Our founder Jan Andresoo was a guest on the start-up radio show and podcast Restart, hosted by Henrik Roonemaa and Taavi Kotka, talking about the opportunities and challenges for Paywerk.
Jan, you have been in the finance world for twenty years... Some people just keep finding new things to do in one sector. A lot of people walk around and can’t find an idea for a start-up. But really the ideas are endless.
I’ve been invited to talk about entrepreneurship a lot, and the only question I always find trouble answering is: where do ideas come from? In 2010 I had an idea to offer hire purchase – nothing revolutionary, even my mother used hire purchase to buy furniture when I was little. But sometimes things fall into place in a way that something old can be made into something new and viable. Sometimes you don’t need to come up with a genius idea, but to bring old things back to life and make them work in a new situation.
The Buy Now, Pay Later sector is booming, and Klarna, the leading fintech, is the pioneer in this field. It began with e-commerce, where you’re not sure if what you’re ordering is exactly what you wanted, will it fit, is of great quality. BNPL originates from the times of catalogue shopping.
Today, you receive your goods, try them and pay for the items you decide to keep. Klarna started this, it is free for the end consumer and the merchant carries the cost. This payment method’s popularity is growing rapidly and BNPL companies are popping up like mushrooms after the rain.
Explain to me – where’s the value? The merchant wants their money now, not later.
The merchant does get paid straight away, but the customer can pay for the ordered goods when they arrive, after deciding which items to keep. Also, it’s a budgeting and affordability tool, as the so-called Slice option is a popular way to pay in three parts over time.
I’ve heard that BNPL boosts sales by 10 to 20%?
Actually, there is a problem: the product needs credit assessment capability. When we look at Europe, credit-based purchasing power is country-specific knowledge. This means that Estonia needs to assess the Estonian shopper’s credit, Latvia the Latvian’s, Poland the Pole’s and therefore the BNPL companies and offers do not move well across country borders.
Let’s say I’m an e-shop with clients in several markets. Now I would need to integrate each country separately to a BNPL provider in each country since today, for example, a German e-shop can’t offer Pay Later to an Italian client. And Paywerk is exactly this borderless BNPL platform that allows integrating many countries and financiers by very simple integration.
Another problem is that since BNPL is so popular and a lot of companies are operating in the sector in different countries, they are all very similar, yet all slightly different. For merchants it is a headache to have different offers in each country depending on the different BNPL companies and their products: slice in 4, slice in 3, pay in 14 days, pay in 30 days...
Paywerk’s aim is to standardize the payment method, one logical slice and one invoice option, and to have local financiers in each country.
So, you mean that for example if I am Booking.com, selling travel destinations and hotels and plane tickets in different countries I may have different banks in different countries taking on the credit risk and financing?
Yes. As credit risk is country-specific, it is difficult to find a financing partner who would be willing to blindly take this risk into their balance.
I’ll ask a traditional question that also Bolt and Wise heard a lot. You are going to do something that the big players already established on the market could do without any real effort. You want to get there before them. Klarna could expand to 180 countries tomorrow and there wouldn’t be much point in your platform. Or at least there would be a huge competitor in your way.
Where did our idea come from? From life itself. Inbank offers Buy Now Pay Later in 4 countries, but we cannot offer a single integration to the merchant operating in all these markets. Why? Because every company begins and builds upwards in one country, makes their decisions and infra-technological structure at the given point in time, and expands country by country. At one point you realize the value lies in opening all the markets, but it is technologically impossible to achieve because you have such a legacy system that enabling it is too big an effort.
For example, Klarna has at least 3 different IT infrastructures: one for the US, one for Germany, one for Scandinavia, and they have acquired 8 companies that work on their own infrastructures. Therefore, how feasible is taking on dozens of new countries when they could grow twofold in the US alone? So yes, I am sure Klarna could enter all the small European markets, but I would venture a guess that creating these technological capabilities come at a high price. Now they need to do business and grow fast, not build the infrastructure to open all European markets to the merchant with one integration.
Yes, I understand, and the success of Bolt and Wise is proof that one cannot do business in all corners of the world overnight. And another thing: we are asking if there is room for a second. The world has Coca-Cola, there’s no need for Pepsi. Yet there are people who want Pepsi as well. Also, it is harder for the big player to fight with effective alternative solutions.
So, if Klarna has 80% of the market and Paywerk has 10%, and Paywerk offers the merchant better interest or better conditions, you win. If I want to win market share and subsidize for a period, it is noticeably easier to do this at 10%. It is not useful to have 100% of the market, so there will always be room for others.
Yes, it is a complex matter to explain. Paywerk is building the infrastructure, offering merchants a simple integration, and dealing with local financiers in each country. And our goal is to open Europe up by one integration. However, If I’m Klarna, Alma, Twisto, then my goal is to offer financing successfully in a market. Paywerk offers the strategic infrastructure to standardize BNPL and the chance for different financiers to participate.
Do I understand correctly that since the credit decision is complicated due to country-specific differences, it is made by the local financier?
No, this needs to be built into the Paywerk infrastructure. If I let local financiers decide this however they feel like, I ruin the standard. Most definitely we need to have credit underwriting capability and infrastructure at Paywerk. But we do not take the credit risk, that is for the partner financiers in different countries.
Your move from a bank CEO position to a start-upper is courageous and surprising because it is usually very difficult to explain start-up principles to people from the banking world. You can’t imagine how often I have argued with so-called old economy representatives on how can Wise be worth 10 bn when their profit is 20 m – it would take 50 years to justify the valuation. But you’ve understood that there is no other way to build Paywerk than as a start-up.
Yes. Paywerk is a BNPL platform, it does not finance, but offers technological infrastructure. And as we all know, technological infrastructure is an extremely expensive investment. We are looking for investors who understand why we’re going to realize this huge and quite risky pan-European ambition, and who are willing to support it with capital.
So where will you be heading? The same markets as Klarna or places like Poland, Czechia, Moldova...
We investigated different markets but finally settled on Germany. There’s a nuance we discovered when building the MVP: there is basically a non-existent capability for cross-border BNPL, therefore our current logic is to concentrate on the German market by also going to their linked markets, as Germans love BNPL. For example, it would be convenient for Germans to use their Buy Now Pay Later options in Italian e-shops.
What phase are you in?
We’re pre-seed. We didn’t rush to raise money. We’ll build the MVP. Our core team is working hard to have something to offer merchants by the end of 2021. As we come from the old economy, we believe that building with our own funding has a higher valuation than simply selling an idea. So, we are pragmatic start-uppers, we come from the old economy and take something from there with us.