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European Payments Power Klarna Launches in the U.S. With Overstock.com as a Customer

The Sweden-based company generated a net profit of around $10 million in 2014 on $319 million in revenue.

Klarna

Klarna has become a household name in Northern Europe. Now it’ll try to do the same in the U.S.

The Sweden-based payments company, which gives online shoppers nearly a month to pay off their Web purchases, is launching in the U.S. with e-commerce site Overstock.com as its first big merchant customer. The company is backed by Sequoia, DST and Atomico, and has signed up about a dozen other merchants too, including online men’s apparel startup Chubbies.

On the surface, Klarna will compete with services from companies such as Authorize.Net, Chase Paymentech, Stripe and PayPal to process online payments for retailers. But Klarna operates with a few twists. When an online shopper makes a payment on a site that works with Klarna, the person does not have to enter payment information to complete a purchase. Instead, Klarna asks them for an email address, shipping address and sometimes a phone number and the purchase is made. Customers are told they have 14 days from when the order is shipped to pay Klarna the purchase amount with either a debit or credit card. In reality, shoppers get 24 days before they are charged a $5 late fee — the initial 14-day repayment window plus a 10-day grace period that comes after an email reminder from Klarna.

In the seconds before a purchase is approved, Klarna’s system searches public and private data sources to decide whether the person will pay the bill. If its algorithm thinks the shopper is someone who may not pay, Klarna will ask them to pay with a credit card or debit card up front just like everyone else. But if the system approves the shopper, Klarna pays the merchant the purchase amount and then is on the hook to collect it.

The idea is that with fewer steps an online shopper has to take to make a purchase, fewer shoppers will drop out before completing the checkout process, which is an ongoing issue. The second time a shopper comes back, he or she can make a purchase with literally one click. This pitch to merchants about reducing friction comes at a good time: Traffic to mobile shopping sites and apps is exploding while purchase conversion rates are worse than on desktop websites. Klarna says 67 percent of its merchants see conversion rates improve between 10 percent and 50 percent when switching to Klarna.

Klarna, which was founded in 2005, offers different types of payment products in different geographic regions. It has raised nearly $300 million and generated $319 million in revenue in 2014, turning a net profit of around $10 million.

“Without the U.S., Klarna has a great business,” said Mike Moritz of Sequoia Capital, who serves on Klarna’s board of directors. “But the U.S. is a massive opportunity and I’m confident that the company will be successful in the U.S. This is a company that most people in e-commerce in America have never heard of, and the fact that it entered the market and is already winning customers like Overstock is a testament to the distinctive nature of the offering.”

But competition for business is intense, including from U.S. based companies that have looked to Klarna for some inspiration. Both PayPal and Affirm, the payments startup from PayPal co-founder Max Levchin, have introduced products similar to Klarna’s. That has not been lost on Klarna CEO Sebastian Siemiatkowski.

“Any entrepreneur loves to think about [him]self as a thought leader, whether it’s true or not,” he said. “But it’s not the idea that counts. It’s the execution.”

Overstock.com, which did $1.5 billion in revenue in 2014, will use Klarna to power its Guest Checkout option on its mobile website. Klarna makes money by charging merchants between 3 percent and 4 percent of each transaction, on average. That’s more than merchants typically pay for processing fees, but Klarna argues that’s not an apples-to-apples comparison. Merchants who work with Klarna don’t have to worry about the additional payment costs that come from chargebacks and fraud monitoring, since Klarna is assuming all of the fraud risk for these transactions.

Klarna will also start offering instant online credit and promotional financing to shoppers buying stuff from U.S. sites that work with the startup.

This article originally appeared on Recode.net.

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