Episode Seventy-One: The Buy Now Pay Later Explosion

The Power Of Data For Personalization And Payments

I think the main thing that's driving company growth is our relentless focus on customer experience from the retailer's perspective, and user experience, from the end user’s perspective.

In this episode of The Power of Data Podcast, Anna Albinsson, International CMO at Dun & Bradstreet is joined by Henrik Ståhl, Engineering Director of the Klarna App at Klarna, where they converse about the drivers around consumer adoption of Buy Now Pay Later (BNPL) models. They also explore the impact of COVID-19 on the retail market and online shopping boom, using data to make a smoother, more personalized online shopping and payment experience, and Klarna’s significant growth.

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The Power of Data Podcast

Episode 71: The Buy Now Pay Later Explosion

Guest: Henrik Ståhl, Engineering Director, Klarna App, Klarna
Interviewer: Anna Albinsson International CMO, Dun and Bradstreet

Anna 00:00
Hello and welcome to The Power of Data Podcast. My name is Anna Albinsson and I am the International CMO at Dun and Bradstreet. Today, I'm delighted to welcome to the podcast, Henrik Ståhl, Director of Engineering at Klarna. Welcome to the podcast, Henrik.

Henrik 00:15
Thank you, Anna, it’s a pleasure to be here.

Anna 00:16
You've had an expensive career in technology and the software space, spanning over two decades. To kick things off, it would be great if you could share some of the highlights of your career and maybe some insights into your role at Klarna.

Henrik 00:30
Sure, it would be my pleasure. So with Klarna, I run engineering for the Klarna app. So I worked for the kind of have a product that runs the app organization. And well, you know, we build the app and if you're in Sweden or the UK, you're probably familiar with it. Now, I'm fairly recent app development. I've been working in the industry for about 30 years, and the way I look at my career is things I've learned along the way. So I hope not to bore you, but I started out in consulting in the early 90s. One thing I really learned then was like how hard even simple things can be for end users. After doing that for about 10 years, the IT boom came along, which was fantastic for a young engineer, you got to get like responsibility for really big scary projects. And I was like 28, I was put as a lead developer for the bank ID product in Sweden, which in hindsight, is probably not something you normally would give to a 20-year-old or 28-year-old. But you know, I learned a lot about how to build scalable systems, I think they're processing 10 billion transactions a year now or something like that, on pretty much the same infrastructure we built way back. We built agile, we were test driving development. So that was like, really, really early on Extreme Programming and Scrum didn't even exist. Multi-product development, BA Systems, Oracle, a lot of customers in Japan. From that, I guess I learned quality. So Japan is interesting. They require you to deploy something and test it for a year before they go in production. And then they don't want it to break. I moved with Oracle to the US to California, when we acquired Sun Microsystems. I was head of product for Java at Sun Microsystems, and a lot of these things just happened to me, it wasn't really a conscious choice. But we had hundreds or 1000s of support customers, and I don't know 10 million developers in the ecosystem. So that was that was interesting, like, how do you communicate with very large numbers of users. I moved back to Sweden and tried to do a retail bank startup which didn’t workout particularly well, I didn't like and I still don't like the way the big retail banks handle user experience. And that ended me up eventually in the room with Sebastian, who's the CEO of Klarna, where we share the frustration with poor user experience of big bucks. So I joined Klarna worked on automation, and then eventually ended up in the app. That's kind of where I am.

Anna 02:40
Yeah, Klarna has an incredible growth story and has seen a huge surge in demand. In the first half of 2020, I know you're adding more than 35,000 new retailers to your network of more than 200,000 retail partners. Can you talk us through that growth and what has been kind of you know, supercharging it?

