintech. It’s one thing when you see simple words like Wise get doubled up on. But Greenlight/Greenlite? What are we doing here? It’s not even that great of a name! A modest proposal – if you want to use the same name as a company in your industry that already exists, you (the CEO) need to beat the CEO of the other company in a board game of their choosing.
#2: Affirm and Klarna Bounce Back
Affirm and Klarna had good quarters:
Affirm reported that its fiscal first-quarter revenue grew 37% year over year to $497 million as gross merchandise volume increased 28% to $5.6 billion during the same period.
Meanwhile, Klarna reported revenue of 6 billion Krona ($549.9 million), up about 30% from 4.6 billion Krona ($421.6 million) in the third quarter of 2022. The company also reported an operating result of 130 million Krona ($11.9 million), a massive improvement on the 2.12 billion Krona ($192.6 million) loss a year ago.
Quite a turnaround!
Here’s what’s driving it:
- Lower losses. Both companies reported that more of their customers are making on-time payments. At Klarna, the rate of credit losses improved to 0.33% of gross merchandise value, compared to 0.74% a year ago. At Affirm, the 30-plus-day delinquency rate, excluding its pay-in-four installments, was 2.4% in the quarter, down from 2.7% a year prior. This isn’t an apples-to-apples comparison, given that most of Klarna’s loans are of the shorter, pay-in-4 variety, and the loans that Affirm is reporting performance on are the longer, interest-bearing loans variety, but still – losses are down!
- Capital markets like BNPL. Affirm got kicked in the teeth when interest rates first started to rise, and its capital costs ballooned without a corresponding increase in the interest rates it was charging through its merchant partners. That ship has now been righted, and investors are, according to Affirm, ramping up their purchases of loans from Affirm (private credit is hot!)
- Klarna, the shopping app. Klarna now refers to itself as an “AI-powered global payments network and shopping assistant.” That sounds buzzwordy, but it is actually a fairly accurate description of where the company is going. An increasingly large percentage of Klarna’s revenue is being generated through the leads that it is able to send to its merchant partners, thanks to its engaged audience of online shoppers.
- Affirm debit card. Affirm’s diversification strategy revolves around the company’s new debit card product, which allows customers to pay upfront or split purchases into installments. According to Affirm, the card has 400,000 active users and is adding as many as 75,000 new users a month.
#3: Can’t We All Just Get Along?
Apparently, the various divisions and teams over at Block are having a hard time playing nicely together. The Information reports:
As CEO of Twitter, Jack Dorsey was widely panned for his hands-off style, seen as contributing to the company’s uneven growth and slow-to-evolve culture, which paved the way for last year’s takeover by Elon Musk. Dorsey’s other public company, Block, originally known as Square, has a whole different problem: Its divisions feud so intensely they can’t agree on even minor points of cooperation.
There are lots of troubling anecdotes in this story. This one, which is about teams at Cash App and Square fighting over integrating Cash App as a payment method at Square, is particularly disturbing:
In addition to squabbling over data, the teams took months to decide on a revenue-sharing agreement for the fees the Cash App transactions would generate from Square merchants.
Eventually the quarreling teams agreed on an even split.
From the point of view of Block, the parent company, the allocation of revenue between the divisions has little significance. The consolidated profit statement that Block reports publicly excludes fees paid by Cash App to Square, as well as the other way around. But those fees do affect divisional revenues, which the company does report publicly. And the profits of each division determine the future budgets they receive, which gives them an incentive to fight with each other, even at the expense of the company’s overall well-being.
Taking months to agree on a 50/50 split of “revenue” that isn’t actually revenue is insane. That’s the type of thing you see at JPMorgan Chase or Google. It’s not what you want to see at a company of Block’s size, particularly when it’s just entering its endgame of merging the Square and Cash App ecosystems together to create a new closed-loop financial services network.
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1 QUESTION TO PONDER
Today’s question is rather specific, so please forgive me, but I’m curious – how does infrastructure impact impact acquisitions?
We’re entering an era of increased fintech acquisitions, but so many modern fintech companies are built on infrastructure that was built by other fintech companies. They assembled the legos, but they didn’t build them themselves. How does that impact their attractiveness as acquisition targets?