With Klarna's efforts to achieve merchant and consumer scale early and ongoing, our research indicates a promising market opportunity exists, with more than one-third of US retailers planning to begin offering purchase-financing options to customers in the next 12-24 months. As an outsider to this market, the question for Klarna will be if its brand and value proposition can stand up against the many forms of direct and indirect homegrown competition.
Klarna has exhibited a promising trajectory over the past several years in Europe, driving growth both inorganically and organically. Lesser known in the US, the company's recent entry here brings it its largest and potentially most lucrative and challenging market yet. Klarna has wisely augmented its value proposition for the US, focusing heavily on purchase financing to drive measurable business outcomes, such as higher average order value, for merchants. This pitch is undoubtedly compelling, but it does not go without opposition from strong direct and indirect sources of competition. To scale, Klarna will need to continue to broaden its base of e-commerce platform and gateway channel partners while also devoting more resources toward consumer and merchant awareness and education. While scale will be a multi-year process, it appears Klarna has both the financial resources and appetite from management to make the US a long-term play.
In just over a decade since its founding in 2005, Klarna has grown from a niche Nordic payments specialist to a global player with operations in 18 markets across Europe and North America. Headquartered in Stockholm, Klarna provides both merchant and consumer-facing payment services for mobile and web transactions, operating as both a payment facilitator and financing provider. The company is well funded, having raised nearly $300m, with investors that include Sequoia Capital, General Atlantic and Wellington Management.
Klarna has pursued growth both organically across its newer markets and inorganically within its Northern European base. Klarna took on two Berlin-based firms over the last year, acquiring Cookies Labs in November 2016 and shelling out a reported $75m on BillPay in February. The BillPay acquisition signals further expansion in Germany and neighboring markets, bringing with it over 10 million regional customers. Outside of Klarna's core markets, the company has continued to organically expand its footprint in its more recent geographies – the United Kingdom and the US.
Klarna says its transaction volumes have swelled at a 60% CAGR over the last five years, reaching $14.1bn in 2016. With over 60 million consumers and 70,000 merchants, the company tells us it recorded $400.3m in revenue and issued $6.26bn in consumer financing credit in 2016. Klarna currently has 1,700 employees across its European and North American offices, up from about 1,300 when we last covered it in December 2015. Customers include Spotify, Samsung, Lenovo and Wish.com.
Klarna's two primary offerings are Checkout and Payments. Although tightly intertwined, they can be packaged and used separately, offering merchants some flexibility in how they choose to leverage the company's core technology.
Klarna Checkout is an end-to-end payment acceptance stack where Klarna operates as a payment facilitator, providing an integrated checkout approach. It enables merchants to accept all major payment methods in a way similar to Braintree or Stripe, while uniquely offering shoppers the option to pay up to 14-28 days after delivery (not currently offered in US). Klarna's primary differentiator is that once a shopper has purchased goods through a merchant using Checkout, the platform enables a one-click purchase experience across all Checkout-enabled merchant sites for future visits. Klarna accomplishes this through a massive cookie network it has built up over the years – predominately in Northern Europe – where in markets like Sweden it estimates 75-90% of devices it sees in transactions already have a Klarna cookie assigned. This network understandably takes time to build out in new markets because it needs considerable transaction volume and shopper intelligence for the model to mature. As part of this service, Klarna assumes all fraud and chargeback liability on behalf of the merchant.
Klarna's secondary product, Payments, is a hosted purchase financing offering that can be deployed within Checkout or via a one-time integration through partners including Magento, Shopify, Salesforce Commerce Cloud, OpenCart, CyberSource and BigCommerce. Payments enables e-commerce merchants to extend either planned payments (customer chooses 6-36 month payment terms at a reduced APR rate) or flexible month-to-month payments (no fixed-term commitment) to their customers.
Klarna gives merchants flexibility in how they choose to integrate financing options within their checkout page, giving the option to keep it always available, positive-reveal (the financing option is displayed only if pre-screening determines a shopper is likely to be approved) or negative-conceal (the financing option is first displayed but later removed if pre-assessment determines a shopper is not creditworthy). Merchants can also customize when financing is offered, limiting it to a specific product or occasion/promotion.
