STOCKHOLM — Ready to check out online? Just enter your email address and a postal code to complete the purchase. The bill will be in the mail. That is the simple option offered to shoppers on 45,000 e-commerce sites using Klarna, a fast-growing online payments service start-up run from a newly refurbished downtown office here.
Enter a few bits of information and your online shopping generates a flurry of activity at the company. In seconds, Klarna analyzes reams of credit sources and online purchasing data to determine whether it will assume the liability for your purchase.
If you are a returning Klarna user, buying during regular working hours or shipping to your usual address, an email and postal code are probably enough. Klarna may even let you pay for the goods up to two weeks after they have arrived in the mail.
But if you are buying at odd hours or sending goods to a previously unused location, expect greater scrutiny. That includes Klarna asking you to pay upfront with a credit card.
The payment system, which for highly rated users is almost as easy as a handshake, has found legions of fans in Europe in the last 10 years. What remains to be seen is whether the company — which is valued at more than $1 billion after amassing almost $300 million in venture financing from the likes of Sequoia Capital — can expand into the United States and elsewhere, where it would compete with larger companies like PayPal that offer a similar service.
To do that, the company needs to prove that its behind-the-scenes technology can accurately detect online fraud when faced with millions of potential new customers. Its backers say that should not be a problem.
“Klarna is like an iceberg because consumers only see about a tenth of what it does,” said Klaus Hommels, a Zurich-based early-stage investor who has backed Klarna, as well as Spotify, the music streaming service, and King, the mobile gaming company, two other successful Swedish tech businesses. “The real secret sauce is how it analyzes credit risk.”
Most payment systems, like PayPal, require users to have money in their account or a credit card on file before they can buy things online. But when a purchase is made using Klarna, the company underwrites the financial risk for retailers until people pay for the goods, either right after checking out or when the product arrives in the mail. Users then pay Klarna, which is regulated in the European Union as a financial institution, with a credit or debit card.
That system requires Klarna to judge each consumer at the moment of purchase. Once an email and postal code are provided, the company quickly calculates the chance of fraud, throwing in variables like publicly available credit information and data from the 170 million transactions already made through Klarna. (Shoppers using Klarna for the first time must provide a complete address.)
Most purchases are approved in less than a second. Klarna makes money by taking a small percentage on each transaction from retailers, and it offers customers installment plans, which charge interest, on their online purchases.
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Customers like Carolina Walther remain unaware of the lengths that Klarna goes to predict online credit risk.
Ms. Walther, a 30-year-old Swedish lawyer, has been a regular Klarna user since 2012. She prefers using the start-up’s payment system to entering her credit card information on a variety of sites.
Ms. Walther says Klarna’s option to pay only after she receives her goods — a service that PayPal also offers to its American customers — is also a big attraction.
“It’s super easy to use,” said Ms. Walther, who buys around 10 items a month through Klarna, including books, eyeglasses and even ski poles. “The only hassle is you have to remember to pay the bill.”
The trouble is, when people like Ms. Walther forget to pay for their goods, Klarna is stuck with the debt. Keeping those problems at bay may become more difficult as the company pushes its service to as many people as possible.
“There’s a question about how much risk companies like Klarna can handle,” said Alistair Newton, an online payments analyst at Gartner, the research company. “Does it have the right appetite to take on that amount of financial risk?”
Klarna had low-single-digit default rates in the Nordic countries where it started. But when Klarna was introduced in Germany four years ago, the company initially had double-digit default rates. It relied on risk models that had proved successful in the Nordics but that had not been adjusted for the credit particulars of German customers.
Now, Klarna builds risk algorithms for each country where it operates. To help it identify fraud in Sweden, for example, the company relies on a mandatory identification number given to each citizen.
The company says it has reduced the level of fraudulent purchases to less than 1 percent of total transactions, though it incurs other credit losses related to its purchase installment plans and other payment problems. Klarna also sets aside tens of millions of dollars to cover financial risk connected to deferred payments and potential fraudulent activity.
“We take our best guesses when we enter a new market,” said Matthew Risley, an American who runs Klarna’s 60-person credit risk team. “The hardest part about our business is making the right decisions when we see a customer for the first time.”
Analysts say catering to the different payment habits of so many customers could hamper Klarna’s global ambitions. It now has 25 million customers in 15 countries, all in Europe. The company recently hired its first employee in the United States and hopes to become available in America early next year, according to two people with direct knowledge of the matter, who spoke on the condition of anonymity because they were not authorized to speak publicly.
The Swedish start-up is likely to face fierce competition. Traditional finance players like credit card companies are backing their own technology solutions. Klarna also competes with e-commerce companies like PayPal that process many more transactions. PayPal has a service similar to Klarna, called PayPal Credit, that is available in the United States but not in Europe.
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And the company’s goal to make Internet purchases a simple one-click process could leave it vulnerable to security breaches — something the company says it is well aware of.
“We can’t offset all the risk,” said Niklas Adalberth, one of Klarna’s co-founders. “We want to make online payments as simple as using Google.”
Despite the risks, the opportunity remains enticing, particularly as people increasingly use cellphones to buy goods online. Global mobile payments, which include e-commerce purchases and transactions between individuals, rose almost 50 percent, to $235.4 billion last year and are expected to hit $721 billion by 2017, according to Gartner.
Klarna says that making payments as simple as possible may set it apart on mobile devices, where people often give up before hitting the buy button because they dislike entering a lot of information while on the go. Almost half of people using Klarna use the service on mobile devices.
Sebastian Siemiatkowski, another co-founder of Klarna, says that people typically finish making mobile payments through Klarna 50 to 70 percent of the time, compared with industry averages of less than 30 percent. “You have to make payments as simple as possible,” said Mr. Siemiatkowski, Klarna’s chief executive. “Making that happen on mobile devices is how we can set ourselves apart.”