A company built on lending money is now paying people to save it. Klarna just launched an FDIC-insured savings account in the U.S., held by partner bank WebBank and it’s part of a much bigger shift. Why are fintechs increasingly going after deposits and what does it take to make the maths work?
Our expert’s take: Andrew Steadman, Chief Product Officer at SBS
How will Klarna’s new savings account program give them a competitive advantage over rivals, and how does it help bring more users into their ecosystem (bank accounts, Klarna balance)?
I think two things come to mind with this strategy:
- They can lower their cost of funds for lending through the BNPL products they offer. As wholesale market rates increased, this clearly put pressure on Klarna’s cost of funds, so savings accounts are a good way to lower that.
- The convenience for customers of managing both borrowing and savings in one place will be attractive, particularly through a digital experience.
Klarna’s new savings account offers a 3.28% base rate with no membership required, higher than what most traditional American banks offer. How are they able to make this possible?
As a source of funds for their lending, these rates still provide a good margin. For example, on the 16th of June the overnight bank funding rate in the USA from the Fed was 3.63 percent; by offering 3.28 percent, they still improve their margins. Of course, they also are not operating with the high cost base of a branch network, etc., and so can be more flexible in pricing without having to account for those sorts of costs.
We’ve recently seen many fintechs moving toward offering direct financial services. Why is this becoming such an attractive strategy for them?
Simply put, there is money to be made. With their digital-first strategy they have a lower cost to serve and are more attractive to younger generations, who increasingly don’t use cash and don’t want to visit a branch. By using an FDIC-insured partner bank, as Klarna has done, they provide savers with the confidence of having their deposits insured, while the provider is able to extend the use of its banking charter as a means of growth. Fintechs see the opportunity to serve customers differently, and while older generations might not choose them, the market is large and so profits are to be made.
Klarna currently operates through a third-party bank (WebBank) rather than holding a banking license of its own. How could this dependency be seen as a constraint on their growth or independence?
I don’t think it will be. This is attractive to both parties: Klarna can offer FDIC-insured deposits to keep savers happy, and WebBank extends the scope of its charter beyond the geographical limitations it might otherwise have, without the costs of building a branch network. The only potential limitation is that if WebBank cannot take any more deposits, Klarna would simply partner with a second institution that could absorb the extra capacity. If WebBank were to fail, that would damage Klarna’s reputation, but it is an unlikely event, and deposits would be insured, so the FDIC would step in. Normally, the FDIC will already have arranged for another institution to take over a failing bank before the failure is publicly announced.
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