The Klarna Business Model – How Does Klarna Work & Make Money?

Executive Summary:

Klarna is a financial platform that facilitates payments on behalf of other companies. It partners up with other businesses (mostly in the e-commerce space) to offer their customers the option to pay products after receiving them (via invoices).

Klarna makes money via merchant fees, late payment fees, interest on consumer loans, interchange fees, as well as interest on cash.

Founded by two Swedish business students in 2005, the company has proven to be a great success. Klarna has raised a total of $3.7 billion and is valued at $45.6 billion, making it Europe’s highest-valued FinTech startup.

How Does Klarna Work?

Klarna is a payment service provider, which allows consumers to try out products before they pay for them. Klarna thereby partners up with retailers to handle the payment process on their behalf.

Consumers have the option to choose from a set of different payment options, ranging from paying directly (and up to 30 days later) to multiple interest-free rates. Payments can be made online (e.g. through PayPal), via bank transfer, or the Klarna mobile app.

With bigger purchases, Klarna also allows you to finance with a maximum run rate of 36 months and multiple payment installments. 

Consequently, Klarna does not charge the consumer but the retail stores it works with. There are no interest, fees, or late charges. Payment approval for consumers depends on a soft credit check (without affecting your credit score), your credit history, age, salary, and other factors.

So why would an online store give away shares of their revenue to have payments processed? Because, as the company states, having Klarna as your payment solutions leads to a 44% increase in orders (i.e. conversion rate) and a 68% increase in order volume.

Another big advantage for the merchant is the fact that whether or not the customer ends up paying, Klarna already transfers the money for the transaction.

Lastly, Klarna also offers its merchants a set of tools to increase sales. These include:

  • Business insights: a dashboard tool to analyze metrics such as the number of orders, weekly sales, or conversion rates
  • On-site messaging: a chatting tool which allows merchants to answer their customer’s most pressing questions

The company facilitates payments for brands like Etsy, ASOS, H&M, Calvin Klein, along with 200,000 other merchants.

A Short History Of Klarna

Where do revolutionary startups normally originate? For most of them, the answer is probably not Burger King. Then again: Klarna’s founders are far from the ordinary either.

Sebastian Siemiatkowski, Klarna’s acting CEO, and Niklas Adalberth met in their teenage years when the pair was flipping burgers and serving hungry guests at Burger King. Even back then, the pair always used to discuss startup ideas.

Their thirst for entrepreneurship led them to study Economics at Sweden’s prestigious Stockholm School of Economics. As fortune had it, that is where they’d later meet Victor Jacobsson, their third co-founder.

Before embarking on their master’s degrees, Sebastian and Niklas decided to take a trip around the world – without taking a plane. That would mean long stints on ships and buses. The trip’s purpose was to not only widen their horizon but eventually discover a business idea to start.

Ironically enough, that is not how the idea for Klarna came to be. After missing their boat in Australia, the pair had to decide whether they wanted to fly back home or postpone their trip – and eventually ended up choosing the latter.

When they got back to Sweden, it was too late for Sebastian to enroll in his master’s degree, which due to the ripple effects of the dotcom crisis (and thus lack of opportunities), saw him doing telesales.

He ended up working at a debt collection agency whose primary purpose was to collect outstanding payments on behalf of e-commerce stores. Back in the early days of the internet, users frequently did not pay their invoices, leaving online stores with loss of credit.

The store owners told Sebastian that if his employer could bear the risk, they will let them handle the transactions. Sebastian, the entrepreneur he is, took that idea to his superior, but he was simply not interested.

He eventually was able to pursue his master’s at the Stockholm School of Economics, together with Niklas and Victor Jacobsson. After telling the guys about his previous experience at work (and the subsequent rejection), they curtly decided to pursue the idea.

A few weeks later, the team presented the first concept of Klarna at an innovator’s pitch – and received overwhelmingly bad feedback, stating that the idea is never going to work out.

Luckily enough, at a networking event, they came across Jane Walerud, one of Sweden’s most successful angel investors. Three weeks later, she handed the guys 60,000€ in seed funding (for a 10% stake) and 5 software developers in exchange for another 37% of the company.

Six months later, and with only half of its 60k funding used, the company was already being profitable. Klarna continued to grow steadily over the next few years. In 2010, Klarna became the first-ever European tech startup that Sequoia put money into (leading its $155 million round).

Whenever competition arose, the FinTech simply decided to acquire it. In 2013, for instance, Klarna acquired Germany-based Sofort AG for $150 million. Klarna has acquired 6 more companies ever since.

In 2015, Klarna finally decided to enter the big leagues by expanding into the United States. The company initially spent $100 million for its U.S. expansion, which became one of its major growth drivers.

In the states, Klarna faces stiff competition from the likes of Affirm and PayPal (as well as traditional credit card companies). So far, the company has amassed a U.S. customer base of 7.85 million.

Another big push became the firm’s move into physical retail. In 2016, Klarna announced its first brick and mortar partnership. Today, the FinTech partners up with the likes of Sephora or Macy’s to provide customers with additional payment options during checkout.

A year later, Klarna received a banking license, which would allow them to expand beyond payment processing. So far, Klarna has stirred away from launching consumer banking products, mainly due to intense competition in the space (including the likes of Chime, Revolut, N26, and more).

