A Perspective on Payments Innovation and International Growth with Sebastian Siemiatkowski, Chief Executive Officer of Klarna

Navigator Edition: November 2014

klarnaRecently we had the opportunity to speak with Sebastian Siemiatkowski about Klarna’s unique approach to payments and the keys to success in a changing marketplace.

Klarna Group is the leading online payment service in Europe.  Since 2005, Klarna has enabled merchants to let customers pay for online purchases after receiving their goods.  In 2014, Klarna acquired the German company SOFORT, another online payment service. The combined company’s 1,200 employees now serve 25 million consumers and 45,000 merchants in 15 European markets.  Klarna recently announced it will enter the U.S. in 2015 as part of its global expansion.  Klarna is backed by premier investors including General Atlantic, Sequoia Capital, Atomico, and others.

Sebastian Siemiatkowski is the Chief Executive Officer of Klarna. Sebastian and his two co-founders developed the idea for Klarna during an entrepreneurship competition at the Stockholm School of Economics. Sebastian has received multiple awards for his leadership including the “Rising Star of the Year” by Ernst & Young, “Leader of the Year” by Adecco, “Manager of Tomorrow” by Sweden’s leading Management Magazine and “European Entrepreneur of the Year Award” by TechTour.

Our discussion covered topics such as the international payments landscape, Klarna’s innovative approach to payments, as well as new products and new markets.

1.  What was the original concept behind Klarna? How has that evolved over time?

Klarna was created as quite a straightforward product. We saw that when you shop in-store or use mail order, you are able to touch and feel the products before you pay for them. This is especially true in Europe, where invoices were really the main form of payments in the mail order world. But online, you had to pay first using a card. We saw an opportunity that this traditional payment method, the invoice, could also be very effective online but none of the new e-commerce merchants really had the energy to build up the processes needed to offer it. So we said we can enable this payment method that obviously is liked by consumers, but we can also take all the hassle and risk away from the merchant side to make it as easy to offer as a card payment.

So really where we started was offering a short-term credit of two weeks to allow people to pay after delivery. Then about two or three years after our launch, we saw that sales financing tools like installment plans were a natural next step.

More recently we considered, “how do we grow globally in places where invoices are not as common and consumer preferences aren’t the same?” We saw our core capabilities as being able to make fast risk decisions and simplifying the user experience. So we used these talents to build Klarna Checkout, which we launched in Sweden about a year ago. Klarna Checkout is our next-generation hosted payment solution that attempts to solve the biggest checkout-related problems that merchants have – accepting local payment methods, enabling one-click payment for everyone, simplifying mobile checkout, and staying up to date with changing requirements – through one integration.

2.  Building a new payment service is hard. Why have consumers and merchants gravitated towards Klarna?

The primary driver for consumers in the early days was safety. Most people in Europe use debit cards instead of credit cards so when you pay it is real money coming out of your bank account, and there was real anxiety around e-commerce for a long time. Another big element has been our focus on reducing friction in the checkout experience while the card associations went in the other direction, especially in Europe, with new security protocols which actually added more steps and friction points to the payment process online. And of course the flexibility to pay over time was also obviously a reason to choose Klarna.

For merchants, initially we were making it easier and less risky to enable a payment method that consumers liked. Merchants could offer invoices or installments without building up credit knowledge and billing and debt collection and all those things.

We just approached the market differently from the very beginning. We realized quickly that we couldn’t compete with banks on our balance sheet, on our cost of funds. But we saw we could build an easier to use solution. In Sweden, some banks had tried to offer sales financing online but they were quite terrible from a user experience perspective with too many steps and paper contracts and so on, which led to financing being a very small share of online checkouts, even in sectors like electronics where it is typically quite important. For example, a typical Swedish electronics retailer would finance about 30% of their in-store sales. Before Klarna, financing was only 2% to 3% of online sales, but the way we implemented it with a simplified experience, it quickly became 15% to 20% online. Based on that, we could position against the bigger players as a premium service based on our better results.

