Risk Algorithm Paves Global Expansion for Klarna Payment System

Klarna AB, Europe’s largest specialized online payment solutions provider, is planning its first expansion outside the region as the company forecasts soaring e-commerce volume from retailers eager to let it assume their credit risk.

Klarna, which operates in 14 countries including Sweden, Germany and Austria, is interested in both the U.S. and Japan, Chief Executive Officer and co-founder Sebastian Siemiatkowski said in a Jan. 29 interview at the company’s offices in Stockholm. Klarna wants to be present in all of Europe and also to expand globally.

“I’d be very surprised if we haven’t launched at least one country outside the EU within one to two years -- a big country,” the 32-year-old executive said. “There is enormous potential.”

Klarna’s expansion comes as large retailers step up online efforts. Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, plans to expand to four new online markets this year while Ikea Group, the world’s No. 1 furniture retailer, has said it will continue to add markets and expand the number of online products available growing its web shop presence to 13 markets from 10 last year.

Klarna wants to make web payments faster and easier and in doing so, increase the number of completed transactions for online shops by removing “the hassle” it says surrounds many payment solutions, such as typing in numbers from a debit card. By assuming online merchants’ credit risk, it also allows customers to pay for goods after orders have been placed and shipped.

Risk Algorithm

To avoid losses, Klarna uses an algorithm with over 200 variables measuring client risk. They include previous purchases, the time of the day the customer buys goods, the frequency of purchases and even how shoppers type their names. Some 50 of the company’s total 1,000 employees work with assessing customer risk.

Klarna late last year merged with Germany’s Sofort to gain control of 10 percent of the combined $100 billion market in countries where the companies operate. That number “should grow substantially” in coming years, Siemiatkowski said.

The company says that only 33 out of 100 people who proceed to checkout on a desktop actually make the purchase, meaning that almost 70 percent of customers disappear during the payment process. Klarna claims merchants get a 20 to 30 percent increase in completed transactions with its products.

Mobile Devices

Klarna’s payment solutions, available both on mobile devices and for desktops, are currently used by 18,000 shops, including book retailer Adlibris in Sweden. SAS, Scandinavia’s biggest airline, is using the system for ticket sales as is Stockholm’s subway system. Sofort’s solutions, which provides direct credit transfers between shoppers and their banks, is used by more than 25,000 shops.

Klarna, which was founded in Stockholm in 2005, uses deposits to fund its operations and has raised 2 billion kronor ($308 million) to 3 billion kronor so far in Sweden, Chief Financial Officer John Keatley said. The company also recently started taking deposits in Germany, he said.

In Sweden, Klarna offers deposits via Avanza Bank, with an interest rate of 1.5 percent on three-month deposits and 2.6 percent on 24-month deposits. In comparison, the rate on six-month deposits at Svenska Handelsbanken AB, Sweden’s biggest bank by branches, is 0.55 percent while the deposit rate on a SEB AB general savings account is 0.3 percent.

While its business is based on innovative solutions and advanced technology, Siemiatkowski has no plans to start accepting payments in the digital currency Bitcoin.

Bitcoin ‘Bubble’

“The way we look at it, it is a bubble,” the CEO said. “I don’t see any practical application of it that is interesting in any larger scale.”

His comments echo concern among Nordic regulators, Baltic central banks and Swedish lenders. SEB, the largest Nordic currency trader, is rejecting requests from clients seeking to set up accounts to manage Bitcoin. No Nordic regulator recognizes the software as money and Nordea Bank AB, the Nordic region’s largest bank, is advising customers to think twice before touching the currency.

While Klarna, regulated by the Swedish Financial Supervisory Authority, uses deposits to finance the credit it extends to shoppers, the company has relied on private placements to bring in capital. Sequoia Capital, DST Global and General Atlantic are among Klarna’s investors. It’s currently not considering an initial public offering, Siemiatkowski said.

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