Klarna also had its fair share of troubling experiences of the years, despite being portrayed as one of Europe’s model startups. In 2012, 2 company executives (of which one included co-founder and then co-CEO Niklas Adalberth) have been arrested for alleged molestation (involving a 19-year-old woman) in a New York hotel.

The company also made some subpar business decisions. In 2017, it launched a peer-to-peer payments app called Wavy to go against the likes of Venmo. The app was shut down just 2 years later.

Additionally, Klarna has faced numerous instances of criticism from consumer organizations and debt charities, stating that the company promotes poor financial decision-making, resulting in massive liabilities.

Ironically enough, Klarna will defer to a debt collection agency should consumers be unable or unwilling to pay.

In January 2021, the U.K. government announced that ‘Buy Now, Pay Later’ companies would be subject to stricter regulations in the future. In the future, these firms will be asked to undertake more comprehensive background and credibility checks.

To that extent, Klarna has been focused to shift its direction towards becoming a financial superapp. It, for instance, launched a bank account for its German customers in February 2021, putting it in direct competition with the likes of N26.

This will allow Klarna to better assess a user’s credit score and probability of default by getting an overview of available funds, financial statements, salary, and more.

Today, Klarna works together with over 200,000 merchants across 17 countries. 90 million consumers have accessed their service to date. The Stockholm-headquartered company employs over 4,000 people across 16 global offices.

How Does Klarna Make Money?

Klarna makes money via merchant fees, late payment fees, interest on consumer loans, interchange fees, as well as interest on cash.

Let’s dive into each of these in more detail below.

Payment Fees

Klarna generates the bulk of its revenue by charging merchants a fixed transaction fee and a variable percentage fee. The fees are dependent upon the payment method the customer chooses as well as the country.  

Taking the United States as an example, businesses must pay a $0.30 transaction fee. The variable fee ranges anywhere from 3.29% to 5.99%.

Klarna offers a variety of payment methods, ranging from direct checkouts to loan financing. For its Instant Shopping solution, which allows customers to check out within a matter of a few clicks, Klarna charges its merchants:

  • A $30 monthly product fee
  • A fixed $0.30 transaction fee
  • Variable fees up to 3.29% for onsite and 3.79% for offsite sales, respectively

The Instant Shopping feature is a part of Klarna’s wider payment products, which include online (named Checkout) as well as offline (called In-store) solutions.

The supposedly seamless shopping experience allows merchants to increase their conversion rates, simply by removing friction as well as having Klarna as a trusted payment processor enabled.

For users that don’t want to pay immediately, Klarna offers a variety of financing methods. These include 4 Installments, Financing, and Pay in 30 days.

With 4 Installments, as the name indicates, customers can settle their bill over the course of 4 payments (with 2 weeks in between each payment). Klarna charges merchants a $0.30 fixed fee as well as variable fees up to 5.99%.

Klarna Financing allows customers to spread the cost by paying monthly. Customers will complete a minimum of 3 payments while the payment period can last up to 36 months. Klarna charges merchants $0.30 fixed and 3.29% variable fees.

On top of that, consumers will have to pay interest on the loan, which can range from 0% to 29.99% APR. This gives Klarna an additional stream of income.

Lastly, Pay in 30 days is aimed at customers who want to try the product before they buy it. This option is mainly aimed at fashion merchants, such as ASOS or TOMS. Payments must be settled within 30 days. Merchants are charged with a $0.30 fixed as well as 5.99% variable fee.

Lastly, Klarna charges late payment fees should the invoice not be settled on time. These late payment fees are charged on a monthly basis and can go as high as $35.

Interchange Fees

As previously stated, Klarna announced its launch of a bank account for the German market in early 2021.

The product works like any other bank account, allowing people to store their funds, set saving goals, or conduct transfers.

On top of that, Klarna will issue a free debit card in cooperation with payment provider Visa.

Whenever you pay with your debit or credit card, a so-called interchange fee is applied. Interchange fees are paid by the merchant and normally are less than 1 percent. So if you buy something for $100, around $1 of that would go to Visa.

Klarna would then receive a portion of that fee in exchange for promoting the card to its users. The actual percentage share is not publicly disclosed.

Interest On Cash

Klarna, just like any normal bank, uses the cash residing on those accounts to lend it out to other institutions, such as said banks.

They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, the net interest margin for all U.S. banks was equal to 3.35 percent.

Klarna Funding, Valuation & Revenue

According to Crunchbase, Klarna has raised a total of $3.7 billion across 27 rounds of debt and equity funding.

Notable investors into the company include the likes of Dragoneer Investment Group, DST Global, Silver Lake Partners, BlackRock, General Atlantic, Ant Group, and many more.

In June 2021, Klarna solidified its status as Europe’s highest-valued tech company with a valuation of $45.6 billion. It is also one of the 5 highest-valued FinTech’s worldwide, next to companies like Ant Financial, Robinhood, or Stripe.

In 2020, worldwide revenue reached $1 billion. This represents a 40 percent increase from 2019. Additionally, more than $53 billion were facilitated through Klarna’s payment platform over the same time span.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..