Just a short post this time, as I just wanted to share my excitement about the likes of Square and Klarna becoming banks (eventually). As an outsider looking in, I can see the rationale for companies like Square and Klarna, payments platforms, for becoming full blowing banking entities:

1. Logical extension of the payments ecosystem – Given that Square and Klarna already process payment transactions for thousands of merchants and their customers, it means that they’ve got a strong foot in the door with small businesses. It therefore makes total sense to offer new products and services to both merchants and their customers.
2. Data, data, data – I can imagine that with the amount of transactional data being processed, Square and Klarna no doubt have built up great customer and merchant data profiles, and are now looking to further monetise on this customer understanding. Offering lending products jumps out at me as a key reason for Square and Klarna wanting to become banks. This pattern fits well on the trend involving challenger banks like Monzo and Chime starting out with limited features, but gradually expanding into fully fledged bank accounts.
3. Regulatory relationships – As Square and Klarna start offering more bank-like products and services, they’ll need to put robust regulatory compliance frameworks in place. Establishing regulatory relationships by becoming a bank helps with establishing these frameworks.
4. Hook at point of sale – Being able to engage with both consumers and merchants at the point of sale feels like a pretty strong hook to me! Loved how backend payment platform Adyen recently got valued at $8.3 billion, and it shows you that the financial sector is way off from calming down.

Main learning point: Whilst there are concerns about small businesses being impacted negatively by the likes of Square becoming banks, I’m excited by the ongoing disruption of the financial sector. Recent applications for banking licenses by Square and Klarna are a sign that the Fintech startups and challengers are scaling. As long scaling doesn’t happen at the detriment of the customer – both consumers and merchants – this can only be a good thing!

Related links for further learning:

1. https://www.cnbc.com/2018/05/18/square-stumbles-into-the-banking-business.html
2. https://www.americanbanker.com/news/the-story-behind-squares-bank-charter-application
3. https://techcrunch.com/2017/06/19/klarna-gets-a-full-banking-license-gears-up-to-go-beyond-financing-payments/
4. https://www.pymnts.com/news/banking/2017/square-makes-its-big-move-on-banking/
5. https://bankingblog.accenture.com/might-fintechs-become-banks
6. https://techcrunch.com/2017/03/23/revolut-launches-a-premium-subscription-and-starts-raising-a-new-round/
7. https://techcrunch.com/2018/05/31/no-fees-mobile-banking-service-chime-raises-70m-series-c-valuing-its-business-at-500m/
8. https://www.bloomberg.com/news/articles/2018-06-05/it-took-a-1-billion-ipo-for-everyone-to-see-why-adyen-matters