‘The payments market is a $1tn business opportunity. That’s so unhealthy,’ begins payments entrepreneur Sebastian Siemiatkowski. ‘If we’re charging the world $1tn to move money between two accounts, which is basically the most unsophisticated thing, like sending an email, that’s mindboggling. I actually think the industry is going to shrink considerably.’
The jaw drops. Finally, an entrepreneur who doesn’t sound like a coked-up televangelist whenever they talk about their business. Cool Swede Siemiatkowski’s business is Klarna, an online payments firm that processes 10% of all ecommerce in northern Europe, and which was valued at over $2bn in its latest funding round last year.
‘I guess to some degree the payments industry tends to overemphasise its importance. There’s so much buzz around this, but what’s the payment experience the consumer really wants? I’d say it’s the Uber one – that means it does not exist. You go into the cab, you go out and you never reflect on payments.’
None of this is to say Siemiatkowski lacks enthusiasm for his sector – quite the contrary, in fact. He believes technology can ‘liberate’ it from the monopolistic clutches of the banks, to the benefit of everyone else. That may well shrink the pie, but it should increase his slice.
He founded Klarna with Niklas Adalberth and Victor Jacobsson in 2005, when they were all students at the Stockholm School of Economics. The idea behind Klarna at first sounds a little odd, almost naievely so: it’s a payment system that allows you buy now and pay later. You order online and receive your goods without even having to enter your credit card details.
In fact, Siemiatkowski explains, the idea predates ecommerce entirely.
‘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?’
But what if people just don't pay?
Customer demand is all well and good, but weren’t merchants the ones Siemiatkowski actually needed to convince?
‘When we talked to online 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,’ says Siemiatkowski.
That probably makes it sound easier than it was. The trio were 23 years old, their only real experience of the world of work was ‘flipping burgers at Burger King’ (though Siemiatkowski had worked briefly in sales too) and they wanted people to trust them with their money. Not exactly an easy sell.
The answer was an old-fashioned mix of heavy sales – in this case cold calling and driving around rural Sweden barbecuing with obscure merchants – and an obsession with appearing professional. ‘We got a telephone number with lots of 0s at the end so it would look like a switchboard. We made the website look very professional. I had a suit on every day for the first five years,’ says Siemiatkowski, who now dresses in the more typical entrepreneur’s jeans.
‘It was easier because the merchants we were working with were entrepreneurs themselves, so there was an instant connection and probably a little more openness to taking risks.’
These days, Klarna’s reputation is enough to calm merchants’ nerves. And if that’s not enough, there’s always its risk algorithm, which somewhat scarily screens out potential ne'er-do-wells before they can even think of attempting virtual shoplifting.
The problem of funding
Siemiatkowski describes himself as ‘lucky’ when it came to getting funding for the business. It had seed funding from an incubator at the Stockholm School of Economics (‘nowadays these incubators are everywhere – ten years ago it was different’), before taking its first $2m in venture capital in 2007. Three years later, Klarna hit the jackpot when West Coast big beast Sequoia got on board.
‘They taught us what a good investor looks like, standing behind you, with a long-term view. The biggest difference between Silicon Valley and the tech hubs in Europe is not access to capital, it’s not really talent, it’s access to great advice,’ says Siemiatkowski.
‘I’ve seen so many entrepreneurs at an early stage, and some [investor] comes along and brags about this or that they’ve done. How do you know whether it was that person or somebody else, how hard it was, whether they were lucky? You don’t know. If someone sounds impressive you might be blown away, and they’ll sit on your board giving you all this crappy advice for a couple of years, and you’ll listen to it.’
With the help of its investors, Klarna has been busy expanding internationally, and as of last year had global turnover of $325m. It’s been in the UK since 2014, recently signing a deal with Arcadia, and came to the US last year. It's now in 18 countries.
Of course, international expansion brings with it its own challenges. So many regulators, so little time...
‘I actually feel like talking to regulators can be extremely stimulating. It’s a lot about problem solving,’ says Siemiatkowski. ‘I hate the word innovation because it’s used too broadly. It’s not a purpose in itself, it’s just something you do when you solve a problem, and that’s about understanding what are all the restrictions that apply.
‘"Legal innovation" can be easily misinterpreted, but actually for Klarna, our engineers are great, our tech is great, but our lawyers are great. Their ability to not look at something and just say no, but actually try to find a solution means we can be compliant but at the same time get a better user experience.’
Sebastian Siematowksi’s advice for fledgling entrepreneurs
‘The best entrepreneurs I’ve met are always very self-critical. They’re constantly asking did I do this right or could I have done that better. However, there’s a downside to that trait: you listen much more to people who tell you how things aren’t.
‘For example I wanted to grow fast but I didn’t want us to be sloppy on costs. Some people said to me you can’t have growth and cost-consciousness at the same time. When someone says that and you’re open and curious, it sounds reasonable. So I listened for a few years before I realised it’s not true, you can have both things.
‘If you feel in your gut that what someone says doesn’t make sense, that you’re right even though you don’t have a logical explanation, then do what feels right. Stand up for it and just do it.’