Klarna's IP centers on its underwriting models. In addition to credit bureau data, Klarna relies on some 180 individual data parameters, including SKU-level data, to determine the creditworthiness of a shopper. The credit application is highly streamlined, requiring just three steps and only top-of-mind data (e.g., last four digits of SSN and billing zip code) to apply. All credit decisions are made in real time without redirects to a third-party site. Klarna assumes the full risk of the transaction while paying the merchant in full within two business days of the purchase. Consumers make all payments directly to Klarna.
Klarna began its US entry in 2015 and counts nearly 100 employees across its Columbus, Ohio (US HQ), San Francisco and New York offices. The company has chosen not to lead with its hallmark 'pay after delivery' option in the US, focusing instead on its financing services to court merchants. We suspect the time required to scale a cookie network on par with Europe, compounded by the presence of large payment facilitators such as Braintree, Stripe and PayPal, has much to do with this decision.
We would also argue that focusing on financing allows Klarna to go to market with its most compelling value proposition for large merchants in the US. Leading with financing enables Klarna to craft its US sales narrative around top-of-mind business outcomes like increased conversions, larger average order value and access to new customers – all hot-button topics for big retailers. On the later point, Klarna also positions itself as a cross-border partner, offering US merchants the ability to reach its 60 million consumer users across 18 markets.
Klarna is admittedly early on in its US entry and its merchant base remains constrained. This is both a testament to Klarna's newness in this market and the extent of the competitive landscape here. Klarna's larger US merchants include Overstock.com, Lenovo, Wacom and GhostBed, with mostly smaller e-commerce retailers such as Shoes.com making up its roster. Klarna is wisely working to broaden its channel partner network in the US, most recently with the addition of Radial. It notes merchants selling high-ticket items such as furniture, home decor, electronics and mattresses have shown the most interest in its financing product.
Although Klarna doesn't break out its revenues, it's safe to assume the overwhelming majority is still derived from Northern Europe. Revenue is primarily derived from merchant service charges and transaction fees and consumer finance charges, fees and interest. The company notes that merchant- and consumer-generated revenues are not far off from one another in terms of size.
Given Klarna's unique role, it has long weighed the merits of working via bank partners versus becoming a bank itself. The company currently has a partial bank license in Sweden that it is able to 'passport' across EU countries. Klarna applied for a full Swedish banking license in October 2015, which is still pending. A favorable outcome would allow Klarna to offer a more extensive range of financial services to merchants and consumers. While Klarna has no such plans to pursue a similar strategy in the US in the near to mid-term, noting that WebBank has been a strong partner, it does not rule out the possibility in the longer term.
From a purchase financing perspective, Klarna faces a diverse competitive landscape. Perhaps its most obvious sources of competition are the existing forms of tender shoppers traditionally use during online and mobile transactions – credit and debit cards. As such, payment networks such a Visa and Mastercard can be viewed competitively, as can traditional credit issuers such as Chase and Bank of America. In some ways, Klarna can also be seen as going up against major private-label credit card providers such as Synchrony Financial, Alliance Data (ADS) and Citi. Admittedly somewhat different from Klarna's approach, these players offer merchants customized and tailored financing/credit programs to drive cost reduction and customer loyalty. We would also consider digital wallets such as Apple Pay and Android Pay – which have made moves to integrate with merchant websites and apps – as competitors, given the role they play in reducing checkout friction.
More directly contending with Klarna's financing offering are PayPal Credit (via PayPal's 2008 BillMeLater acquisition) and Max Levchin's heavily funded Affirm Inc. These products offer similar value propositions to Klarna, compete for real estate on merchants' checkout pages and both are consumer-facing brands. There are also several emerging financing/credit providers we are monitoring, including Vyze, Blispay and Zibby.
Jordan McKee is a Principal Analyst leading 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers. His research helps vendors and enterprises assess the key implications of emerging technologies driving the digitization of the end-to-end shopping journey.
Cam O’Shaughnessy is a Research Associate at 451 Research. He is a recent graduate of Dickinson College, with a Bachelor of Arts in International Studies and minors in Economics and Mandarin. He studied abroad in Beijing at Peking University for two semesters.
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.