Henrik 03:01
Sure. I mean, thanks for quoting the numbers, by the way, I wasn't aware, but I'm not always following the marketing. It's absolutely massive the growth that we've seen, and there was an increasing number that was mentioned was on Black Friday, last year, I think we had more transactions than in the first, you know, so many years of the company's existence in one single evening. The volume is kind of crazy. But yeah, so what's driving the growth, so Klarna offers payment methods that are more designed to both the end users need rather than what the infrastructure allows you to build, so to speak. So I think the main thing that's driving company growth is just this relentless focus on customer experience from the retailer's perspective, and user experience, from the end users perspective. That combination positions us in a fantastic way when we compare the services that we provide to traditional banks. Obviously, we've been riding the wave of online shopping, and that's how Klarna started some, you know, 10-15 years ago, and you know that's been growing significantly of course. Now, the checkout experience, interestingly, it's one of those small things you see when you buy something online. But it makes a huge difference if you make it the checkout experience good in terms of the conversion. So that I think is key to Klarna success.

Anna 04:16
What role does data play in creating, you know, this smooth environment with frictionless checkout systems and so on?

Henrik 04:24
Yeah, I mean, this is The Power of Data Podcast, I guess that's the right question to ask. So if you think about what you as an end user goes through when you decide to go buy something online. Look at it from the end users perspective first, right? So you have the kind of pre purchase experience, you know, you're browsing things online, we’re probably be interested in price comparisons. We don't offer that you know, but it's an important part of the journey for many customers. And then it's the actual process itself: you going through actually making purchase. So what can we do that's key for us, what can we do to actually make the checkout experience good? And it's some basic things like we know who you are, so that we can autofill things like your address for delivery and whatnot, you don't necessarily have to enter your email and/or your phone number that you need in order to get kind of post purchase updates on delivery. That's, you know, it's both easy and hard at the same time to get that right. Payment methods are often customized per user based on past history, what your preferences have been in the past. So if you make a purchase at one merchant with a particular payment method, and if another merchant uses Klarna, we can show you the user the same preference on the other merchants. So from your perspective, it just makes it easy. The payment methods are presented are based on an assessment of your preference, but also your creditworthiness, right? So if we know about your history, we can be more flexible, we can offer you know, free 30 day invoice – it depends on the market, but you don't even think about it. But this is actually customized and personalized, based on you know, significant amounts of data that we've collected.

Anna 05:59
Talking about growth, I think I use the Klarna app like every week, is that really normal to use the app to that great extent?

Henrik 06:07
Yeah, I think so. So you Anna I are Swedish right? Many of our listeners here will not be, but in Sweden, almost half of all ecommerce goes through Klarna. And the user experience you get both before, during and after the purchase is quite differentiating compared to other vendors. And in particular, the post-purchase experience, which is the main reason why many people in Sweden use the app, you get updates on tracking of deliverables, you get notifications when it's time to pay an invoice. And if you buy something, and you're supposed to pay after it arrives, because I know you want to try on the clothes or whatever, then if the delivery is late, you can delay paying the invoice until it arrives. These small user experience hacks, they cause very frequent interactions with the app, which of course means we learn even more about the user in the process.

Anna 06:56
Yeah, I agree. It's very, very smooth and I really like the notifications. But also to be able to report when if you order something and you don't receive it on time, that's also really smooth. Can you give me an example of how you can use data to improve the online shopping experience?

Henrik 07:15
Sure. I mean, that's a very interesting question. So Klarna doesn't do all of this, right. But conceptually, you can divide up the kind of shopping experience into like pre-purchase, purchase and post-purchase, right? Pre-purchase, depending on what you want. As user, it may be, maybe you're looking for a specific product, then you want to know where it's available, you want to know where you can get it for a low price, or you don't quite yet know what you want, so you're interested in like discovering something that matches your interest - maybe you’re buying something for yourself or gift for someone else, right. So everything to do with discovery can be personalized. So if we know what you have bought before, where you have made purchases before and what your interests are, we can ask you what your interests are, we do this when you sign up for the app, but we can also try to infer what your interests are based on your kind of past purchase buying pattern. In particular recent buying pattern tends to be quite relevant. And an interesting thing with Klarna is because we have information about where you are making purchases, but also what you are buying in many cases, we have this for all purchases you make with Klarna, or all purchase you make with the app. So that gives us a really interesting data set to use for personalization that never leaves the app, which is interesting. So we don't sell this or share it right, but we can personalize your experience during the discovery phase. During checkout itself, again, I think I mentioned this earlier, but it's about pre-filling forms pre-selecting payment options that match your interest and that's also based on data. The credit checks are heavily data based, we actually use third parties for some other checks, but we see them with certain information that enables them to provide a kind of a higher quality credit response so we can make sure that it's tailored for your profile, right. We don't want to have an unnecessarily high risk for you as a shopper. And post-purchase, the experience can be heightened by very simple things like we capture the items that you buy when we can and we make them visible in your purchase history. So you can go into your purchase history, you can view images of the things you buy, you can search your purchase history. So these are some very basic examples of how data can improve your shopping experience.

