Klarna takes its online service to offline merchants

Klarna, one of Europe’s most highly valued tech startups, set to introduce payment-processing services at brick-and-mortar stores later this month.

Klarna — a Swedish payments provider for e-commerce businesses — makes the move from click to brick as it rolls out its first in-store solution later in May.

“We expect the offline offering to potentially outgrow our online business,” said Klarna’s co-founder and chief executive, Sebastian Siemiatkowski, in an interview with WSJ. The concept is being launched soon in a store in Stockholm and the plan is to expand it to the whole of Sweden as well as internationally.

How it works
Klarna’s physical store offering will look a lot like its existing online offer. Customers simply produce their mobile phone number to the cashier when checking out at the register. Within no more than a second or two Klarna sends an SMS with a link to an online portal to confirm payment completion.

The Klarna platform pays merchants immediately in a transaction and treats collection of funds from the consumer as a separate action that is undertaken later. Consumers can decide to settle up immediately with Klarna or pay out over 30 days in installments—which comes at a fee. In either case, the entire transaction risk is taken by Klarna.

To asses credit risk, Klarna considers over 200 data variables to determine if consumers are creditworthy. If the shopper looks too risky, the deferred payment option is not offered.

A changing payments landscape
McKinsey & Company’s last global payments report estimated the payment services industry was worth US$1.7tn in global revenue for 2014. With online payments currently accounting for less than 10% of total retail spending in Western countries where Klarna has a presence, the move into physical stores opens a much bigger market for the company. A market place where banks must increasingly share with nonbank digital players as digital technologies continue to disrupt the payments industry.

Klarna’s competition at physical storefronts won’t be just banks, but increasingly, high profile digital players such as Alipay, Apple Pay, Android Pay, and Google Wallet to name a few.

Squeezing out the competition
Klarna and nonbank digital providers are likely heading toward a competitive crash with Europe’s big banks, as recent regulatory changes now require banks to further open their networks to up-and-coming players.

Klarna, though, does not intend to work with or through banks for long. The firm has applied for a banking license from the Swedish financial supervisory authority and aims at offering bank accounts and payment cards of its own in the future.

Klarna will first introduce its service in physical shops at a Stockholm beauty store later this month and expand throughout Sweden and the rest of the world from there. Michael Gegerfeldt, who manages the Stockholm store known as Eleven, said transactions through Klarna will on average be 42% cheaper than through his set of traditional card terminals.

“Today we never talk to banks,” he said.

Founded in 2005, Klarna was most recently valued at US$2.25bn. Currently, the firm services 65,000 e-commerce merchants in 18 countries and had revenue of 2.8 billion Swedish kronor last year (US$346mn).

Tags: payments

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