CEO Sebastian Siemiatkowski wants his company, Klarna AB, to be the Apple of European payments. That is to say, he is trying to earn a reputation for being "better than the rest in every small detail… of technology and innovation."

Klarna is steadily working to bring that philosophy to new regions. After purchasing Germany's Sofort AG in December, Klarna now commands payment services for 10% of Europe's $100 billion e-commerce market, accounting for 43,000 online merchants in 14 European countries and 25 million end customers. Klarna now boasts partnerships with more than 60% of all of German Internet merchants, says Siemiatkowski, who helped co-found Klarna in Stockholm in 2005.

"Klarna had a presence in Germany before [the Sofort acquisition]," Siemiatkowski says, "but we're sending a message to Germany and the rest of Europe." A message, he says, that the combined companies will be able to offer a wider array of payment options to make the online and mobile buying process easier and smoother.

Klarna's own approach has been to offer "instant credit…to reduce payment friction to a healthy level," Siemiatkowski adds. It also supports credit cards, debit transfers and 20 different local payment options. Klarna already had a strong presence in the Nordic countries, and the acquisition of Sofort gives it a foothold now in France, the U.K., Italy, Spain and Poland. 

Liz Oakes, principal advisor in management consulting for KPMG LLP in London, says that Klarna "has a very good position in Sweden and is expanding beyond its base into Europe. Klarna positions itself to take fraud and credit risk in the system, which is the typical domain of a bank.  In this they are competing with the banks in the online world and commoditizing what has been a merchant banking relationship."

In Europe, only a third of online shoppers who begin the purchase process typically finish it, Siemiatkowski says; in mobile commerce, he says it is closer to 3% (One-quarter of Klarna's transactions derive from mobile commerce). Unlike the United States, where credit cards are a go-to option for most online shoppers, in Germany, for example, less than 10% of online buyers use a credit card for their purchase, he says.

"The way we use our technology is to separate buying from paying, to make it as simple and safe as possible to buy online," Siemiatkowski explains.

Klarna assesses risk based on the customer's shopping history and location along with other factors to determine the number of questions a customer must answer to complete the transaction; where the risk is low, Klarna asks only for the customer's name and address, and extends instant credit.

Klarna may face challenges as it aims to expand, according to Oakes. While she agrees that the deal with Sofort will fuel a greater reach, she questions whether growth can be achieved in markets that are "more heavily credit transfer-based." The company also faces rivals like iDeal, an e-commerce payment purveyor in the Netherlands that allows customers to pay for goods with direct transfers from a bank account, she says.

"[Klarna's] services disintermediate a bank from its customer and will be perceived as a threat by banks," she says. "The concept of a customer giving a third party access to its bank account contravenes all service-level agreements and therefore the question of liability in the event of a mistake or fraud remains an issue."

In addition, Oakes says, Klarna will face headwinds from the current wave of legislation in European payments domain, including the Payments Services Directive and Payment Account Directive, Account Switching and anti-money laundering legislation. 

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