Building a Disruptive Payments Company (with Klarna CEO Sebastian Siemiatkowski)

0:00Hello acquired listeners today. We are doing a deeper dive into the payments landscape after our visa episode late last year and To do that and learn more about his company Clarna We are joined by Sebastian Shemekowski the co -founder and CEO of Clarna now That is a name that many of you probably recognize They are best known as a by now pay later company with ambition to play a broader role in the payments landscape They were founded 19 years ago in Stockholm not too different than our friends of the show at Spotify and By now have 150 million consumers globally using the service and powering two million payments a day But we will get into Clarna specifically later on first.

0:44Welcome Sebastian Thank you for having me straight to be here So I want to ask you in some ways a crazy softball question in other ways an impossible question to answer and that is Starting at the 30 ,000 foot view if someone asked you hey, can I have a high level overview of how payments works and who are the major players in the value chain? You know in five minutes or so. How would you respond to that? Yeah, well considering that I hope there's a lot of geeks on this call or on this list of these book us I would probably in this case start a little bit differently. Well, I would say usually look I think the easiest way to think about it is the issuing and acquiring side and the networks, right?

1:18So the issuing side would be the bank giving you your credit card That provides you and that card has an access to a credit line or it calls the balance Then you have the networks in between visa and mastercard that kind of sets the standards and both the brand the Recognition to us that you know that this card will be accepted in these places But also the standards for how that exchange of financial information and payments and the settling of that transaction actually happens and Then finally obviously you have the acquirer in the PSP's Which basically are the ones partnering up with immersions and helping them enable the acceptance of payments Providing terminals if it's a physical store or providing the checkouts and the you know cashier experience if it's online And then you have a number of companies that kind of circulate in this industry whether it's people helping with Recognizing fraud or helping with underwriting or you know different for example e -commerce platforms that may also offer We know Shopify is a fintech company to a large degree as an example So there will be a lot of people that are a little bit of both But in general, I think that acquiring network issuing side explains a lot of it and You founded Klarna 19 years ago Wined all the way back.

2:29What was the insight that you had Where you said I should attack and start in this very particular corner of payments Yeah, so not to make that too lengthy but for whatever reason I've always had this like dream of starting a company I was inspired by the founder of a key out of Swedish in Vakamprad and I read Richard Branson's book about virgin when I was like 14 year old And I thought it was a fantastic story and stuff So I've had a lot of different business ideas that I obviously myself thought were awesome I each one of them, but most of them stayed as a draft on a piece of paper I happened to spend two years in Stockholm school economics, which is a business school And I did a sabbatical year which took me around the world without flying which was an exciting adventure coming back I was out of jobs and I was just desperately looking for a job And this was a low economy because the it dot com bubble had just burst So I tried to kind of go to PWC or these kind of places that somebody with an economical background should work at But I didn't get in job.

3:28I found myself getting a job at a account receivables factoring slash depth collection company Which was kind of the last place in the world I ever imagined myself working as a sales guy And I had a lot of experience from me being Kind of a younger 17 18 years old. I used to work extra as a As a telemokiting guy who would you know call you and bother you in the evenings trying to sell a subscription to a magazine or something like that And so I got this job and my job was basically to open the at that point There was still telephone catalogs right like these catalogs of of businesses And I would call them and say hey When somebody doesn't pay your invoices or when you Need factoring so you want to borrow against your account receivables who are you using currently and would you consider using the company That I work for and the funny thing is the company I was working for was called acme ACME And it was a really stupid idea why to use that name but they said like that's the dummy company that Microsoft uses is in all other presentations Right, so they said this is free advertising for us every time they use this dummy company.

4:35It's like advertising for us They didn't sound like a great idea, but I mean Basically, I was just picking up the phone call and I was calling all these businesses And this happened to be 03 when it was difficult right you would call this lady in accounting in some mid -sized Swedish company And she would say look I've used this other company for 20 years and I don't really care And maybe you can save me a thousand dollars of fees, but I don't care like I've been using them and I trust them and so forth right So it was difficult. However, I happened to call A few e -commerce companies because at that part of time, you know, Amazon didn't exist in Sweden So there was these early entrepreneurs that had found that you could buy Google AdWords really cheaply for like cat food And you could start shipping a lot of cat food right like it was actually quite easy back then right you just buy an ad word And nobody else was buying and suddenly you'd had all these customers flocking at your website And they were in need of some payments methodology right and What happened there was The prevalent form of payment online then was just like it is today was visa and masakad there was card payments however Traditionally in mail order catalog mail order businesses had provided a bill me later option which is true in the US as well right And so the catalog companies had already figured out that if you would provide credit when you sold something at a distance Meaning, you know, it's different when you go into the store you see the product You touch and feel it and it's like this is what I'm buying and then you pay for it But in a distance selling where you would order something from a catalog The experience of being able to say please ship this product to me first Allow me to touch and feel it before I pay for it So buy now pay later made a lot of sense.

