Sweden’s Klarna Racks up Some Big Gains in the Early Going of Its U.S. Debut

Sweden’s online-payments firm Klarna started operations in the United States only four months ago, but already it is making itself felt in the highly competitive business of serving U.S. e-commerce merchants.

Nearly 20 retailers have signed up for the company’s streamlined checkout service, including big sellers Overstock.com and Shoes.com. That’s shy of the 50 or so the company expected by year’s end, but not a bad start after a Sept. 1 launch. And close to 1 million consumers have used the service so far, ringing up sales at a current annual run rate of $1 billion.

Meanwhile, more payment options are on the way. “This year, you’ll see us scale aggressively in terms of the number of merchants and options for consumers,” Brian Billingsley, chief executive of Columbus, Ohio-based Klarna North America, tells Digital Transactions News.

Klarna counts on frictionless checkout to boost usage, especially on mobile sites, where abandonment rates soar when users must type out streams of information. To use the service, consumers enter an email address and a Zip Code for identification. That links them to a wallet that stores credit and debit card credentials, though Billingsley says bank-account transfers via the automated clearing house and proprietary credit cards are coming in the second quarter.

For each transaction, Klarna pays the merchant within a couple of days and then bills the consumer, who has fully 14 days to pay Klarna. That appeals to buyers who want to try out products before they pay for them, Billingsley says. Merchants pay what amounts to a discount fee for each transaction. The current rack rate is 3.5% plus 30 cents, though bigger sellers pay less. In return, Klarna handles credit risk, fraud prevention, and chargebacks. Also, merchants should see lower abandonment rates, the company says.

Klarna is not alone in this business, but the U.S. market is wide. “There’s certainly a niche—maybe a pretty big niche–in e-commerce for low-friction payments and low-friction credit,” notes Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consultancy that follows payments, in an email message.

The streamlined checkout is particularly important as e-commerce increasingly moves to mobile devices, though here Klarna is up against rivals that recognize the same thing. A number of gateways and processors have recently introduced fast-checkout routines to keep mobile users from walking away from transactions.

A prominent example is PayPal Holdings Inc.’s One Touch technology, which allows PayPal users to buy with a single click. As of October, 1 million merchants globally, and half of the Internet Retailer 500 merchants, were offering One Touch, and some 7 million consumers were using it.

Despite its fast start, “Klarna will find electronic payments in the U.S. in 2016 a tougher slog than Sweden a decade ago,” observes Grover. “Online and mobile-commerce payments friction is being reduced by a host of open, in-app, and closed digital wallets. Offering instant credit based on limited payee and purchase data is interesting, but not unique.”

But, competition or not, Billingsley sees no slowdown for Klarna in America. For its first U.S. Black Friday and Cyber Monday, “we blew past our goals” for volume, he says.

Privately held, Klarna has achieved a $2.25 billion valuation, based on its most recent funding round. That ranks the company among the so-called unicorns, private tech companies that are worth $1 billion or more. But unlike many such firms, Klarna eschews the region where much of the tech money is. “We not in Silicon Valley,” says Billingsley, whom Klarna recruited from Alliance Data, a major processor for private-label credit cards. “There are some distractions to being there. We want to be current. We want to be mentioned. But we want to stay focused on the long term.”