Anna 09:29
I also want to know how do you work with data and analytics today? Do you handle everything within your company? Or do you also partner up with other companies?

Henrik 09:40
So we do have a large number of partners and we use a lot of third party services for various things. As a matter of fact, it's a little bit of a development strategy to buy rather than build when we can, we feel it enables us to move at higher velocity that serves us well. Now when it comes to date, it depends on what type of data it is. A lot of the data we deal with is, is very sensitive, it's personal data, financial transactions, personal information, name, address items you're buying and whatnot. And much of this data, it's either personally identifiable or it is sensitive for a person from a privacy perspective. That data is how to lead in. It's an extremely careful manner. And it pretty much never ever leaves the kind of four walls, if you will. That said, when we call third party services, sometimes when we make those calls, we have to include some data in the calls and we get helped to provide like an accurate response, it could be a credit check, for example.

Anna 10:36
All right, Henrik, in 2019 Klarna launched its own open banking platform, what made Klarna choose to go down the open banking route? How did you view the opportunities for that market?

Henrik 10:49
So I'm not sure if you're aware of it, or if the listeners are aware of it, but Klarna is kind of the instigator behind much of the open banking revolution, right? So about 15 years ago, Klarna, had a P&L solution based on an acquisition, Sofort, that was made in Germany. So they had built direct debit payment solutions against a large number of banks in continental Europe, based on integrating with this bank's own internet bank. So basically, you take the user credentials to the bank, from the end user, and then you use them to register a payment. And the interesting thing is that Klarna with that solution as a client, if you will, we have coverage from like 90% of the banks in pretty much all regions, and in some cases, much higher than that. And the key to this is that the end user shouldn't have to care, right? It should just work. And then we're part of the initiators of the kind of PSD2 legislation in the EU, as a co-initiator. And I'd say leading drivers the right way to announce that. And again, it's really all about the passion, we're really passionate about the end user experience. So we both the user of open banking today for payment, as well as a provider to it. And just to show how important this is to us, we've contacted so many banks, I think the total number of emails that we send to banks about, you know how their own PSD2 to solutions is more than 10,000. So the business case here for us, if you will, it's really about user experience. And if we have good user experience, we know that it drives business for us.

Anna 12:26
Right, you also have the buy now pay later model. And that model actually accounted for 3.6% of all online retail sales in the UK in 2020, with over 10 million users, that's impressive. But what is driving the buy now pay later model?

Henrik 12:46
It's a shift in how people look at payments and credit. And that's partially it's generational. So historically, the main model has been credit cards. But the issue with credit cards is that how good terms you get on a credit card is largely related to you know how strong your finances are. So it's like very rich, you can get like interest free 60 days periods, loyalty points, and whatnot. But a new young adult that comes out, they get a worse deal than people have a very solid economy. And what's happened then over time is that when young adults come out, they no longer even get credit cards, right? They use debit cards for spending. And it's by far the most popular form of payment in the UK, I think it's something like four out of every 10 payments is debit cards, because people just don't like credit cards. However, there's still a need for credit, because you want to try something before you pay for it. You want to manage your cash flow. But rather than having like a rolling credit card bill that risks ending up with like late payments, getting credit at the point of purchase, specifically for that point of purchase is in general, a lower risk experience for the user. And also the risk or running over, ending up with things like late fees is much lower, in particular with Klarna where we have like an explicit strategy to actually avoid that type of revenue. We view it as bad revenue, if you will.