6:22It's not about credit for borrowing money. It was to Provide safety and trust to the consumer that like I can touch and feel this thing Before I part with my money You have to remember this is in a country called Sweden where most people had debit cards and not credit cards Right, so yeah, you ask what was the payment landscape in Sweden like that point So actually a lot of people had credit cards But it didn't like using them because they thought they were dangerous and they would get in depth and stuff So people really use them as a lost You know, a lender lost resort. Yeah, exactly. That's pretty smart So they mostly were using the debit money So to them go online and buy something in these early days was a risky undertaking like I'm punching in my credit card number or my debit card number Which gives somebody else access to my positive balance on my salary count And then I'm shipping money to this small e -commerce business.

7:11I've never heard the name of to get my cat food At potentially cheap price So the ability to be able to say hey could I first order that stuff get the cat food Inspect it and say yeah, it's healthy cat food is what's it advertised to be and then pay for it made a lot of sense right so That just you know made me thinking like wow why aren't these e -commerce companies doing what the mail order companies used to do And we're still doing because they were quite successful mail order companies that were just migrating to the internet And they were actually doing it and they're offering what we refer to as an open invoice payment method back then which then merged into buy now Pillator but it was basically that ability So I had this idea the company I was working for considering the name of it as you heard acme Was not the most serious company in the world so I kind of figured out this was not going to be the place where I was going to be able to Develop these ideas and then It happened to be so that I went back to school To university and they had an incubator and I came with the idea there like hey Maybe this is something that I should start a company doing actually So that was kind of the background it really was the initial founding insight that is the core product today of people for Individual purchases will want to pay later even after they transact Correct a lot of companies do a lot of winding around in the woods before figuring out the core product I'm sure it took some time to get traction, but like the initial idea was the thing with market fit Well Actually, I don't want to sound like that, but it didn't take that much time to find traction So what was interesting here and again you have to remember this is in a small country of Sweden with 10 million inhabitants But we had this idea we went to the incubator.

8:49I found my two friends that you know I knew one of them from high school necklace and the other one I met in university We decided to go down this route around October, November We found a business angel investor That invested in December and she brought some engineers the engineers built The first MVP of our system to process these transactions and underwrite the transactions and you know all of these things From about January to April it took them about four months and it did it in their spare time because they've still had full -time jobs We asked our business angel to give us $40 ,000 She gave us $60 ,000 for 10 % of the company And we said at that point of time look we only need 40 ,000 to come to profitability and she's like no no you're gonna need 60 Different era different era how much money have you raised to date just to get out there a lot A lot and little bit more I think it's four billion dollars or something But the point is what's interesting is we spent 30 ,000 dollars before we became profitable So we were about six months into it and the transaction started running and We very quickly became profitable actually and it was only in many years later that we started raising you know bigger Round some investments and we were profitable for the first few years of the business Because the business model was very effective The merchants loved it because they saw an increase in sales right you're enabling transactions Yeah, exactly so you know and consumers loved it because they felt much more secure of using this over using the debit card So it really kicked off now it was in a small market right which is why We didn't become PayPal at that point of time it would have been very different if you would have like Stric and gold like that in the US with something right but hearing Sweden It became extremely successful very quickly to the consumer trust element Were you holding the payment information yourself?

