Visa takes a strategic stake in Klarna, the finance startup out of Sweden

Klarna, the $2 billion+ startup out of Sweden that works with some 70,000 e-commerce sites to enable payments and provide flexible financing to make purchases, is adding one more key investor to help take its next steps into a wider range of services. Today it announced that credit card giant Visa is making an equity investment in the company, and as part of it, the two are forging a strategic partnership to roll out new products.

Visa and Klarna are not disclosing the size of the stake — following the same pattern Visa took when it invested some years ago in two other fast-growing financial startups, Square and Stripe — and Klarna is not specifying what form the strategic partnership will take.

One good guess is that it will involve payment cards. Just the other week, Klarna received a banking license, which will give the company the ability to move into card services and other financial products: the company technically now will be called “Klarna Bank” although it will continue to keep its branding as is.

There will be other services too, it seems. “There are many things you can do with a credit card besides the issuing of plastic cards, which are obviously still widely used, but clearly technology and product is moving very quickly towards digital or virtual issuance which is extremely interesting but also wider NFC technology, push payments, biometric authentication, mobile wallets, and so on,” said a spokesperson for Klarna. “It is not a lack of possibilities or ambition in product development nor is it always being first but it is about being the best. For us it is providing merchants and consumers smooth, seamless and safe solutions across platforms and channels that meets their evolving needs and preferences.”

In doing so, Klarna needs a bigger warchest (and stronger army) to compete against an interesting mix of other players. They include the likes of PayPal, which continues to add more services to widen its own payments net; and a range of banks that are starting up at aiming at the new class of consumers, such as Atom, and more established entities that also want in on the action by investing in them (such as BBVA).

The investment comes on top of a significant secondary investment of at least $225 million made by Brightfolk, a Swedish firm controlled by a fashion magnate called Anders Holch Povlsen, at what we understand is a valuation higher than its previous $2.25 billion, which was reached in its last $80 million funding in 2015. Klarna provides online payment services for several of the youth-oriented online retail brands controlled by Povlsen, making that a strategic investment as well.

For Visa, the investment gives the company one more assurance of an entry point into a new class of financial services — specifically those who are catering to newer generations of consumers.

We are living in a time when we have more choices than ever before for how to keep our money, and how to pay for things, and where to spend it — be it through new kinds of currencies, by bypassing traditional card services altogether, and by foregoing physical stores and physical wallets. All these present potentially disruptive competitive forces for companies like Visa, and so striking up relationships with the new class companies, which are unpinning the financial services being built for those users, gives Visa a seat at the table, so to speak, to remain a part of the transaction.

Indeed, “Visa’s planned investment is part of a global strategy to open up the Visa ecosystem and support a broad range of new partners who are helping to redefine and enhance the purchase experience for millions of consumers globally,” Klarna noted.

“Klarna has demonstrated an expertise in consumer credit and online purchasing and together, we share a vision for how today’s online and mobile commerce experiences can be as simple as they are in the real world,” said Jim McCarthy, executive vice president, innovation and strategic partnerships, Visa Inc., in a statement. “Visa is committed to partnering with a new generation of partners and payment providers to bring secure, online commerce to many more consumers in Europe. We look forward to working more closely with Klarna to accomplish this.”

For Klarna, it gives the startup a move into opening up its services to a wider range of customers by offering more products powered by established and trusted brands.

“The Visa and Klarna partnership is a natural fit. We both understand consumer credit and the value of consumer centricity in developing innovative payment solutions,” said Sebastian Seimiatowski, chief executive officer and co-founder of Klarna, in a statement.

Klarna is an interesting company where new financial services are concerned.

The company has been around since 2005 and has been one of the more closely watched startups in the financial scene for years. It was Sequoia’s first tech investment in Europe in 2010, and they anted up a year later as part of the company’s whopping $155 million round (which is large today but was especially big back then).

To date, Klarna has disclosed just under $377 million in investment (but with Visa and possibly others there may have been more). Other investors include Sequoia, DST, Atomico, IVP and others.

It’s been profitable since 2005 — also somewhat rare among a lot of fintech startups — and has been steadily growing.

According to an investor deck from 2016 that TechCrunch was passed by a source in May — which confirmed the company’s $2.25 billion valuation — Klarna had at that point processed transactions from 45 million users from 65,000 merchants in 18 countries, equivalent to 400,000 transactions per day.

That worked out to 2,776 million Swedish kronor in revenues ($318 million) in 2015 and SEK170 million ($19 million) in EBT margin (6.1 percent).

Klarna says that transactions have grown 50 percent year-on-year in 2016, with 37 percent growth in Q1 of 2017. Volume growth was up 44 percent in 2016, with 39 percent growth in Q1 of 2017. In the last quarter it also added 17,000 new merchants.

Klarna notes that Forrester has predicted double-digit growth in online sales by 2021, when connected devices and mobile tech will account for 12 percent of Europe’s total retail sales, which themselves will be growing 12 percent year over year in the next five years in the region.