Klarna: payments company lets customers try before they pay

When two Swedish teenagers’ luck ran out and they had to sleep rough while hitchhiking in the US, they had no idea their shared hardships were forging a friendship that would launch an ecommerce company that is taking on the world.

“We had a few days with no money and no one picked us up, we were hungry and slept on the street. You get to know each other quite well like that. It was helpful,” says Niklas Adalberth, deputy chief executive of Klarna, the leading epayments provider in Northern Europe.

His hiking partner, Sebastian Siemiatkowski, now Klarna’s chief executive, had contacts in the retail sector who were frustrated by Swedes’ reluctance to shop online. In the early years of the last decade, people didn’t want to pay for goods upfront.

But after the two friends enrolled at the Business Lab at Stockholm’s school of economics, an idea was born: to take on the seller’s risk and allow the buyer to receive and examine the goods before paying for them. Together with a third friend and co-founder, Victor Jacobsson, they pitched the idea to a gathering of the cream of Swedish industry — and were flatly turned down.

“We were three 23-year-old kids with no finance and no experience beyond flipping burgers,” Mr Adalberth says. “But afterwards, one entrepreneur came up and said: ‘Don’t listen to the old people.’ That was very important, it gave us some spirit.”

With no families to support, and Sweden’s strong social safety net to catch them if they fell, the three carried on. With seed money from angel investor Jane Walerud, they launched Klarna in April 2005. Their first client sold women’s lingerie online — and is still with them.

In profit ever since, Klarna is a “unicorn” — a tech start-up valued at more than $1bn and one of the few in Europe to achieve that title. With 1,200 employees in nine countries, it is one of Europe’s fastest growing companies and processes 40 per cent of Sweden’s internet retail sales.

“Even before we started, merchants were asking how to separate the buying from the paying, to allow people to buy easily and deal with the payments later on,” Mr Adalberth says.

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“And if you don’t need to put up your credit card in advance of making the purchase, why would you? Imagine the Amazon experience but without having to upload lots of detailed information.”

Klarna takes the full risk, paying out to the merchant whatever happens. The customer only pays if satisfied, and has up to 14 days to do so. Last month the company launched a campaign enabling customers to avoid payment until the end of the summer.

The essence of the business is a super-smart way of assessing customer risk based on very limited information. As a result, there is no need for most customers to go through a complex process of registering their payment details — they just enter their address and date of birth, and click the “buy now” button.

Sweden is particularly rich in terms of publicly available data relevant to financial risk — you can check a customer’s income online, for example. But now Klarna has developed advanced algorithms that model financial risk based on up to 140 variables, including such data as a customer’s geographical location, IP number, machine ID, time of purchase, and so on.

“In the beginning, it was important to have access to the Swedish data, but after we developed the algorithms and added more variables we are now able to do this for hundreds of merchants in the UK and elsewhere,” Mr Adalberth says.

Mr Siemiatkowski and Mr Jacobsson researched a Masters dissertation together on how to use behavioural data for risk, and found that it is four times more powerful than financial data. Information from 250,000 transactions every day is fed into the model. Klarna does not sell its customer analyses to other companies.

If the model flags up potential risk factors, then the customer is asked to pay upfront. “If you want to buy several iPads at 3am from a Hotmail account in Romania, then we might say you can’t pay after delivery,” Mr Adalberth says.

He attributes the company’s success partly to the three founders’ ignorance. “We didn’t have a clue about the components that made up the payments system at the time, so we reinvented everything,” Mr Adalberth says. “We rebuilt the entire payment chain ourselves instead of having to ask if we could modify someone else’s system.”

Their novice status made them humble, which also helped. “We needed to take on very senior people from the start who knew payments better than us, so we created the right humility to do it, which makes you listen to other people and take their opinions seriously.”

Of course it was not all plain sailing: “We were fighting a lot of course,” Mr Adalberth recalls. But the three set a policy early on that even if they got angry with each other, no one was allowed to walk away without resolving the discussion. It helped that they were a trio — there was always someone in the middle to negotiate.

Klarna has expanded from a try-before-you-buy service into straightforward instant payment, which it now handles for Stockholm’s public transport system, enabling ticket purchases by SMS text message. The company is busy building its team in the US and other markets.

“We are still like a start-up in terms of the opportunities ahead,” Mr Adalberth says. “It does keep me at wake at night to think how big it could become.”