10:44Was that part of the value proposition of like oh you don't have to give the cap for your company your payment information This is a centralized place where you can trust us of where the secure platform Yeah, I mean it has become that more and more but the merchants always wanted to Understand who is their customer and what are they buying and so forth So we made sure to build a system in such a way that the merchant had full access to it as well With the consent of the consumer and how in those early days I'm sure it's sort of evolved over time But obviously if the benefit is paid later there's sort of a concept of float You said you quickly got to profitability who was sort of floating the the money in the meantime Yeah, and this is the funny part right which is and I think only Truly nerds like yourself will be able to appreciate this fully But the funny thing is that what we're basically describing here is a factoring idea right because basically We are underwriting and account receivables and then we're acquiring those accounting receivables from the merchant We figured out because everyone was asking the same question How are you going to fund this because you need a lot of cash right you need to buy these invoices and then wait Or these account receivables and you need to wait for them to be paid by the consumer But we figured out which is a typical to me like entrepreneur conclusion is that like yes If you worked in the finance industry you would be like of course that's necessary But if you're an entrepreneur and you talk to these online merchants back then they were like you know what I'm not interested in a cash flow solution They themselves were actually sorry to say so but many times fairly poor and understanding the importance of cash flow So what ended up happening is we went to these smaller e -commerce businesses and said look The thing you want to avoid is the risk will take on the risk of the customer not paying because that was one thing that they were very worried about The second thing that the merchant was very worried about was the administration If I do this myself because some of them could have done it themselves like I said like hey, I'm just gonna Print an invoice and then ask the customer to I mean like an electrician would come to your house right And will give you a bill and say pay me for my work right they could do that But they were also worried about the administration What if I need to collect this money and get a collecting agency and like oh my god and Customer service and all these things those were the two primary concerns not the cash flow.

12:53So we ended up Constructing a business model would say we'll buy these account receivables from you will take the risk We'll do to all the admin, but we won't pay you until three weeks later So we end up actually creating a funny a factoring model business model that actually had a positive cash flow And basic Our merchants were basically funding us for the first few years Some merchants obviously recognize it said look I need the money instantly. I need it faster And then we would say well then we need to charge you a higher fee And we had enough merchants that accepted To get delayed on their payments and in combination with the fact a lot of consumers paid Not at due date, but much earlier right they would just pay instantaneously So those two cash flows we managed to balance it was actually quite some time before we started having cash flow issues You sort of had the golden goose of being able to scale with customer funds without actually going out and raising additional capital Which most people would think is impossible for a factoring business who's Theoretically entire value proposition is fronting money what you need to get from some facility or you know Maybe you dip into your equity capital to do that But you write it's a very entrepreneurial insight of actually the customers are not obsessed with cash flow They confront the money effectively and we'll handle the risk in the administration Yes, and that's exactly it right so that was was funny about it and you know and it worked over the years As we became more I don't know like hopefully trustable You know, we started having banks fund this and we found different ways of solving this But initially that's actually how we solved it It's almost sort of visa -like in a way I guess you were taking the risk in a way that visa wasn't but you're a network you know You're not actually the financial provider in those early days exactly exactly When was the first time you heard the phrase by now pay later because I will say I think I heard it in probably 2015 or something and If you had started the company over a decade before that it had to be one of these scenarios where you thought you are operating in one space Then your space got named by somebody else and you had a choice whether to adopt the generalized name or not great question So for a long period of time I was very Angry with the fact that in my opinion what was a clone of clana in Australia called off to pay Had also then created the buy now pay later term But then fortunately for me I found that financial times had written an article about clana back in like 15 13 or 15 before off the pay was launched where they actually title it by now pay later So That kind of made me at ease that I think it was financial times that coined the the term so now feel a little bit more happy from a From a pure prestige perspective Bringing up after pay brings up this sort of interesting point that this space lends itself well to Companies that serve geographies and their specific needs So you sort of could have before everyone was at global scale on Australian provider a Swedish provider a US provider And then I imagine the race was just sort of on to figure out well, how do we serve the needs of those other markets in addition to our own You're totally right.

16:07So what happened in our case was we launched this in Sweden it worked then as being Swedish You know funny enough now when I look back at it Like the first next market was like Norway and Finland which are like four million people you know whatever But that's like partially driven by merchants demand right because a lot of Swedish e -commerce merchants were active in Norway and finished market And so it kind of the Scandinavian countries The next big market for us was Germany and Netherlands and the reason we chose those markets was because there was a strong tradition Of what in Germany is referred to as Rachnung Which is basically invoice or buy now pay later in those markets And for a long period of time we were like how are we going to break into this US and UK market because in our opinion We looked at it and we said credit card are so prevalent There's no need there's no need for our product in those markets and that was my conclusion And it made us continuously like think about like okay, but how are we actually going to do it?

