Founded in Stockholm in 2005, Klarna is one of Europe's fastest-growing companies offering safe and easy-to-use payment solutions to e-stores. Valued at about $1.4 billion in 2014 when it raised roughly $100 million from existing investors, Klarna has nearly doubled its valuation in is 2015 funding round by reaching $2.25 billion.
According to the official website, Klarna is active in 18 European markets where it serves 35 million customers and increases conversions of 50,000 merchants by 25%. Some of the major international clients of the company are Spotify, Disney, Samsung, Wish, Adlibris, Fitnessguru and ASOS. Klarna states that its goal is “to become the world's favorite way to buy.”
With a 10% market share in Europe, the company is actively rolling out in the US. With a mission to simplify the buying process, Klarna may not look very different from—for example—PayPal. However, the company has a unique model where it allows customers to pay back to Klarna in 14 days while Klarna covers the expense to merchants.
Commenting in the interview with CNN on the way Klarna is different from PayPal and others, CEO of Klarna Sebastian Siemiatkowski said, “Most importantly, what we have had at the core of our offering and thinking is the user experience. I am not sure that historical companies have done it in the same manner and at the same extent. They are more built on the existing infrastructure. We are trying to redefine it, find what is the best solution for the user experience.” Sebastian also added that simplicity is the core of the solution.
The most exciting part is still ahead. Customers do not even need to provide card details at the checkout—they can just use their zip codes and email addresses. Clearly, this process is much simpler and eases the customer’s journey to the success scenario: actual purchase. The simpler process is aimed to increase conversions for the merchant by removing “obstacles” and potential “turn-offs” from customers’ way.
The whole idea looks very intriguing so far with a promised 25% increase in conversions and better customer experience. Nevertheless, there is a cost to pay for a better experience and simplicity: high fraud risk. With a level of personal life transparency we have in 2015, there are little to no obstacles for anyone to find out one's zip code and email address, which puts the company at a very high risk given that Klarna pays the price to merchants for customers.
How does Klarna ensure safety in this case? The answer is quite unexpected—ask “high-risk” customers to enter their horoscope. To avoid system abuse, Klarna profiles customers into "low-risk" or "high-risk" categories and adjusts their checkout on the fly accordingly, as Sebastian Siemiatkowski, CEO of Klarna, shared with Business Insider.
Explaining the rationale behind the model, Sebastian brought up a case when a customer is buying a physics textbook on a mobile phone and typing in a shipping address that is close to where he is currently—it all makes sense, and there is no reason to consider him as a fraudster. One click and the purchase is made.
But there are cases that look very suspicious. Sebastian provided an example of those to BI, saying, "But if you're buying four iPhones at 3 o'clock in the night and you're shipping to some odd address, we might want to ask a couple more questions for verification before we allow you to finalize your purchase."
We are all familiar being asked to verify our identity through different questions. Sometimes it is a question about our address, phone number, or even card details for particularly high-risk cases. An interesting example similar to Klarna’s concept is the way Facebook verifies the user asking to recognize friends and connect pictures, as Sebastian explained. This is exactly where the idea of asking about the horoscope falls. Even though the company never actually implemented the idea massively, they played around with the concept.
So why horoscope? If think about it, when asked about the horoscope, each person is able to give the answer right away as we know our horoscopes without the need to search online by the birthdate. For a fraudster, the question imposes a serious barrier as it is extremely unlikely that someone can guess a horoscope right away. Even with an available birthdate, a search needs to be conducted to find out the horoscope, which would take longer an actual account owner to answer. Amazingly simple and viable at the first sight, isn't it?
The whole concept should serve a single goal—to ease the experience of buying for customers. Even if half of merchant's customer pool has a “high-risk” profile, making the experience better for the other half is a great achievement and drastically affects financial results for the merchant.
When Klarna (previously known as Kreditor) started its journey in 2005, it reached 1,000 client merchants in as little as two years. In 10 years, the company expanded to 18 European countries with 250,000 transactions made each day by 35 million customers. Truly, Klarna is one of the fastest-growing companies offering secure and simple way to foster sales for e-stores. It is a matter of time when buying process will be as simple and safe as Klarna sees and makes it today. We will follow the company's to see what the next step for the company will be in identity verification along with the horoscope check rollout.