Information sharing is about to get much different in Europe, giving bank alternatives such as Klarna more to work with as they compete against the financial services establishment.
"In northern Europe most countries have only around five banks that dominate the entire market after 20 years of consolidation," said Jim Lofgren, CEO of Klarna in North America. "We believe we can be the force to disrupt the banking industry."
Klarna offers a consumer-direct point of sale financing product, and it partners with merchants and e-commerce companies. Merchants offer fixed or flexible monthly payments, or can delay payments for up to two weeks. The company has built its brand in local markets, and is also expanding into central Europe and the U.S.
The company hopes to get a boost from new Payment Services Directive rules (PSD2) governing data that go into effect in January 2018. PSD2 updates rules to accommodate the growth of mobile transactions, third party payment apps, faster payment processing, virtual currency and the changes in payment insurance rules. Banks will standardized application programming interfaces for balance checks, statements and payments, and provide these APIs to third parties.
The new rules allow consumers to order their banks to share data with third parties, which would include disrupters and challengers like Klarna.
Klarna uses artificial intelligence to manage credit risk, and its ability to produce fast terms at the point of sale. That has helped it win business from 70,000 merchants and 60 million customers, as well as investment from Visa. Klarna just received a Swedish banking license, which will enable it to offer more complicated lending products and value added financial services.
Other financial and payment technology vendors are taking advantage of the changing regulations. Modulr is selling technology to help suppliers adhere to the rules for B-to-B payments and IBM has developed new compliance technology for PSD2 and faster processing.
PSD2 is a real game changer in Europe and, in time, will affect the financial services industry on other continents, according to Zil Bareisis, a senior analyst at Celent.
"There is a tremendous opportunity for the banks, but there is also a threat," Bareisis said. "Which banks will be successful to compete in the customer experience layer? Which ones will become the easiest to do business with for the third parties?"
As it charts its future, Klarna hopes the new data rules will provide greater consumer control over their own data to open the local financial services, merchant acquiring and payments market. It will be easier for consumers to apply a broader view of their finances to larger purchases at retailers.
Lofgren would not discuss specific financial services or lending products in its pipeline. But the banking license, which is transferrable in the Eurozone and would ease entry into the U.S. market for broader banking services, would allow Klarna to grab more share of a merchant's business, similar to Square's discussed move to offer consumer credit through its merchant network.
"It can be tough for a consumer to move all of their financial information over to another relationship," Lofgren said. "But PSD2 will allow that with a click of a button. It gives all of that control over to the customer. Banks have to open their whole data infrastructure to the world."
There is a counter argument that the new data rules could help banks by enabling improved CRM and marketing relationships in partnership with third parties.
"PSD2 opens a backdoor for banks to act on behalf of their customers," said Daniel Doderlein, founder and CEO of Auka, a Norwegian company that sells bank technology on a software-as-a-service basis and sees PSD2 as an opportunity for banks to improve data-driven marketing through collaboration. "Places like Facebook or Google or others are going to be able to use that connection."
Banks have an opportunity to innovate and build on the trust they have with customers, Bareisis said.
"Customer consent, to allow third parties to access their account, and to let the bank use data about them in certain ways, is paramount, so institutions that provide tools for their customers to manage that consent in an easy and transparent way will benefit from a trusted relationship," Bareisis said.