17:06The funny thing was that We eventually decided to kind of dip our toes into the UK market That was basically I think around maybe it was pretty late like 15 14 15 We used most of like between 2010 and 15 We used for two things I can come back one we tried to compete with Stripe and Adian on the acquiring and PSP side and we can come back to that later, but the other part was Payment service provider right so as one of those and then the other part what we spent 10 to 15 on a lot was to get Germany to work because We had at that point of time four five markets and it was really difficult for us to kind of rebuild our systems and rebuild everything that we were doing so it would actually be able to operate in multiple jurisdictions with different regulatory requirements etc etc So but in 15 when we had a small team we put them in the UK and we said hey Let's go and try to get something going in the UK And then the team came back and said you know what we think there's a huge opportunity for this product Which gives you an opportunity to buy now pay later And I said no that's a terrible idea The only option we have is to go into high ticket financing so more the approach that a firm has had I mean basically going at like the mattresses and the home electronics and kind of do that And not go for like small ticket items or fashion or whatever And I said to the team so you're not allowed to do that And secondly the team had an idea that we're going to go to like one of the biggest fashion retailers and try to nail a big whale from day one And I was like we've never done it like that We always go to the small merchants and then the medium -sized merchants etc And I was actually quite tough on the team.

18:46It's like that's a really bad idea. You're not allowed to do it And they fully ignored me right they just ignored me entirely right so 6 12 months later I had another bus to review meeting with them And they were like okay, so we're trying to do this buy now pay later to large fashion retail I was like I told you you're not allowed to do that. That's a horrible idea And like please don't do it And then three months later it came we've signed ASOS and we're going live with buy now pay later And it's been a smashing success right so it kind of funny you always want to attribute You know, in that case actually it was very fortunate.

19:16We had a very independent thinking team in the UK Who recognize something that I had not recognized And that then also off -to -pay had recognized in Australia Which was that credit cards have been growing 2x between you know 7 8 to 18 But debit cards have been growing 10x and that there was this new Generation of card users that simply did not have access to credit cards So it didn't like to use credit cards and to them the traditional business model of Klanah the very basic idea that we had when we started in Sweden So the funny thing it wasn't Klanah that figured the US out It was the US market that became the Swedish market and that was was opened up for the US for Klanah right which is kind of opposite to what you would usually expect to happen It wasn't us like it just happened to be that the demographic and the 2007 financial crisis the changes to credit cards promotions in campuses and you know tougher restrictions on underwriting and all these things created this massive boom in debit And then that meant that there was suddenly a new online shopper That had a Need for our products that didn't exist when we started Klanah and Sweden on 05 It's fascinating.

20:30So it's not that like credit card users switched to become debit card users It's that the market for Unpenetrated digital payments ended up Mostly accruing to debit card users which changed your characterization of oh the US market has mostly credit cards to well all these new people that in what was previously sort of a latent unexplored market are now You know primed to be the type of customer that we have here in Sweden Exactly the thing is that What I really found interesting in all of this is that like we have occasionally work with McKinsey They do some things that it's very high level and I find it less value And they sometimes do really great things.

21:09So I have both fantastic things to say about McKinsey and sometimes I'm somewhat of a criticism But with that said McKinsey published a report and this was a fantastic report It was actually published in May 2014 so long before the Binah appellator thing and it's called New Frontiers in credit card segmentation tapping unmet consumer needs, right remember These are a few years before Binah appellator like about five years before Binah appellator became a thing in the US And in that report McKinsey says There is a group that credit cards are not catering to and they call them Self -aware avoiders This is a group of people in the US who have had poor experience with credit cards They don't like the practices of credit cards the way the credit cards promote Overindepnised by you know giving you a credit limit that's very very big and you think you have that money and can spend it the way They always ask you every month to pay a smaller amount and pay the lowest possible amount so that you revolve and build up a balance like all these tactics and practices that credit cards have applied That a proportion of the population in the US have simply You know not like or they seen their parents get in financial depth in 2007 and couldn't get out of it All these things that was a group and the interesting thing is a group of fairly high median annual household incomes They are spending quite a lot But they were McKinsey estimated that group to be about 20 % of the US population that they called self -aware avoiders And when you look at the features that they promote like what are the features that are most important Is it really like the whole credit card industry has been over obsessed with the idea that everyone is a reward seeker There are reward seekers out there and it matters a lot to them But it's not the whole population right so Instead of talking about rewards as the most important benefits the self -aware Voiders won't simple and transparent fees rates and terms Right They won't avoidance of mishaps that trigger fees Pay off horizon for each major purchase And swipe to installment loan McKinsey is basically describing binopulator five years ahead of its time right People were an entrepreneurial organization.

23:23Yeah, they could have you know started clarity in the US Yes And even I read this report and I didn't fully grasp the potential of it Back then But the point is that there were these indications that the markets were changing the needs of consumers were changing Opening up for a different form of credit that would be more Attracted not too necessarily everyone. Yeah, I mean, I guess this is one of the downsides of the visa master card system and that it was explored on that episode Visa master cards business model is in many ways very very similar to yours But Their partners are the banks and the banks business model is banking they lend money they make money on lending money So that's underlying that whole system For sure and that's the point if you look at how much money a credit card issuer is making As much as they may look in the papers and say oh that there's a new generation of users that won't buy now pay later Is it attractive if I'm doing revolving at like 30 % interest rate And I'm running my credit card portfolio at this bank.

