Online payments are often synonymous with card payments, but today a startup that’s built a profitable alternative, based around making and taking payments by way of a bank transfer, is announcing a round of funding amid a surge of growth.
Trustly, a startup from Sweden that has built a platform to make it as easy (and competitive) for merchants to accept bank transfers as it is to take card payments to complete online transactions, is today announcing that it has raised a significant round of funding from a group of investors led by BlackRock.
In an interview, Trustly’s CEO Oscar Berglund said the company and its investors are not disclosing the exact amount of the investment, but we understand from reliable sources that the deal values the company — which is profitable and had revenues of over $150 million last year — at over $1 billion, and that it will give BlackRock and others participating in the investment (including Aberdeen Standard Investments, funds managed by Neuberger Berman, the Investment Corporation of Dubai and RSIC) a minority share in the business.
For some further background, private equity group Nordic Capital essentially acquired Trustly in 2018 for €700 million ($794 million at today’s rates). This deal represents a partial exit. From what we understand the base valuation also rose with this transaction.
That’s both on the back of growth — both organic and also inorganic, as it merged with US rival PayWithMyBank, last year, to expand its network to touch 600 million consumers — and Trustly’s impressive list of customers. That list has more than 6,000 merchants today and also includes Facebook, where you can find its logo to let people buy ads and pay via Trustly; AT&T, which lets people pay bills using the network; Alibaba.com for making purchases in Europe; topping up PayPal accounts in a number of countries; and sending and receiving money via TransferWise.
This also essentially puts this investment in the hundred/hundreds of million/s range.
Trustly’s growth comes amid a bigger picture of how e-commerce is evolving as it continues to mature and become more ubiquitous — a trend that has been accelerated in the last several months as many have turned away from physically making purchases because of social distancing measures.
When many of us think of online payments, we usually associate the process with using credit or debit cards, or maybe logging into a mobile wallet to complete a transaction. But the reality is that payments are a much more fragmented business, with consumer and merchant preferences changing with each region and including a wider range of options than simply Visa, MasterCard, Amex, and PayPal or some other wallet.
Bank transfers as a method of payment are not at all common in some markets, especially those where cards have become ubiquitous. For example in the UK only about 5% of transactions online are made this way.
But in other markets, this is a very common and well-used route. In Austria, Estonia, Finland, the Netherlands and Poland, a majority of consumers prefer to pay via bank transfer — respectively the rates are 50%, 50%, 40%, 60%, 45%, Trustly tells me, basing its figures on a number of data sources including some of its payment partners, Adyen, PPRO, Global Data and Worldpay.
And Berglund said that the picture is a positive one for Trustly — and other companies that it competes with, including Klarna (another startup ‘unicorn’ from Sweden, as it happens) — because it seems that bank-based transfers as a payment method is on the rise.
There are multiple reasons for that shift. Perhaps most obviously, we’ve seen a lot of security issues around card usage, including too many stories of malicious hackers breaching businesses’ network security and stealing data and card numbers, and other kinds of card fraud. Even as more watertight procedures are put into place (such as mandatory chip-and-pin transactions in many countries), there remain loopholes and also general unease among consumers.
On top of that are changing tides in consumer-focused financial services. Specifically, thanks to the rise of mobile apps and a plethora of startups that have built “challenger banks” to provide more user-friendly banking, consumers today want and expect more control over their finances.
Using credit cards for many represents a departure from that, given that they are designed to help you spend more than you might actually have to spend, so that you can pay back in increments with interest. And, I’d argue, even debit cards can be a departure from transparency, since you are still not seeing your account balance in real time when you make purchases, and many people have overdrafts in place to again spend more than they actually have to spend.
“I think that bank transfers plays into the younger generation of millennials who just consciously don’t want to get into the debt trap, while also being used to everything being done in real time,” Berglund said.
If the story for end users — be they the consumers doing the buying or the merchants doing the selling — is all about transparency, easy user interfaces and simplification, it’s because the work under the hood remains very complex and fragmented. Such is the case here as well.
Trustly’s network, Berglund explained, is based around Trustly itself setting up its own business accounts across a wide range of banks around markets where it is active.
When a user elects to pay by bank transfer, it essentially goes through whatever interface his/her own bank uses when interacting with it directly, which then routes the payment through Trustly’s network to be paid into a merchant’s account.
The system is as secure as an individual’s own online banking interface, which typically will use two-factor authentication to complete a transaction, unlike most card transactions. Berglund says that for this reason, the company has not experienced any of the kinds of of breaches or frauds that you see in card payments.
In terms of Trustly’s business model, it is a customer of the banks, while the merchants are its customers: it charges a transaction fee to merchants who use the Trustly network to receive payments, and Berglund said that the percentage varies but is essentially lower than what they would pay for card-based transactions.
But because payments are complex, this is not the full story. In addition to working with merchants directly, Trustly also integrates with a number of third parties like Worldpay, PPRO, Rapyd and others that use these latter services to integrate a number of payment options through a single API (rather than multiple APIs or integrations) into their check-out stack.
And Berglund added that it’s looking like it might be taking on another new wave of customers going forward. Banks themselves are exploring ways of providing more services to merchants who bank with them, and so Trustly is talking to some of them about the potential of a white-label version what Trustly offers so that they can provide the service directly.
The reason it’s not replicated is the same reason it’s hard to build any financial service from the ground up: Trustly has put in place not just a banking network but the integrations around it, plus the customer service it provides to merchants around the business of payments. That makes it hard to replicate, he added. “You have a huge platform here in the middle of this business, not unlike the platforms that exist for card payments,” he said. “It’s a big system all in all.”