Anna 14:12
All right. And now we are in the middle of a pandemic, online shopping was growing at a steady pace of 4.5% globally before the pandemic. However, with retailers having to close their doors, we saw an incredible digital shift. What is your view on COVID-19? How has that changed your business?

Henrik 14:33
Yeah, if you want some numbers, I think the increase in online sales was like 32% in the UK 2020 compared to the year before. The penetration between February when the pandemic was just getting started from online versus retailers like it climbed from 20 to 30% in just a few months. So we've seen exceptional growth and it is very clearly visible given the volumes we have. What's interesting and this is partially driven by new users. So for instance, older people that historically have had a lower proportion of their purchases have been online, have gone more online than before. And they've also learned how it works. So they're, they're sticking right and they continue. We also see new buying patterns where certain products that people used to prefer to buy in store or they were used to buying them in store, they now learn that they can buy those products online, and there will clearly be some kind of rebound, because there’s something to say for the experience of browsing in the store. But we believe that some of these buying patterns will persist and stay with us. Now COVID, specifically, we see very, very clearly the effect of for instance, you know, cross border, in-store credit card purchases, they kind of went to zero, events, travel eating out, these dropped quite dramatically during COVID. Whereas things like grocery shopping and home improvements climbed significantly, it's overall this amount of money spent was about the same, but you have the spending pattern shift.

Anna 15:54
And what do you think the future will look like for Klarna? and How big can this be, you know, this business model?

Henrik 16:03
So Klarna is one of the largest buy now pay later companies in the world, right? If not the largest, and also significant large, even compared to other payment vendors. And if you look at where we are today, in the markets, where we big, we are very much a trusted vendor in payments. If you're a small, medium sized business, you use Klarna, the end user is more likely to trust the Klarna brand than necessarily the merchant. So retailers, they can leverage the cloud a partnership to basically create trust. We have massive scale, we're very good at handling risk, which is important when you deal with credit, and payments. And we have a super strong focus on a smooth and user experience. Now, how big can it get? Well, our CEO, he often calls I don't remember who said it originally, he often likes saying that the value of a company is the total sum of all the problems it's solved for its users. And we solve a lot of problems for the end users. It's like our bread and butter, what we think about every day, how to make things convenient for you how to give you control when you're when you're shopping, when you're managing spending. We moved into personal finance, we opened a checking and savings account in Germany, for example, we have launched loyalty programs in the US and Australia. And so based on the platform that we have, where we have a lot of happy retailer partners, as well as a lot of end users that that like the Klarna user experience, we can grow that go into new markets, we can grab market share. But we can also go sideways and add features to help with things like personal finance, payments, and things like loyalty programs. I don't see this leveling out anytime soon. We're on a massive growth trajectory and I think it's just going to continue.

Anna 17:48
Since the Klarna app is one of my favorite apps, is there any new features or functionalities in the cloud that you can share with us?

Henrik 17:56
I guess we're a little bit hesitant talking about future but even more flexibility on payment options. Not all of the features we have are available in all markets today, that's something that we intend to address. So in Sweden, and in the US and Australia, for instance, you can use Klarna to make purchases on any merchant that has a website, regardless of whether they are a partner or not. We basically generate a one-time card that we use to pay the merchant and then we straighten out the payment plan with the user. We are going to be improving existing features likely assistant features in the app itself, how the wishlist feature works with price drop notifications.

Anna 18:56
Good things to looking forward to. Henrik, thank you so much for joining us on the podcast today. It's been a pleasure speaking with you.

Henrik 19:06
Thank you, Anna.

Anna 19:07
And thank you to our listeners for joining. Take care and goodbye.