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).

The business model of Klarna is based on charging the businesses it works with a fixed as well as a percentage fee for every successful payment. The company furthermore makes money from interest paid by consumers for the loans it issues.

Founded by two Swedish business students in 2005, the company has proven to be a great success. Klarna has raised a total of $460 million and is valued at $5.5 billion. Furthermore, revenues for 2018 exceeded $620 million on a profit of $12 million.

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 such as ASOS and H&M and handles the payment process on their behalf.

Consumers have the ability 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 depend 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 percent increase in orders (i.e. conversion rate) and 68 percent 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

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 guest 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 degrees, Sebastian and Niklas decided to do a trip around the world – without taking a plane. That would mean long stints on ships and buses. They wanted to use that trip 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 fly back home or postpone their trip – they chose the latter.

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

He worked for a debt collection agency, and from e-commerce shops, he always received the same feedback: they are going to stop selling on an invoice-basis because they seldom receive the money. Which led to too much credit loss. They said to Sebastian that if his company can take the risk, they will let them handle the transactions. Sebastian, the entrepreneur he is, took that idea to his superior, but he was not interested.

Sebastian then quit his job and entered the Stockholm School of Economics, together with Niklas and Victor Jacobsson. He presented the idea and the trio figured they could try it out for a couple of months and make a business out of it.

They presented the idea of Klarna at an innovator’s pitch, and received overwhelmingly bad feedback, stating that the idea “is never going to work”. Luckily enough, at a network 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 percent stake) and 5 software developers in exchange for another 37 percent of the company. Six months later and only half of their 60k funding down, the company was already being profitable.

They went on to raise over $1.2 billion in 16 funding rounds from accredited investors such as Sequoia Capital and General Atlantic.

How Does Klarna Make Money?

The way Klarna makes money is very simple. For each transaction and depending on where your business is located, they charge a fixed as well as variable fee. A comprehensive list of its fee structure can be found here.

The fees are dependent upon the payment method the customer chooses. They include Pay Now, Pay Later, and Slice It.

Pay Now, as the name implies, covers direct payments, that is before the product arrives. These can be made either through the Klarna app or other payment vendors such as PayPal.

With Pay Later, consumers can be up to 30 days after their product was shipped. The customer receives an e-mail with a link to the purchase options. The advantage is that customers can first try out the product and send it back if they don’t like it.

Slice It allows customers to pay their orders over multiple installments. The maximum number of months is capped at 36 while the maximum order volume depends on the credit score Klarna has assigned to you.

Furthermore, Klarna makes money by charging interest on consumer loans. When a customer chooses to pay for an item over the course of an extended period (e.g. 36 months), a loan has to be issued.

The Annual Percentage Rate (APR) of an average Klarna loan is around 18.9 percent. APR’s can be as high as 30 percent.

Klarna Funding, Valuation & Revenue

According to Crunchbase, Klarna has raised a total of $1.4 billion across 19 rounds of venture capital 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 September 2020, Klarna became Europe’s highest-valued FinTech startup with a valuation of $10.6 billion. It also became one of the fifth highest valued FinTech’s worldwide, next to companies like Robinhood or Stripe.

 In the first half of 2020, Klarna generated sales volumes and revenues of $22 billion and $466 million, respectively. The company posted a net loss of $59.8 million during that same period.

Key Takeaways

  • Despite early disbelief for the business model, Klarna’s founders have achieved instant success after their launch
  • Their model hit a big consumer pain and allowed both them and their merchant partners to grow exponentially
  • The way Klarna makes money is very simple, that is charging their merchant based on every transaction

Hi folks, my name is Matthew! During the day, I lead a tech team of 10 folks 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..