Klarna brings buy now, pay later to e-commerce

In a fresh bid to harness the impatience and impulsiveness of the modern consumer, a number of online retailers have signed up to an e-commerce payment service which allows users to buy now, pay later. Klarna, a Stockholm based e-commerce business, are the intermediary offering the service which gives shoppers the option to defer payment by up to 30 days, as well as giving them the ability to “slice” larger orders into more manageable instalments. So far a number of retailers (mostly high street giants including the Arcadia group, size? and JD) are offering the payment option, though some luxury brands are available through Lyst. E-commerce giant ASOS are also trialling the service.

What is Klarna?

Klarna started in Sweden in 2005 with a mission to ‘simplify buying’ and, after joining with SOFORT in 2014 to form the Klarna group, they’ve made significant strides in the payment services market. Though they only received their banking licence in June 2017, Klarna Group claim to be “one of Europe’s biggest banks”, with the company valued at $2.3bn in December 2015 after their latest round of investment (they’re backed by the likes of Sequoia Capital, Visa, Permira and Bestseller). That same year Klarna achieved $325 million in sales, and are now processing over 650,000 transactions per day (including over 40% of e-commerce transactions in Sweden) – numbers which suggest that they’ve struck a chord with modern consumers.

So how does Klarna’s payment system work?

The secret of Klarna’s success is it’s ease. Unlike traditional checkout processes, shoppers don’t need to create an account or fill out any long-winded forms; Klarna simply asks for an email and delivery address before using an algorithm to determine whether a customer is creditworthy or not. Klarna then pays the retailer (bearing the risk that the customer will default on their payment) before starting the 30 day timer for the customer.

Klarna offers three checkout options: Pay now, Pay later, or Slice it.

Co-founder and CEO Sebastian Siemiatkowski says that the idea comes from the traditional way of buying things in Sweden:

“‘In Sweden the way of paying was the bill. You’d order some things, get them to your house, look and feel and then if you want them you’d send a cheque to the mail order company. Of course with that comes a risk that the customer won’t pay, so when ecommerce came along, these companies found credit cards a much smoother way of operating. But the customer demand was still there. Not everyone feels comfortable with a credit card, or has a credit card. They worry am I going to get the goods I ordered?’”

Sebastian Siemiatkowski, Co-founder and CEO of Klarna

In the same interview with Management Today, Siemiatowski went on to discuss the three potential roadblocks that Klarna faced when promoting their service to merchants:

“We identified three things they were worried about: the risk of not being paid, having to do lots of admin and cash flow. When we ranked those, we realised the first two were much more important to them than the third. We said we’ll solve for the risk and admin, but when it comes to getting paid, you have to wait until we get paid. They were okay with that.”

So why is this taking off now?

Klarna addresses a very modern problem for online businesses, specifically the final hurdle in an e-commerce funnel; online checkout conversion rates. According to the Baymard Institute, cart abandonment currently stands at around 69%, which represents a lot of missed sales. How many times have you clicked all the way through to the final page of the shop checkout only to get cold feet? When a customer gets to that point, no amount of money spent on social media, affiliate marketing or paid advertising campaigns will address the apprehension a customer has before pressing the ‘Buy’ button – but Klarna’s novel approach manages to increase customers’ willingness to commit to an online purchase. Their results suggest that it’s a winning formula, with Finery reporting that basket sizes grew by 15% and the number items per basket increased by 20% after introducing Klarna’s buy now, pay later service.

What’s equally promising for the service is that over 60% of its business today involves mobile shopping, a figure which was under 10% two years ago. Some estimates put mobile cart abandonment rates as high as 85%, so there is significant room for improvement in the mobile field.

Klarna on the Topman website

High street giant The Arcadia Group offer Klarna payment options through a number of their brands, including Topman

So far, a number of brands have signed up – though most of these would be considered high street retailers. However, some luxury brands (such as Burberry) are available on Lyst, who are also a partner. It stands to reason that the concept could translate just as easily to other luxury brands’ e-commerce platforms, making impulse buys that little bit easier. The option of spreading payments for purchases over a number of months might be more popular with luxury customers (particularly aspiring millenial consumers), as a finance option for the latest Louis Vuitton wallet or Bottega bag will make luxury more accessible. It’ll be interesting to see how luxury brands react to the service, especially as some brands still have significant catching up to do. If a big player like Net A Porter decided to trial the service it could have a big impact on the balance between the booming e-commerce sector and the struggling retail sector. ASOS are marketing the service as “bringing the fitting room home with you”, which suggests that they anticipate an even greater number of returns as customers are encouraged to load up their online baskets. The knock on effect of this could mean that sales figures be stunted as the increased cost of returns eats into any gains. Whether this approach translates to luxury buyers who are spending hundreds or thousands of pounds on individual items remains to be seen. Nevertheless, we’ll be keeping an eye on the uptake of Klarna across online retailers over the next few months.

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