24:27Is it attractive to offer Pay in four interest free installments like you know that doesn't sound attractive like I'm not gonna make more money doing that Right, so it is a model that actually makes less money of its users Which means that it's better for consumers and it's a model that means that people borrow less so It has that advantage for the consumer, but that's not necessarily an advantage for The bank itself or the credit card provider today, right now My point is to only to say that you still make money with this model It's just that you make less money and it's easier for a company like Lana that's never or actually we have done some revolving as well But like if you take even off the pay as an example who never had revolving It's easier because You only have upside you don't have the downside right if you have this massive portfolio of people That are paying you tremendous amount of revolving fees and stuff like that Then it's very hard to take a decision that you're going to change into a business model this simply There's a major innovator dilemma Yes, yes, yes, yes Is this sort of the Christiansen idea of low end disruption?

25:29There's a new market that wants a different product that product is not as financially interesting to Incomments and therefore there's this opportunity created to create a lower margin sort of quote -unquote worse in many ways Product to this new set of consumers. Yeah, I think that's a big piece of it I think that like if you look at the also the criticism and the Challenge that a company at Lana gets. I think part of it is as we provide credit There's always the discussion of credit and they choose associated with it but there is definitely a Part of that criticism that is pushed by banks and other Incomments that are seeing a major threat to their existing revenue lines like if this model becomes more prevalent And if consumers I feel very confident that in the coming years we're going to see that people that use these models are actually better off They get less in depth they pay less in fees than people using credit cards and eventually when that becomes more and more Confirmed as the truth That will create a tremendous pressure on these incumbents models, right?

26:37So is it fair to say that using Clarner or a BMPL system you're essentially signing up to a more structured credit or payment plan versus you know a credit card All of the financial responsibility is on the card holder the financial responsibility is still on the payer here But it's like hey, I know the terms upfront. It's structured. I can't get myself into a situation like we've been talking about where my revolver just gets out of control So yes, I want to make it clear here as well that like When when we start a clone out to come back to the early days the first model that we offered was just a buy -in -up Later so you would buy something now and you would pay within 15 to 30 days now after about two years we did See the opportunity to move into revolving and also Financing of higher ticket items such as you know a home electronics device or something like that When we did that we looked at the competing banks in Sweden and we looked at their business model And we said like how are they actually doing this like how does it work what fees today charge what are the revenue lines?

27:41You know how do they underwrite and all these things? And we concluded that there were all these great tricks That made a consumer pay much more so like a classical trick would be hey sign up for 12 months interest free And then what you would do is you would send the customer A bill for your monthly payments on that 12 -month interest free loan Where you would either pay a higher amount which would keep the 0 % interest plan Or you would pay a lower amount that actually meant that you move into a 36 -months revolving account with 20 % interest Now obviously consumers are gonna say oh this month was tough and they're not necessarily gonna understand fully the consequences So somewhat even by mistake paid a lower amount and would be moved to a higher interest bearing plan And we were like oh okay, that's how you make business in the banking world awesome Let's do it.

28:30Let's copy these things And we did it and you make a lot of money from doing those things Now it took us some years to also start reflecting like but hey Did all of these consumers really understand what they did? Did they want to pay that high interest rates? Is it healthy? It took us some time to start reflecting on this and then As we started reflecting these we started changing our business model removing some of these tactics that banks have applied To maximize this and I think that there's a great episode on Netflix called credit cards explain Well, there's basically 30 minutes Which is just moved through all of these tactics that banks have applied in the last decades It's a different generation.

29:09I think in In 2019's there wasn't this corporate social responsibility thinking there wasn't that thing It was just like how do I maximize profit right like that was the driving Force and if somebody came up with a tactic That was legal And made people pay more interest then you would do it like there wasn't that consideration is this healthy Does this make sense? Etc. To the same degree right and I think what we've been doing is We've been challenging these things and I think a great example of that too. Answer your questions was when I used to work at burger king When I was 15 when you swiped your card right The terminal in in burger key would say press one for debit Press two for credit now that made a lot of sense because When you make your everyday purchases only a few transactions are relevant to put on credit Maybe it's a bigger purchase and I want to put it on credit for that purpose or you know something But like your everyday spend at burger king probably is a debit transaction.

