How is the development of e-commerce transforming the city?

How is the development of e-commerce transforming the city? Claes Tellman, Vice President of Klarna First of all I would like to get into how the e-commerce online business affects infrastructure in cities. I will give you at least 2 clear cases here in Sweden right now and some thoughts about that. First a little bit about Klarna, who we are, what we do. Klarna is a really interesting story. I do not know how many companies there are today out there in the world that started eight years ago by three guys who were then 30 years old. They came out from the Stockholm School of Economics, they had no business background in their families, they had no money in their families or anything and they had this idea. Eight years later, which is now, we have 800 employees in eight countries, we have another 300 consultants etc. that we employ and we are actually looking at trying to be global as the goal, step by step. New large markets, countries and maybe double or more than that to come in five years, other continents etc. We get back to what the idea was and how they did it, but they started really from nothing eight years ago. I always say that now, we are approximately where H&M and IKEA were when they reached eight countries. Pretty hard to do, of course. It is seven or eight language systems and we had to work with a lot of things. Also, it has doubled in growth, in revenue every year and has been profitable every year since we started, so it is in many ways really an exception when you talk about start-ups, because we are a real live company. One thing that has really helped Klarna kick off and take off to where we are today. First Swedish government subsidised PC s at home, about ten to fifteen years ago, in the late 90s, the Swedish government said, Everybody wants a PC at home, we will pay about 20% of the cost, so immediately 1.2 million Swedish households got home PCs and those were people that did not have them before so everybody more or less had a home PC pretty quickly. The other thing the government did for infrastructure was broadband, which really helped e-commerce, online business, Klarna and the people and their lives here. The third thing that really had helped us is of course the EU and that we have a banking licence in financial business that we can use all across the EU, so that has really helped us. Now we have at least 1100 people that have a job and we can create more jobs because of this. The turnover : we have a lot of transactions as we have 15,000 merchants spread across Europe and the world. www.lafabriquedelacite.com 1

We are now in seven markets and eight countries; Sweden, Norway, Denmark and Finland came first in that order. Then we went to Germany, the Netherlands and Austria. Also we have development in Israel, so we are actually active in eight countries right now. On the investments side I would say the most interesting thing is probably that arguably some of the most interesting investors in the world, General Atlantic and Secoria in the US bought large shares in the company. Secoria is known since they started with Cisco, Apple, Facebook, Google; they own parts in all those companies. They have gone in early in all of them and they have been really successful. Here is actually what we do and the whole idea those three guys came up with, in 2005. It was awfully hard to pay online then. It still is. So you want to pay online and a lot of the payments do not go through. If 100 people buy something online, using mostly a desktop or a computer, they go to the checkout to pay and only 33 of them do actually go through with the purchase. Why is that? That is where they started. Can we fix this? Can we make this closer to actually shopping in a real store, and how do we do that? That was like the whole idea came from here. They came to the conclusion that if we can be closer to the actual shopping experience in the store - you buy a bike or a dress, you get to see it, test it, feel it before you buy it, just like in a store you go in and then you check out the goods before you pay. - Then they pretty soon got into looking at there is an enormous risk here involved. There is risk, there is simplicity, how simple is it to shop and there is also, of course, safety. Those are the main issues. Here is how they tackled them. They said, Okay let us go the other way. Let us try to make the purchasing process as simple as we possibly can. That has now been developed over eight years so today 80-90% of everybody, if you go in and shop with Klarna - what do you have to do to shop? You fill in your mail address and your zip code and that is all. Now that this information is in the top of your mind, it is a thought, something that everybody knows I know my mail address, I know my zip code. So you do not put any money into a bank account or direct banking or your credit card does not hold any money that you have to then get back. - The other part is of course, all the administration that we all go through today on almost all other e-stores when we shop. You have to fill in your address, your name, your credit card, all of this information and different codes. It is really interesting, I came in here about a year ago, it is really interesting because almost everybody else - banks, credit cards - are going in the other direction. They add more and more codes. I have a MasterCard now. First it did not have a chip. Now we have that. Then you had one code of four digits, now you have two www.lafabriquedelacite.com 2

