- Klarna partners with e-commerce retailers to offer customers flexible payment solutions such as BNPL and Pay in 30 days.
- Klarna’s success in BNPL has made it the highest valued fintech company to come out of Sweden.
- Klarna is expanding into banking and online groceries to beat out some heavy competition.
The Klarna payment network and loan giant is Europe's highest valued fintech startup. It partners with e-commerce retailers to offer point-of-sale (POS) loans to the consumer market.
The payments processing space is extremely competitive, requiring deep pockets to take on the incumbents. So how are Klarna funding their rapid growth? We examine their business model to find out.
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What does Klarna do?
Founded in 2005, Klarna has proven to be the most successful fintech startup out of Sweden and even Europe. As of June 2021, Klarna had raised more than $3 billion of funding, giving it a valuation of more than $45 billion.
The company operates a network of over 200,000 partner merchants in 17 countries worldwide and over 90 million people use Klarna for point-of-sale financing on their purchases. Klarna has headquarters in Stockholm, with more than 4,000 workers across 16 offices around the globe.
Klarna partners with e-commerce retailers to handle payment processing for their business. Consumers can choose to take an instant loan with interest-free repayment over four payment dates. The consumer can download the Klarna app to make direct payments or link it to their bank account for automatic repayments.
Klarna also supports larger purchasing, offering terms up to 36 months. Klarna charges transaction processing fees to the merchant, not the consumer. When assessing the consumer for a loan, Klarna performs a soft credit check, which won’t impact their credit score.
However, if you have bad credit, it may affect the APR charged on point-of-sale loans and the cost of your monthly installment.
How does Klarna work?
According to Klarna, listing them as a payment solutions provider on your e-commerce site adds up to a 45% increase in order volume. That's a significant jump in revenues for any retailer, and they're willing to pay for this order flow.
Another huge advantage for the merchant is that Klarna takes the risk in the deal, compensating the merchant even though the consumer still has outstanding credit on the purchase. Essentially, Klarna underwrites the loan, so both the consumer and the merchant benefit.
Klarna also helps online e-commerce businesses increase their sales by offering innovative tools to help them get more out of their business. Business insights is a dashboard solution analyzing sales metrics like order volume, weekly sales, and conversion rates. Onsite messaging gives business owners the chance to connect with customers and answer questions.
Klarna is the preferred partner for established online retailers and brands like Etsy, H&M, ASOS, Calvin Klein, and over 20,000 retail merchant partners in its network.
How Klarna makes money
Klarna makes money by charging merchant fees, interest on its consumer loan business, and late fees on loan repayments. The company also makes considerable income through its cash-on-interest model and interchange fees.
The bulk of Klarna's revenues come from charging merchants fixed and variable transaction fees on all consumer payments. The fee scale depends on the payment method used by the consumer and the country of the transaction.
For US clients, merchants pay a flat fee and a variable percentage fee that Klarna tells us "change based on different variables and based on each merchant." Klarna offers merchants a diverse range of payment methods, from loan financing to direct checkout options. In exchange, Klarna pays the merchant upfront, taking the customer’s credit risk.
Payment options include buy now pay later, pay in 30 days, and short-term consumer financing. Buy now pay later gives customers the option of four easy installments across eight weeks, with two weeks in-between each payment. Pay in 30 days allows customers the option to pay up to 30 days later without interest or upfront fees.
The Klarna Express Button lets existing Klarna customers checkout within seconds using pre-filled payment data. In return, Klarna charges the merchant a fixed transaction fee and a variable transaction fee of the total transaction.
Klarna opened a German-facing bank in 2021, allowing the company to offer its customers a bank account. As a result, Klarna account holders get all the savings benefits and transfer advantages of using a real bank account.
Klarna also offers account holders a free debit card that works with ATMs across Europe. Whenever the customer uses their debit card, Klarna collects an interchange fee on the sale. The merchant is responsible for this fee, which is typically less than 1% of the sale value.
Interest on cash
Klarna also uses its client's cash deposits to loan as collateral to other financial institutions like banks. This practice is entirely normal and legal in the banking industry. In return for lending the funds, Klarna receives interest payments at interbank rates.
Klarna collects this net interest on margin from its institutional partners, accounting for a significant chunk of its revenues.
Future growth engine
Looking ahead, Klarna sees growth in three areas: international expansion, expanding their merchant base, grocery offerings, and banking.
Klarna is looking to expand internationally, with entry into the New Zealand market earlier this year and additional markets to come.
In addition to an established presence with many of the larger retailers, The company continues to expand its merchant base, including Bluemercury and 6,000 small and medium-sized businesses.
Klarna recently signed with Aldi to offer BNPL services for online grocery shoppers, a large, growing market.
Klarna's move into financial services through its German banking partners also shows its intention to expand its offering into the consumer banking market.
Of note, regulators in the UK and the US are cracking down on predatory lending practices instituted by buy now pay later firms. However, Klarna plays a clean game, explaining its deal structure with no hidden clauses, although the company admits that better background and credit checking practices should be instituted across the entire industry. Klarna relies on its AI algorithm to assess risk in every deal it offers while providing near-instant approvals.
As a banking-sector player, Klarna targets the consumer market and competes for market share with other leading fintech and BNPL companies in the European and US markets. Some of Klarna's top competitors include other BNPL firms and e-payments providers, including Afterpay, PayPal, Quadpay, Stripe, Affirm, and WePay.