30:06Hopefully right But maybe you know, I'm out of salary. I'm getting my salary my paycheck tomorrow And I'm okay to take it on credit for 24 hours These situations may vary in people's lives But the point is there was an option between one debit and two credit and everyone's like above 40 30 you know remembers these things now the banks removed that They removed it and today you swip a credit card and you get everything on your monthly statement Everything your burger king purchase, you know, your Walmart food Everything is on that why? Because obviously as you had that ability to click per transaction Your monthly statement Was before when you had one for debit and two for credit the monthly statement would only be For the full amount of what you put on credit And if you had the option to put on debit you would have a lower amount So let's say if you had that option with one for debit and two for credit Maybe your monthly credit card statement would be 500 dollars How likely are you to revolve then where you're not less likely to revolve because you can actually afford 500 dollars But if you put your full consumption of a month You had maybe a thousand dollars and now suddenly you're going to revolve So the banks remove these things press one for debit and two for credit Because they simply saw that it drove less revolving and less revolving means less money And then means less Ability to offer cashback and rewards That then is the main feature to drive in new credit card customers So you got this loop Where everything is a cent of ice To basically get consumers to pay maximum interest and maximum revolving right And now what we're doing with our solutions is reintroducing press one for debit Trest two for credit so we have both pay now and pay later So we're trying to kind of bring back a lot of these ideas that used exist that were simply just more healthy From a spending perspective and a credit perspective Oh, yeah, how does that manifest in the corner product today?

32:00What does pay now look like I mean, I think people are quite familiar with the clonna button to buy now pay later Yeah, so Well, we're going towards is that we're not there entirely yet, but within one or two years We hope that every time you see clonna On a merchant website it will mean that you know that you have those two options and already today debit for clon It's about 35 % of our volume right so almost not half but it's a third of our volume is debit Not in the US obviously where we're predominantly only credit still But in a lot of European countries the debit side is quite meaningful And our ambition is for it to be 50 50 online And in store probably be 80 % debit and 20 % credit or something which we think is kind of the long -term healthy proportion So the mall that I usually go to that's just kind of closest to my house in San Francisco is stones town mall The entire mall and it's huge Is basically covered in Clonna batters and for the last year or so that I've been going there for like This is so weird like clonna I think by now pay later.

33:06I think online I think e -commerce like what is clonna do I do tell us about In store, you know, we've been trying to approach in store in many different ways So I think to come back to that original thing like we started definitely with the buy now pay later model I'll actually put it in a different context in 910 We had this widely successful buy now pay later and we had this idea that we were going to what you refer to in the industry close to loop meaning that we would be both the merchant acquireer PSP and the issuer this was the compete with striping ad yet exactly So we had this idea I was laugh about the fact that we had this presentation I had this presentation for my board back then I said look we're going to launch a new product called clonna checkout and the idea is that checkout will allow Online merchants to offer all the local payment methods visa mastercard local payment methods by now pay later methods Etc and we will you know do all the acquisition and all the processing and everything for these merchants And then I said look I think we have a few competitors that looks scary There's these callus some brothers in Ireland who figured out the importance of great APIs and that actually most of the people integrating payments are engineers So let's build a great product for engineers And then there's these guys who've done it before the Dutch guys who you know really know this industry And the funny thing with Peter at Adyen Was that at that one time clonna was a bigger company than Adyen You know in all aspects organization revenues over so I went down to Peter and I said look Peter You have to sell your business to me because I'm gonna run you over and Peter just looked at me It's like who's this brat kid coming in, you know That was like probably you know whatever 30 and he was like 40 and he's like who is this guy coming in and like you know Threat in me So it took me a few years to fix my relationships with Peter after that now we're good friends at least so that's good So we had an idea that we were gonna compete in this I always laughed that if my investors were listening to me in that board call They would have said oh I need to go and make an investment in Stripe and Adyen which actually Sequoia did The better of them did right yeah exactly so I was like I was very right The only problem was the clonna did not deliver on our Thing right so we we got check out out it became actually a very successful product in the Nordics Where for a period of time we had more than 50 % of all online transactions In Sweden were process over clonna checkout right so it's hugely successful But we struggled to bring it international and do it as well as Stripe and Adyen dude After about five years and I remember like in 2013 There was an announcement Adyen did like oh we we added 50 payment messages in Asia or something I send it to my engineers.

