Klarna – A Model Fit For SEA?

Klarna – dubbed one of Sweden’s fintech unicorns and praised to the skies by many for disrupting the payments landscape was in the news recently for an acquisition of the consumer financing arm of Close Brothers to strengthen its financing arm in the U.K., further advancing co-founder / CEO Sebastian Siemiatkowski’s global ambition.

In my opinion, they have carved a niche of their own, taking advantage of the unique demographic behavior of the Nordic market. However, I believe it will be a while before we can properly evaluate expanding into the U.K. / U.S. is a good strategy, given that these markets are vastly different – both markets already have a myriad of payment options, some of which similar (e.g. PayPal credit for Pay Later, Amazon Pay for Checkout) to what Klarna offers, and that the average U.S. consumer probably views taking on debt (and living paycheck-to-paycheck) as a more normal way of life than the average Nordic person.

Any company looking to replicate this model in Asia would have to consider credit / default costs extremely carefully and is also likely to be challenged from a moral standpoint how to educate consumers on their products, if there is a customer value proposition at all.

Who are they?

Klarna is a payments solutions and consumer credit products provider, whose main target customer is the lower income population, and millennials who tend to shop through mobile devices and are starting to get married and hence buy big ticket items that get paid over time.

They separate buying from paying, allowing users to checkout while Klarna fronts the bill and invoices later, essentially taking on risk from merchants and consumers.

“When it comes to banking, it has been very local still… in the U.K., Germany and Sweden. What we really believe in the long term is that there will be global banks.” – Sebastian Siemiatkowski, Co-Founder, CEO, Klarna

What is their value proposition?

Merchants

• Increase sales by offering flexible payment options to customers and reduced friction from paying immediately
• Reduce working capital through assuming risk of payment collection
• Support daily operations through working capital financing (“Klarna boost”)

Consumers

• Convenience of purchase through desktop and mobile integration, “one-click” checkout and simple credit scoring procedure
• Flexibility through range of payment options
• Purchase protection through “buy-now-pay-later” option

Where do their revenues come from?

FY17 revenue was ~SEK 4.5B (~S$690M), with the largest contribution (~65%) from commission income, which they define as fees related to merchant services and end-customer receivables (e.g. reminder fees for their Pay Later option).

It is not immediately clear what the components of each revenue segment is, evidently a measure taken to hide the profitability of Pay Later.

How does the unique Nordic market complement their business model?

• High mobile penetration (~88%, Deloitte estimate) – supports Klarna’s “one-click” credit approval process, where only email and delivery addresses are required
• High level of social trust – low credit default rates
• High level of cashless transaction (~99%) – data trove for credit scoring and large market for online payments

How applicable is it to SEA?

• Mobile penetration varies across countries in the region (e.g. 58% Philippines vs. 82% Singapore; 80% TH, 73% VN, 68% MY, 67% ID) but is still significantly less than Nordic countries, albeit with much greater growth potential and market size
• Countries have their unique challenges and there is likely no “one-size-fits-all” solution – any company looking to break into the markets will need ‘hyper-local’, country-specific plans
• Cash is still the main use

What are some of their key statistics?

• 60M end customers
• 90K merchants
• 800K daily transactions
• ~14Bkr loans to public in FY17 at ~11% avg. interest (based on ~1.6Bkr interest income)

What are their recent developments / going-forward strategy?

• Expansion into banking services
  • Consumers: Klarna card, potentially current account
  • Merchants: Klarna “boost” financing
• Increase consumer reach
  • Mobile app as “one-stop shop” for payments, personal finance and shopping
  • Expansion beyond traditional eCommerce into public transport, media and physical stores
• Geographic expansion
  • Partnerships with Wirecard, ACI Worldwide, covering the U.S. and U.K.
  • Raised $20M from H&M and will build financing and payment services for them