Today with Klarna Checkout the proposition is a bit different. It’s still about a good customer experience leading to higher sales. But payments are so much more complicated for merchants than they used to be and we can simplify them again. This is valuable for all kinds of merchants. You’d be surprised, even really big merchants have much to worry about – building their e-commerce platform, optimizing the presentation of merchandise, etc. – that even though everyone will say “payments have to be a top priority,” oftentimes it gets overlooked.
People in the industry are often surprised to learn that Klarna never was, and has never been, an alternative payment service like all the digital wallets out there that only capture maybe 5% to 10% of payments. From day one, Klarna has always been the main payment method for our merchants; our share of payments is typically over 50%.

3. You have said that you want Klarna to be a global company. You are on your way with a presence in 16 countries. What lessons have you learned in your international expansion so far?

It is very hard to scale a credit business, and so we’ve tried to understand what it is that makes it hard and how do we create a new model that reduces those challenges and allows us to become global.

Every market is very different. When we went from Sweden to other Nordic countries to Germany and elsewhere, we learned a lot about how to take risks in new countries, the availability of data, and so forth. We learned that we need to find models that are local in their appearance but abstract local differences as much as possible. For example, we are learning how to make good credit decisions on behavioral data, such as what you are buying and when, because there are definitely differences in the credit bureau data available by country. We are also being careful to avoid adverse selection. This is an area where our Checkout product will be valuable because we can cherry pick in real time which customers receive credit offers at first then scale up over time as we gain more confidence in that market.

So we have learned from all the challenges that we’ve had launching in different countries, between different user experiences, different behavior, and different consumer credit laws, to build a highly configurable platform and flexible processes that will allow us to scale.

4.  Klarna now has over 1,000 employees – a size at which many companies slow down, but Klarna has continued to innovate. What advice do you have for leaders of established payments companies to foster innovation within their large organizations?

Innovation today is in the details. Fifteen or twenty years ago it was innovative to just make online payments work but today that’s not enough. To be innovative now you have to be constantly fine-tuning the small things, which requires detailed knowledge about your product. And there are not that many people who have enough knowledge and still have the passion to continuously drive this innovation. Big organizations need to focus on recruiting these people and being agile enough to let them do their work.

Another thing we have learned is that in order to be innovative in the financial services industry, it is as important to have the best lawyers and the best engineers. Unfortunately in many companies the legal department and the compliance department believe that their job is to say no. That is not the case. Their job is to understand the desired user experience and help create products that are within the regulatory standards but are, at the same time, extremely easy to use: how are legal terms being presented, what questions do you really need to ask, can you ask some questions later, and so forth. That demands creativity. Legal innovation is key to success in the online environment.

5.  Klarna owns the “full stack” with its own brand, bank license, technical platform, and servicing operation. What were the pros and cons of this approach? Would you recommend new startups follow this approach?

There were definitely people along the way who thought that was perhaps not the best choice. But looking back, I would tend to disagree. Our vertical integration has been our big strength; it is what set us apart and enabled us to do creative things.

Back when we started we never ever would have been able to create such a user-friendly credit product with so few questions if we were working with a bank. They would have focused on compliance and their internal rules; we were able to focus on understanding the new Internet environment. We have also benefited tremendously by performing both issuing and acquiring under one roof. This gave us a lot of product flexibility which we used to deliver merchant-specific products and evolve over time.

But it definitely created challenges along the way. We had to build a lot of technology and change it over time as we evolved. It has also been a challenge to hire enough of the right people. That said, there is a tendency in business to say “oh, there are challenges here, it’s too complex, let’s not do it.” But it’s when you overcome complexities that you create barriers to entry; that’s when you really create value.

For more information, please contact Ben Brown, Senior Consultant, specializing in Credit Card Issuing and Payments Innovation,

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