35:47I was like guys We haven't added a single payment method in two years I can just look at the pace here of execution and I can see where this is going But in 15 it was the final blow was when adyen signed Spotify And so obviously Spotify being a neighbor of ours is like you're backyard exactly right you're like okay Here comes your worst competitor in science with your best friend and you're like okay So it became a very critical point of time for the company because we said okay look It's clear that we're not executing on the strategy as well as they are And we have two options right either we pretend to be almost adyen and Stripe And then we exit the company because somebody wants to buy an almost adyen or an almost Stripe Which for example happened there was a Bambora was a company in Sweden that got acquired by in Genico because they were an almost Adyen So you can do that or we pivot right And this was when we pivoted in direction that we're on right now So in 15 we kind of changed the ambition and we said look if we can't win on the merchant side Let's instead pivot and try to win on the consumer side right and let's become and be clear You were still doing well on the merchant side for the by now pay later platform Just not the full umbrella checkout platform exactly right They check out really worked in the Nordics where we had good support and good for it And the biggest challenge was actually in the US market was Shopify dominance right because Basically the only opportunity we saw for checkout Was to start with smaller merchants and then kind of grow into larger merchants But Shopify decided they wanted to do their own checkout and there be their own fintech company And at that point of time it became basically blocked kind of the only entry point that we had into the market And so that kind of was also like a revelation like it's gonna be very difficult right And since then you've seen it for a few companies that have been trying To do checkout there's been That company in the US I forgot the name that I got quite a lot of attention trying to do check So there's been a few people that's been fast as an example in a few others It's been trying to do something like that but So it became clear to us that we needed to move away and today You know add in a stripe bar our biggest distributors It's really changed a lot.

37:54We actually mostly are integrated over acquirers and PSPs like them who are promoting and offering the clonar product to merchants It's actually Not that common today that immersion has direct integration with us anymore But it's pretty good. Yes. Well that'll help not require a gigantic sales force Yeah exactly so that's like classically the problem with merchant acquiring is you need to have boots on the ground and every geography Which is why you needed banks to do it exactly now so and it became problematic for us obviously we check out because we were partially competing With stripe and all you know so in order to get those Relationships and partnerships going we've made commitments that we are you know moving away from that part of our product line right and move into the consumer Product line which is kind of been the direction of the company ever since 15 Yes, we haven't talked really about the consumer products at all and that seems to be the more recent evolution in the company So what does that look like?

38:49Funny enough in 15 So we were like okay the binocular thing worked really well We didn't at that point of time yet recognize there wasn't opportunity in the UK us So we were a little bit concerned we did a lost attempt in 15 to launch checkout in the US with very limited success So we're a little bit like what do we do? It happened to be that my second co -founder was leaving at same point of time So I had a entirely new management team come in which at that point of time I also learned that I don't want to hire executives from the outside I rather promote from to within and the company had been around for 10 years So I took some of our best junior managers and promoted them into my management team and We basically sat down with a white paper and we said okay, where do we go from here?

39:31Like we need to find a different direction And actually the conclusion was the following what's gonna happen with financial services? That was the big question We said okay Well, we can say that we don't know It's a bit like self -driving cars We don't know when it will happen, but eventually what will happen is You will wake up in the morning and your digital financial assistant will Basically say hey, Ben, you know, I look through your mortgages this night and I realized that you're overpaying And I have negotiated a new rate on your behalf with a separate bank and the only thing you need to do in order to save 10 bucks on your mortgage every month Is for you to say yes because I'll do the all the switching for you and I'll just move you to a different bank, right Eventually that's gonna happen.

40:16I don't know how fast it's gonna go I don't know when these things will become a reality But it's very clear that direction is speaking with the way software is developing and obviously in the last year now with AI coming along You're like okay, that's much closer than I thought it was gonna be the point is like it's like self -driving cars I don't know when it will happen, but I know it will eventually happen So the conclusion was like okay, so the future we're looking at and financial services is that At some point of time, there will be this digital financial system that just does this on your behalf, right?

40:44Okay So then the next question then is okay, but where does that leave us? What do we do in that world? Like what is clonna in that world Well Obviously you said like well the best position to be in is I want to be your digital financial assistant Because maybe if I did that for you Ben you give me a dollar tip for like hey, thank you for fixing that mortgage thing I'll give you a dollar and tip right like if you can get me a cheaper mortgage. I'll give you a lot more than a dollar Yeah, I'm happy to hear that. I'm happy to hear that So the point is that we talk after this episode Exactly what this all means is that eventually you'll have to be that digital financial advisor, right?

