Klarna, A Unicorn, Is Coming To The U.S. And Going After U.S. Credit Card Companies

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If you live in the U.S., you might not be terribly familiar with Klarna, a 10-year-old Stockholm-based company that provides payment services for online storefronts in a somewhat unique way — by “separating the buying from the selling,” as company cofounder and CEO Sebastian Siemiatkowski explains it.

Put simply, you visit a site powered by Klarna, input only your email and zip code, and presto, your item is purchased. You then have 30 days to pay back Klarna, using whatever payment method you like. The big idea is to increase conversion rates, and whether or not they realize it, 35 million consumers have now used Klarna across the sites of 50,000 merchants, who understandably love the service. (The fewer keystrokes required, the higher the chance a purchase will be made, especially with a smartphone.)

Of course, what’s happening behind the scenes is a sophisticated fraud management operation, one that counts Sequoia’s Michael Moritz as a board member and which was most recently valued at $2.25 billion. Klarna plans to compete more aggressively in the U.S., too. Over the past year, it has set up offices in New York and Columbus, Ohio. Now it’s searching for space in San Francisco, where it eventually expects to employ up to 30 people to help it strike relationships with companies big and small.

Over coffee earlier this week, we talked with Siemiatkowski about Klarna’s roadmap and what he thinks of one competitor in particular: four-year-old Stripe, whose valuation is twice that of Klarna and which now has its sights on the Nordic countries where Klarna has become king. (Stripe also happens to be backed by Sequoia.) Our chat has been edited for length.

TC: You’re competing in a crowded payments landscape. What’s Klarna’s key differentiator?

SS: We realized this whole idea of allowing people to pay without even having a credit card, because we would extend credit to them and they would pay later on, created many fewer friction-filled situations. In the U.S., there’s this obsession with how many credit cards a company has on file. “Apple has 150 million credit cards on file; that’s why it’s so well-positioned to do payments!” But we thought, What if you don’t need credit cards on file? You could just extend people credit and allow them to pay later on and really separate buying from paying.

Another difference: We used to just be one choice at the check-out. You could still decide to pay using Visa or PayPal or Amex or Klarna. A couple of years ago, we reinvented ourselves around our newest product, Klarna Checkout, where we basically take over the entire transaction. [Editor’s note: It’s a white-label product; you can check it out yourself at Overstock.com, one of Klarna’s first big U.S. customers.]

TC: You’re qualifying people for purchases in less than a second. What type of information do you need to do that?

SS: We’ll read through all the background, like the screen size, the computer device, and what are you buying. We’re the only company collecting SKU-level data, so we know if you’re buying an iPhone or three sweaters. And we take all this in combination and decide whether to say yes or no. As for other variables, we’re looking at whether the purchase is being made at three o’clock at night versus three o’clock in the day; we know that if you’re buying a book on physics at a book store, it’s a fairly good credit and there’s a low risk of fraud as opposed to a big electronics purchase.

The problem with payments is the credit card thing was implemented exactly the same — [with users inputting the] same amount digits, expiration date, the three-digit CVC code on the back of the card — for every transaction, even though transactions are hugely different when it comes to risk. Some are very risky, and some are like click-buy and don’t worry about it. And this one-click experience that Amazon is so famous for, [we want to bring to] other retailers.

TC: Are people confused by your much shorter process?

SS: They are, so you have to be really great in how you present it and communicate about it. Whenever you change behavior, you’re always going to have [some transition period].

TC: You entered the U.S. market four weeks ago. Who have you signed up?

SS: Ten clients, including Overstock and some Shopify merchants, including Chubbies, one of those merchants that everyone on Shopify knows well because they’ve been successful.

TC: What percent interest do you charge for extending credit, and how do you split that with the vendor?

SS: Actually, we don’t. Consumers have to pay within two weeks or 30 days (depending on the merchant), and that grace period is free of charge.

TC: So how do you make money?

SS: If you look at the whole credit card industry, the companies that make the most money are the credit card issuers. It’s not Stripe or some of these other guys; they make just a fraction from interchange fees, plus whatever they charge per merchant, so there’s not a lot of money in there. It’s Citi and Capital One that make money. So by offering a solution to the merchants that drive conversion rates, we start to introduce to consumers an alternative to your credit card, and we do that slowly. We start nudging you, Hey, you could use this alternative to credit cards, and a subset of these people are like, “Great, I like this experience.” And they start using it more and more and it replaces the credit card, sort of like a virtual credit card. Then [we charge] similar to credit cards [regarding interest rates].

TC: How many people are using the service this way right now?

SS: About 10 million.

TC: So they click a button and Klarna will always fill out the field of information at checkout.

SS: Yes.

TC: Will you create a loyalty program for users to compete with the traditional card companies?

SS: You’re into our roadmap kind of thing. We will, over time, depending on the maturity of the market. In Sweden, we already process 40 percent of all online payments, and while Sweden may seem small, it’s very advanced in terms of e-commerce.

TC: You staged a secondary offering recently. Why?

SS: We had a warrant program that allowed us to buy shares at a lower valuation and we wound up owning more after the secondary sale.

TC: It valued Klarna at $2.25 billion. That’s a lot, but it’s roughly half that of Stripe, which some see as your biggest competitor. Do you see Stripe that way?

SS: Our case is different. Because we’re able to take people out of their existing credit card relationship and show them there’s a better alternative, we make much more per transaction. On $10 billion in volume last year, we made $300 million in revenue. So you can see our take rate is much higher than any other payments company.

Stripe is a very different play. It’s making [a smaller amount of] money for each transaction after paying both the merchant and Visa, so it’s a huge scale type of game. I’m a fan of [Stripe’s founders] and I think they’ll thrive and be successful. But living up to $5 billion is going to demand a lot of success.