Getting more ambitious

THERE is a through-the-looking-glass quality to the blue-lit tunnel that leads into the headquarters of Klarna, a Swedish online-payments firm. And there is something back-to-front about the company itself. It is a startup firm that grew up in Europe, and is now seeking to expand into America—the reverse of the usual pattern. Unlike most tech unicorns galloping to expand their market share, it already makes a profit. Even more strikingly, it plans to move from an area of financial ferment—mobile payments—into the sterile old business of retail banking. Investors are giddy about its plans, however unusual: a funding round last year valued the firm, whose name is Swedish for “getting clearer”, at $2.25 billion, up by almost a billion on the year before.

Klarna’s business “is quite basic”, says Sebastian Siemiatkowski, its founder and boss. Some 65,000 online merchants have so far hired it to run their checkouts. Its main appeal, for both retailers and their customers, is the simplicity of its system. Shoppers do not have to dole out credit-card details or remember a new password. Instead, they can simply give an e-mail and a delivery address, and leave the payment to be sorted out later. (Klarna pays the retailer in the meantime, and bears the risk that shoppers will not stump up in the end—something few other payment firms do.) Customers who have previously used one Klarna-run checkout are recognised when they visit another, further reducing the need to fill out online forms. All this hugely increases the “conversion” rate—the proportion of customers who actually make a purchase after putting an item into their online “basket”.

Like many fintech firms, Klarna believes that its algorithms do a better job of identifying creditworthy customers than the arthritic systems used by conventional financial firms. It relies on the e-mail and delivery addresses supplied, as well as the size and type of purchase, the device used, time of day and other variables. This not only allows it to bear the risk that customers fail to pay when Klarna bills them, but also to offer them extended payment plans, for a fee. These loans have higher margins than the cut-throat online-payment business—although the giants of the industry, such as PayPal, are experimenting with similar offerings.

Klarna handled sales of roughly $10 billion in 2014 (compared with PayPal’s $235 billion), generating $300m in revenue, all in Europe. (It has not yet made public figures for last year.) It handles 40% of online payments in Sweden. In 2014 it bought a German firm, Sofort, expanding its presence there. It thinks it can continue to grow in Europe, but its main focus now is America, where it launched in September.

Klarna has not been signing up American retailers as quickly as it had anticipated. But it hopes two global trends will speed its expansion. The more that online shopping moves to phones, the more pressing it is for all online traders to make their checkouts quick and easy to use, but still safe. Customers particularly detest typing in credit card numbers on their phones, especially if asked to do so in public—while riding a busy bus, say. Klarna reckons over 60% of its business today involves mobile shopping, compared with less than 10% two years ago. Some retailers, such as sellers of shoes and clothes, report an especially rapid shift to mobile.

The other broad trend is for shopping across national borders. Online markets, such as Wish.com, connect bargain-hungry consumers in rich countries to producers of clothes, watches, toys or jewellery in, for example, China. Klarna works with Wish on European sales, letting customers pay for goods ordered cross-border only after getting them, which can take weeks. That reassures shoppers not ready to trust an anonymous Chinese T-shirt firm to deliver. Many sellers are appalled by the prospect of having to comply with different countries’ financial laws, say on extending credit, so they readily outsource payments.

Klarna, in contrast, is a glutton for regulatory punishment. In fact, it is entering the most regulated bit of finance: retail banking. It is licensed as a bank in Sweden, which allows it to collect deposits from all over Europe. Mr Siemiatkowski sees this as a cheap source of financing, but also as a big opportunity. Just like online shoppers, he argues, bank customers are desperate for a safe-but-simple mobile interface like the one Klarna offers in payments. The firm’s 45m users provide it with a big and growing pool of potential banking customers who already have an inkling of the sort of service it can provide. “In the longer term we need to reimagine what banks really are,” he says, sounding like a typical fintech boss at last.