41:19Which in a way is kind of what You would you know think of as like what was the purpose of a traditional bank man? It was your financial advisor to it like hey, I'm gonna take over You know, I'm gonna take care of your finances of your savings I'm gonna make sure that they grow I'm gonna you know take care of all this stuff that you don't understand and don't have an interest in And I'll just make sure that you're good off the only problem is that Once bank got that trust from us as customers They took it to their advantage and they started finding all these ways to not necessarily serve our best interests as customers But at some point of time like we just realized that great that's directionally where financial services are going and it is Going to be a very very disruptive force because for example one of the things it means It means the end of the excess profits that we have seen in banking industry So in banking industry we always had excess profits or because people are not very Easily moving between banks because they find it hard and difficult to change and they're not sure they're getting any value a lot of these things will go away And it's just gonna look like a very different industry than it does today, right?

42:27And so we said well, okay, we want to be that digital financial advisor. Well then the next question is How do you win that? How do we make sure that Clona is the best digital financial advisor And we concluded that we don't know everything but we know a few things We know that it is beneficial to be global over being local Because this will be a question of scale the more markets you serve the more consumers you serve The more likely you are to be able to operate such a thing. It's going to be about volume a size. It's going to be important, right So global distribution was very critical So that's when we said we have to really expand our network of a number of countries.

43:06That was like one, right The second thing is data The more I understand more you Ben or you David have the more you have trusted me Of data about yourself, so about your transactions about you know your financial life The more likely and capable I will be to be able to provide you Advice and services of value right because the better I understand you as customers the more likely I'm able to actually save you time Save you money You know do something that's a value for you, right? So we then realized the clona had one very unique thing That really sets us apart the two means much much much more critical and has been much more at the core of what clona is Then buy now pay later And that is skew level data so Whenever we started a business because we started as an open invoice business We needed to produce an invoice at the very beginning of our life as as a company that meant we needed skew level details on every purchase So as you know when you process a transaction on visa You don't get that right you just get the amount and the merchant name in our case We know exactly at h &m you bought this sweater of this color of this size Etc right and today we even show you images of the items that you bought There's two really interesting things here that are simultaneously happening one is the strategy thing that you're talking about when you started with skew level data You know, it just lends itself better to well great now.

44:32We're gonna have more data the other thing is Literally just technology advancing. We're 50 years past the origin of credit card networks You just couldn't actually run that much data over the networks and now the networks are what the networks are It's I don't want to say impossible for credit card networks to retrofit and then get skew level data But like it's a hard task to roll that out to the entire network Cycle table it is it very much is and I know that I'll let you go But I'm still like how do you get that data with the card now that like But I get back so no but you're right but but the point is that like visa and mascot tried is in the 90s called level three Right, so they had level three data.

45:08They tried to convince some versions of it But it was very difficult and this is again where a four -party network will suffer because a third party network like American Express or Klan or PayPal has the ability to Be close to like if we get skew level data from merchants We can instantaneously make sure that it's visible to the consumer and they consume you can see the value of it The problem with visa mastercard is that even if merchants would share that data with them They need the banks to change all of the banking apps to start visualizing them showing that data So you really get this catch 22 where it's so difficult to drive innovation when you have so many parties involved Each one with their own self -interest their slowness in adaptation etc.

45:47It's one of the reasons I think it's never worked the other reason is trust Right, so the amount of time I had to spend With this top CEOs of US retailers to say hey Trust me with this information, right? Trust me with that if it's mazes or Sephora or H &M Or you know, whatever it is I've spent so many hours like why should you be comfortable with sharing skew level with Klan? All right, and how is that gonna benefit you as immersion? So there's a lot of aspects to this but we realized that this is something That when Utilized in the right way with the consent of the consumer It can actually create tremendous value.

46:26That's helpful right? So so I think that was one and then the other thing is you know, we said well look other people will figure out We we already said back then if we're gonna go down this consumer path and we need to build a brand as well So the whole smooth and the pink and all that became very important for us But it's also like we just said look there's gonna be three parties that we're gonna compete with It's gonna be big tech like Apple's gonna try Amazon is gonna try Google's gonna try to be in this space Secondly, there's gonna be FinTech Revolute chime New bank whatever And then there's gonna be the traditional banks Goldman Sachs doing Marcus or whatever right So it's very clear to us that there will be these three categories of companies that will try to aspire to do similar things that we're doing The only thing that we can try to do is be faster better smarter move faster, you know, innovate faster And try to do this differently than the others But eventually and I still very committed to this I think in a few years you will see out of all of this emerge You know three or four really large global players in this space Who are basically being that digital financial assistant of customers and that will be a very valuable position to have So that is basically you know what we're trying to do So how does this work with in store at Stone's town?