The $20m investment by fashion chain H&M in Klarna, the Swedish bank, recently attracted attention amongst traditional retailers. But does it point to the continued dominance of traditional retailers, or is it a case of too little, too late?

Given the hype of the Dot Com boom, it has taken a surprisingly long time for e-commerce to become accepted as a genuine long-term trend. But with high-street goods retailers like Tesco calling for increased taxes on e-commerce to subsidise their local business rates(1), you know online retail is here to stay.

In fact, online retail sales represent 17% of total retail sales in the UK, up from just 5% in 2008(2). And UK consumers can no longer afford to resist more cost-effective sales channels, since consumer debt is at its highest in history(3). While cross-border retailing was also off to a slow start, a 2017 study by UPS found that 71% of online shoppers bought from retailers outside their home country, 96% of online shoppers are purchasing on marketplaces and 43% of smartphone users purchased from their device.(4)

Against this background, it’s becoming obvious that high-street brands have failed to adapt to key drivers of rising online sales. As their figures reveal, e-commerce marketplaces like Amazon and Alibaba have become the new online high streets by supporting every step in the retail processes for consumers and sellers alike, from product search and browsing, to financing, delivery, complaints facilitation and returns.(5) In that environment, traditional retailers can’t simply rely on a digital version of their own-brand physical stores to attract and retain customers; and their call for subsidies shows they aren’t making enough money through their online sales channels to subsidise their under-performing bricks and mortar.

This is not the fault of the tax system, either. Businesses have to factor taxes into their business models, not the other way round. And taxes should be technology-neutral. They should certainly not oblige taxpayers – and ultimately consumers – to subsidise legacy technology over innovative competition.

So it must be tempting for major retailers to hedge their bets by investing in financial technology that other retailers may also use – in other words, trying to capitalise on the marketplace effect without sacrificing their brand. This would seem to explain H&M’s investment in Klarna. The fashion brand has 4,700 physical stores and online shop fronts in 14 markets, while Klarna offers point of sale, mobile and online payments, delivery and returns management and try-before-you-buy-and-pay-later service to about 90,000 merchants. This is still a far smaller customer base than major card acquirers, for example, but by offering complementary finance products Klarna also stands to gain access to their customers too – as demonstrated by its tie-up with WorldPay, the largest card acquirer in the US and the UK, which is always looking to add new payment methods for its merchant base.

Meanwhile, from Klarna’s standpoint, the deal with H&M represents another in a series of deals that began with a kick-start by VISA, the card scheme operator in June 2017.(6) Since then, Klarna has bought the retail financing arm of merchant bank Close Brothers with access to only 600 active merchants in the UK with a loan book of only £66 million; and integrated with various providers of technology and card acquirers who wish to add the option for customers to obtain physical and online point-of-sale finance.(7) Klarna also offers a free peer-to-peer (P2P) payment service to a potential market of 60 million European consumers (still a long way short of rival offerings like PayPal(8)).

Of course, one might question whether it’s a good time for H&M, or anyone else, to make yet more credit available to today’s consumers, but the credit cycle will turn again eventually.

Most importantly, however, one needs to bear in mind that, in 2017 alone, over 300,000 businesses started selling on Amazon (9) – whose real competitor is Alibaba, the Chinese marketplace operator (10). Meanwhile a broad range of vertical-but-local B2C and B2B marketplaces have evolved around private rental opportunities, transport services, and even auditable supply chains using distributed ledger technology.(11)

I’m afraid that traditional retailers have left it way too late to dominate the online world in the same way they have featured on the high street to date.