Klarna has been a pioneer in the buy now, pay later (BNPL) space, and, with its commitment to customer buyer preferences, the company continues to drive innovation at the online checkout and in store. The company has ridden the wave of the boom in the digital economy. Today over 500,000 merchants offer Klarna as a payment option to 150 million active consumers (source: Klarna Press Release, May 2022)
As one of the most prominent players, they process significant volumes of traffic daily. And, with high volumes of traffic, performance improvements in processing these payments can result in substantial business benefits. Picking the right Payment Service Provider (PSP) can mean significant uplift in approvals and a reduction in operating costs.
That’s where Checkout.com comes in. Checkout.com is able to offer its Intelligent Acceptance product to merchants. A proprietary AI-powered optimization engine that maximizes acceptance rates and lowers transaction fees. It does this through its global network data and payment expertise.
“As a leading online payments provider, Klarna's core business revolves around facilitating smooth and seamless on-line and in store shopping experience. Payment optimizations enable Klarna to increase revenue resulting from an increase in the number of successful transactions. By streamlining the payment process, Klarna can increase the conversion rate, enable better consumer experience and capture more successful transactions, leading to higher revenue for both Klarna and its merchant partners. Card acquiring is a complex business where success relies on data driven decisions & intelligently adapting on issuer requirements. Smart retries, adjustments applied on transaction messages based on issuer preferences could make a significant difference in both increasing revenue and decreasing payment costs” says Tomer Turbovich, Senior Engineering Manager & Money Movements Account Group Lead at Klarna.
Klarna partnered with Checkout.com and has been using Intelligent Acceptance from Checkout.com. With Intelligent Acceptance, once a customer pays, the transaction is optimized in real-time based on a wide, rich set of data points across the Checkout.com network to drive improved performance, reduce costs, and ensure a smoother customer experience.
Through these optimizations and the dedicated support of Checkout.com's team of payments experts, Klarna has realized:
Here's how.
It is not uncommon for transactions like those that Klarna processes to be of a lower value amount. SCA regulation dictates that these lower-value transactions don't always require mandated authentication. To reduce friction for their customers, Klarna, therefore, is presented with an opportunity to leverage two types of exemptions. These are:
In both of these cases, the merchant assumes liability if there is a chargeback. Klarna must, therefore, decide the best exemption route for each transaction.
This choice presents a challenge for Klarna. As the SCA landscape shifts, issuers' responses to exemptions vary, creating a challenge for merchants. Some issuers favor specific exemptions or may not support all categories. Their preferences can change daily, causing customer soft declines and inflated processing costs.
To counter this, Intelligent Acceptance learns from the billions of transactions that are processed by Checkout.com to understand what works for each issuer. In addition to this, regular issuer outreach is performed so that the decision-making behind these issuer preferences can be understood. This allows the algorithm to be updated to align as closely as possible with issuer preferences.
Using this approach, Klarna can seamlessly handle SCA requirements for all its transactions without developing and maintaining complex, bespoke strategies for each transaction and issuer. By optimizing the exemption selection process, Klarna can deliver a frictionless experience for its customers while minimizing soft declines and processing costs.
Outcome: A 6% increase in acceptance rate for transactions under €30 across four key markets (UK, Norway, Spain, and Denmark).
The introduction of Network Tokens provides merchants the opportunity to lower processing costs and drive higher acceptance rates. The opportunity is particularly great for merchants like Klarna, whose customers add their card details when signing up for a buy now, pay later payment and agree to these details being stored for use on future installments of the payment.
However, it was given issuers' inconsistent adoption of Network Tokens, which made it difficult for Klarna to make effective use of them. For Klarna to successfully utilize Network Tokens, it required an understanding of when the issuer fully supports them and how they perform compared to traditional card numbers (FPANs). This is because even when Network Tokens are supported, they may not always yield the best acceptance rates. The primary reason for this is that to utilize Network Tokens, additional fields need to be added to the ISO 8583 message—the international messaging system used for card transactions. However, not all issuers have adapted their internal systems to correctly interpret these additional fields, resulting in subpar processing by the issuer, which ultimately results in false declines.
“Tokenization introduces an important opportunity to increase acceptance rate and reduce payment costs. However due to varying issuer behavior, acceptance rate should be optimized by using Network Tokens or PANs depending on the issuer preference,” says Tomer Turbovich.
Intelligent Acceptance has allowed Klarna to abstract this complexity. Network Tokens are applied only when they are supported by the issuer and outperform DPANs. Intelligent Acceptance also has a built-in retry capability. If the issuer declines a transaction using a Network Token, the payment will be automatically retried using PAN credentials in real-time, rescuing the transaction.
Outcome: A 0.15% increase in acceptance rates by applying Network Tokens instead of card PAN numbers; a 70% reduction in non-tokenization fees from Mastercard; and a 16% retry success rate by retrying with PAN details if the Network Token was declined*.
Read more about tokenization
The payment landscape is complex and ever-changing, and what drives performance today might not work tomorrow. Intelligent Acceptance has a live continuous experimentation framework, helping merchants achieve optimal performance for their transactions across the payment lifecycle. And as we have seen with Klarna, small wins across the board can result in meaningful results. Allowing merchants to achieve maximum revenue from each and every transaction.
Checkout.com also understands that each business has unique priorities and this will be reflected in their payments. That’s why Intelligent Acceptance gives merchants full control over what parts of the payment flow get optimized—messaging, routing, retries, authentication, and Network Tokens. As well as allowing merchants to select criteria for either maximizing acceptance rates or lowering transaction costs.
Most importantly, transparency is a core value for Checkout.com which is why merchants have visibility into these optimizations that are carried out and the results they achieve. This comes from building a real relationship and a true partnership with the shared goal of perfecting payment performance.
*Based on a pilot conducted from September 2022 to March 2023
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