March 25, 2013 / 3:11 PM / 5 years ago

Booming Swedish IT startup eyes PayPal's home turf

* Germany to drive near double-digit revenue growth

* Keen to expand to North America, Britain

By Mia Shanley

STOCKHOLM, March 25 (Reuters) - Swedish online payments firm Klarna, one of Europe’s hottest tech start-ups, will focus its firepower on Germany this year while keeping its eye on the United States, home to EBay’s big money-maker PayPal.

Klarna had a near $1 billion valuation based on its latest financing round and has grown rapidly in northern Europe since 2005, turning profitable in only its second year of business.

The firm is one of the many Swedish tech start-ups giving the bigwigs a run for their money, though analysts say its dream of expanding across the Atlantic may be ambitious given PayPal’s clear dominance there.

Klarna does dominate the markets where it is well-established, creating a niche for itself in the fast-growing world of e-commerce and assuming risk for merchants.

“We are creating the same experience you have offline, online,” Niklas Adalberth, one of three co-founders, told Reuters at a headquarters dotted with bean bags and flags for its global staff. “Customers want to order the product, touch and feel it, and then pay the money.”

So far, no company has managed to take significant market share from PayPal, the payment pioneer and leader which was bought by EBay in 2002 for $1.5 billion and is now its crown jewel, making up well over a third of total revenue.

PayPal did acquire in 2008 Bill Me Later, which offers credit lines, but the service is only available in the United States.

Klarna is however gaining ground. It completes an average 70,000 transactions a day, with its 20,000 merchants and 9 million consumers, under one-tenth PayPal’s user count.

Klarna, which ditched its first name Kreditor for Klarna - a Swedish word meaning clear - is keen to tackle new markets in Britain and North America.

“I think it would be very fun to challenge them,” Adalberth said, though he declined to say how close a U.S. launch might be.

Gil Luria, a Wedbush Securities analyst who covers EBay, said while Klarna was one of the “emerging leaders” in its area, taking on PayPal at home could be an uphill task.

“It’s quite difficult to compete in countries where PayPal is already established, and accepted,” he said.

But Klarna’s co-founders like a good challenge. They wound up last place in a business school competition after some of Sweden’s top executives snubbed the concept.

They pressed on anyway, bringing in Russian investor DST, one of Facebook’s biggest shareholders. Michael Moritz, a partner at Sequoia Capital whose milestone investments include PayPal and Google, is on its board of directors.

Other Swedish firms who have taken on giants include Spotify, which competes with Apple’s iTunes, and Rebtel, the world’s second-biggest provider of voice-over internet calls after Microsoft’s Skype.

Klarna, which takes a cut from merchants and charges interest on instalment payments, had a 1.2 billion crown ($186 million) turnover in 2012, up 60 percent on the year. Germany should drive a near doubling in revenue growth this year.

The Swedes have been approached about takeovers.

“As we see now, the upside is just too compelling for us to consider anything,” Adalberth said.

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