codes. If you have a visa you have chip, one code and then Verify by Visa. You have to remember things. If you are in a bank, first you just had a card, then you had a card with a chip, then you had a machine, now you have the codes, as long as you do not do it without using the code. Then you send the code to get a code for every transmission, or at least you do in Sweden. So more and more security added by the engineers is where more or less everybody else is going. We are going in the direction of keep it simple. - Then we of course get into the next step. So you go home, you order a dress or a bike and you get it, you feel it or touch it and you want to buy it. Now normally you get an invoice, a paper invoice with the package that you then pay. You can pay it online of course. You can also get an email invoice, but I mean that is how it works. Or if you don t want it, you have not put any money or anything anywhere, you send it back. That is the simple part. Now inside of this, of course there is an enormous detailed risk assessment of each individual or the shops of course, the online shops. So can we trust that this person will actually pay? That is like the whole secret on the consumer side, the risk assessment. On the other side of course we have to work with the stores and make sure that they will deliver and everything works there. That is simple, it is safe and it is risk assessment. This has been a huge success. So here, now, we have 15,000 stores and some of them spread across Europe and some are international, of course. We are looking at several more large markets as we speak. So hopefully I have made myself clear here, because once we get to your country hopefully you will see that if you go in and shop and Klarna is an option to pay it will be a lot more convenient and simple and easier to use Klarna than to use whatever other options there are there. And what does that mean? That means that the online stores get a lot more business because instead of having 33 people out of 100 purchasing it might go up to 43 and they will make a lot more money. Something about mobile: there is a shift or a final step as we see it right now. That is of course that 97-98% of all traffic and also all purchasing online was through desktops. Now it is shifting so in a lot of places and a lot of stores get 30 to all the way up to 50% of all their traffic from cell phones. However, only 3- % buy it here. If you sit on a bus or somewhere and you want to buy something on a cell phone it is very hard. So actually, our biggest success is a new way of shopping through a cell phone that we introduced in Sweden seven or eight months ago. We are launching it in Norway and Finland this fall. It is the only product today that is showing the same figures on the mobile phone that is on the desktop so it is very promising. www.lafabriquedelacite.com 3

So what about e-commerce? Does that have an effect on infrastructure and cities? If you live in Sweden there has been a riot and an uprising for one simple reason, just one, although I can mention 10 here. But just to take the biggest one, local transportation. About six months ago they changed the payment carrier who made the payments. Before that everybody could just use their cell phone and pay right away as simple as that. Just pay with a text message or SMS, just pay when you went on a bus or a subway. Then they changed. They went into the business person and they changed over so somebody else will provide the payments parts and now everybody has to register everything and chaos is too nice a word. This affected about 1.2 million people here and about 90% or so of them had problems paying and getting on their bus in the morning and getting to work, and they have had enormous development and enormous issues to fix this. So talk about e-commerce and online having an effect on infrastructure. Huge. What happened was they dropped and lost 60% of their sales, just in 1 week. Where did that go? Well some people simply did not pay, some people walked instead. I think they have come back to maybe 30% now, but people had to register. Huge problems and they still do not have their money back. What does this do? Well now the transportation companies do not get the cash flow, it is somewhere else, so they have to discuss layoffs, investments. All of that was affected. Normally they had an enormous amount of cash flow coming in every day or every week, every month. A huge impact on the infrastructure and of course a lot of negative media. If you go on to Facebook or blogs or whatever and use Google Translate you will find a hundred thousand things, people were very, very upset and still are. The other thing along the same lines, which is maybe more sad, is that we had a high rate of donations to charities here, very important charities. This is of course the most well-known ones. The city for this case looked at the infrastructure and decided to go into that and who is going to be able to run the payments and it went down by 90% so they lost a lot of money. What is the next step? Well, they have to lay off people, what can they invest in, how are they going to get the money for donations? This is the first month after the change was made. It had heavy effects on people s lives in general, infrastructure, anything from the possibility to create new jobs, to invest in things, cash flow was has gone, or went down, so it is really important. Those are the 2 things that I wanted to bring up as an example that we all have to think about and do not underestimate how e-commerce and everything online as you know effects people s lives in many ways that you do not think about right away. It has an enormous impact. I bet you can go out and ask anybody on the street about how they pay their tickets for the bus or for the train and what they think about this and how their lives have changed. - The third thing is the discussion about shops that we see that have to close down because people buy online. To some extent, of course, that is true but you also see the contrary. You see at least two things. I can mention maybe 10 shops here in Sweden that have opened up that started online and there are a few chains that have maybe 10 shops here today. They were first only online, maybe six or seven years ago, then they had a hole www.lafabriquedelacite.com 4

in the wall where you can just pick up the goods if you do not want it to be sent to your home. Then they went into a small store where you can buy some goods and suddenly now they are like a combination of online and a real store, and now they have 10 stores. So it goes both ways. I am part American on my Father s side and I heard that in the US there are a lot of stores now giving out tickets so if you do what a lot of people do and go in, this was probably New York City, and if you want to buy a pair of shoes and you go into the store and try them because you are going to buy them online at a better price, I think this was at Macy s, they give you a ticket with a code on saying that if you buy them through our store with this code you will get as good a price as anybody else and we will still get the business. So this is merging. All this has to be taken into consideration about peoples everyday life, everything from transportation to shopping to health care when you build the infrastructure and this of course leads into intelligent cities. We are of course operational so we are there with 50 million consumers on the ground. I see this and peoples everyday life. www.lafabriquedelacite.com 5