Klarna: Solving the Most Fundamental Challenges of eCommerce

Earlier this week, a mate told me about a Swedish payments company that is funded by Sequoia Capital, the venture firm that invested in Google, Paypal and more recently Square.  To learn more about the Klarna, I thought I’d do a post on them.

First, some background.  Klarna was established by three students at the Stockholm School of Economics in 2005, when they took part in the school’s incubator programme and received EUR 60K of angel investment.  The background for their business idea can be summarised with two simple facts:

·      70% of online shoppers would prefer to pay by invoice

·      29% of those who don’t shop online do so because of security

The entrepreneurs behind Klarna therefore decided to develop a convenient, secure and flexible solution to enable online payments by invoice.  The customer simply selects Klarna Invoice as payment method at check-out, enter its national ID number and Klarna will underwrite the payment.  The merchant sends the order, along with an invoice, to the customer, who settles the invoice with Klarna within 14 days. 

By implementing Klarna Invoice, and better catering to customers who are uncomfortable with using credit cards for online purchases, merchants increase sales by an average 25%.  Klarna charges the merchant a set-up fee of EUR 330, an annual membership fee of EUR 330 and a transaction fee of 2.95% plus EUR 1.7.  This is clearly not cheap, but with few competitors offering a similar service, most merchants will probably see the value of Klarna.

In addition to their basic Invoice solution, Klarna has launched two other products; Klarna Account and Mobile.  Klarna Account is an instalment service that allows customers to break up their repayments over several months.  All purchases that are made through Klarna are consolidated to a single account, which provides additional simplicity.  This service has half million users, who on average make 5 times more purchases than other online customers.  

Klarna Mobile is the most the most recent Klarna product and is currently only available in Sweden.  With this solution the customer enters his mobile phone number at check-out and receives a PIN-code by SMS, which is used to verify the purchase.  The customer is automatically set up with Klarna Account, which provides one monthly account that aggregates all purchases and enables the customer to split the payment in instalments.  Although this service initially targets online payments, there is clearly potential to expand it to brick-and-mortar purchases.

The numbers certainly demonstrate that Klarna has hit on a very attractive opportunity and show why Sequoia chose to invest.  Five years after being set up, Klarna is now present in 6 northern European markets, Sweden, Finland, Norway, Denmark, Germany and the Netherlands, and is accepted at more than 8,000 merchants.  4 million customers have made a purchase through Klarna to the value of more than EUR 500 million.

The beauty of this model is that Klarna is not dependent on building a network, as customers can use the service without already being registered users.  Although customers may be more inclined to use the service as it becomes more familiar and they begin to consolidate their services with Klarna Account, at its core, the service is as relevant to the first merchant as it is to the millionth.  

Still, there are a number of challenges ahead.  The credit card networks are continuously improving their security features, slowly alleviating customers’ concerns with security.  Furthermore, every week a new player seems to enter the online payments space with new, more convenient and secure technology.  These trends may eventually put pressure Klarna to reduce their merchant fees.

Moreover, Klarna’s Mobile solution does not seem like a viable competitor in the bricks-and-mortar space.  Customers are more comfortable with using credit cards for physical transactions, cancelling out Klarna’s proposition to brick-and-mortar merchants.  With this in mind, physical merchants are unlikely to accept the relatively high implementation, membership and transaction fees that come with Klarna’s service.  Finally, the scale of sales and implementation resources that would be required for Klarna to expand their service among physical merchants would probably see them overreaching.

Despite these challenges, by developing a secure and convenient method for customers to shop online, Klarna has solved two of the fundamental challenges associated with ecommerce.  With little competition in this space in Europe, Klarna will likely to continue growing for many years to come, certainly justifying Sequoia’s EUR7M investment.

Social Commerce: Leading the Future of Online Shopping & Payments

Until recently, e-commerce was the domain of online shopping sites and payments was a fenced-off part of a now-familiar ‘check-out’ process.   With the emergence of social and geo-location-based services, e-commerce will change fundamentally.  This will disrupt the current online payments process and require more flexible and customisable solutions.  This blog entry looks at the emergence of social commerce, early market leaders and possible implications for online payments.

Although online social networks have been around since the late 90s (sixdegrees.com launched in 1997), the tipping point can be traced to 2003 when PC penetration, the emergence of broadband technologies and the rise of software platforms fuelled the growth of these networks.

Today, these networks have fundamentally changed the online experience from a passive, read-only mode, to an active, read-write experience.  The corporate world has thrown itself on the bandwagon and nearly all companies now have a presence on social networks.  Still, very few have cracked how to transform this presence to dollars on the bottom line. 

In a recent edition of the Lydian Journal, Karen Webster identified 4 forces that will trigger a tipping point for social commerce:

The explosive growth of social networks

·  75% of worldwide online users now visit social networks or blogs, a 24% increase from 2009 

·  Although younger users are more likely to visit social networks, half of Internet users aged 50 – 64 and one in four of users aged 65 or older now use social networks

·   Among the different networks, Facebook is the largest with close to 600 million users, followed by Twitter (190M), MySpace (122M) and LinkedIn (70M)

Social networks become the dominant destinations online

·  Time spent on social networks Facebook and Twitter accounts for nearly one-quarter of the time spent online for Americans, up nearly 50 percent from a year ago

·  One explanation is that social platforms allow their users to do everything from online gaming to messaging with friends to exploring their interests and favourite brands, and thus economise on their time spent online

·  Mobile phones are also increasing the time we spend on social networks; 150 million people connect to Facebook via their mobile and 37% of Twitter users connect via their mobile

Social networks are high-trust sources of information

·  People join social networks to be part of a connected community

·  Communities of peers are high-trust networks where users are more willing to disclose personal information and even make purchases

·  Peer-to-peer word-of-mouth has always been a source of valued, dependable information – social networks have the potential to systematise this and become a hub for purchasing decisions

Merchant begin to see the value and growing importance of social networks

·  Based on the above factors, merchants are beginning to view social networks as a sales channel with which to turn fans into customers

·  Nearly all major retailers have a fan page on Facebook as traffic to their own websites is being cannibalized by traffic on Facebook, where fans are more willing to buy and advocate on behalf of the brand

·  Analysts estimate the value of an average Facebook fan to be $136.38, suggesting that fans are likely to spend an extra $71.84 they would not otherwise have spent

·  More than half of Twitter-users recommend companies or products in their Tweets, with just about that same percentage actually following through to buy that product

Although social networks clearly represent a fantastic prospective sales channel, very few companies have yet managed to generate revenues on these platforms.  Attempts to tap into this opportunity can be grouped in three categories:

·  Shopping cart technology that facilitates check-outs on Facebook (e.g. Payvment)

·  Deal-sites off social networks that drive sales at discounts (e.g. Groupon or Living Spaces)

·  Promotional activities aimed at driving traffic to online or offline stores off social networks (e.g. JetBlue’s Twitter promotions)

However, the next years will no doubt see tremendous innovation and social networks will transform our current experience of online shopping.  New forms of online shopping are likely to tap into social dynamics in new ways and will require more flexible and customisable shopping and payment interfaces. 

It is therefore essential that payment providers develop technologies that can support this development. PayPal and IP Commerce have approached this challenge by opening up their platforms to external developers.  However, the other major players, such as Visa, MasterCard and American Express will undoubtedly have their own responses.