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Klarna is a financial technology company that lets consumers make purchases with prepaid Visa cards. Klarna earns money by collecting fees from businesses. As a result, it does a mild credit check and then pays the merchant.
Klarna also earns a commission on interchange fees and interest earned on customer accounts.
Klarna is a financial technology firm that intends to revolutionize how consumers pay for online purchases. It provides a “buy now, pay later” service that enables online buyers to make purchases from major retailers without paying in full at the time of purchase.
Consumers may choose to pay for their products in four interest-free payments every two weeks or in full within 30 days. Additionally, they can finance their purchase for six to 36 months.
Customers can use the Klarna app to make purchases without making an initial payment.
Customers can choose to spread payments over three months or to delay payment for long periods, rather than just paying all at once.
The store will send the items ordered immediately, but payment will not be requested from the customer later.
This method of shopping enables you to make purchases online and then select whether or not to keep them before you pay for them.
This implies that shoppers who use Klarna will not have to wait for a refund on things they opt not to keep.
What is Klarna?
Klarna is a financial technology company that processes payments on behalf of other businesses. It collaborates with other businesses (primarily in the e-commerce arena) to allow customers to pay for things after receiving them (via invoices).
Klarna earns money by charging merchants, charging late fees, charging interest on consumer loans, charging interchange fees, and charging interest cash.
Klarna was founded in 2005 by two Swedish business students. It has been a tremendous success. Klarna has raised a total of $3.7 billion and has a market capitalization of $45.6 billion, making it Europe’s most valuable FinTech company.
How Does Klarna Work?
Klarna is a payment service provider that enables users to test products before making a purchase. As a result, Klarna collaborates with retailers to manage the payment process on their behalf.
You’ll find a range of payment options available, including immediate payment (and up to 30 days later) as well as numerous interest-free options. You can make payments online (through PayPal, for example), via bank transfer, or via the Klarna mobile app.
Klarna also offers larger purchases, with a maximum run rate of 36 months and various monthly installments.
Klarna, therefore, does not charge consumers directly but works in partnership with retailers.
There are no interest rates, late fees, or penalties. Payment approval is based on a soft credit check (which does not affect your credit score), your credit history, age, wage, and a variety of other considerations.
Therefore, why would an online retailer give away a portion of their earnings in exchange for payment processing? Because, as the company explains, partnering with Klarna results in a 44 percent rise in orders (i.e., conversion rate) and a 68 percent increase in order volume.
Merchants also have a significant advantage, as Klarna transfers funds regardless of whether a customer pays or not.
Finally, Klarna provides its merchants with a suite of tools for increasing sales. These include the following:
- Business Analysis: a dashboard tool for analyzing key performance indicators like order volume, weekly revenue, and conversion rates.
- On-site messaging: a chat feature that quickly enables retailers to respond to their customers’ most pressing questions.
The company processes payments for Etsy, ASOS, H&M, Calvin Klein, and 200,000 additional merchants.
What services does Klarna offer?
Klarna’s most popular option is Pay in 30 Days, allowing users to defer their payment by 30 days.
The firm does a soft credit check to complete this order, which does not affect your credit score.
A Pay in 3 service divides the payment into three monthly installments, with the first installment due at the time of purchase.
The third choice, the finance plan, requires a comprehensive credit check, which may negatively influence your score.
Repayments are spread out over six to thirty-six months with this option.
How Does Klarna Make Money?
Klarna does not charge interest or fees for its normal payment choices; therefore, how does it make money? It levies a transaction fee to retailers.
Klarna charges a $0.30 fee for all payment alternatives, in addition to variable costs of up to 3.29 percent or 5.99 percent.
Klarna earns money by charging merchants, charging late fees, charging interest on consumer loans, charging interchange fees, and charging interest cash.
Klarna is a no-interest, no-fee delayed payment mechanism.
There is no time limit on the interest-free term or additional fees for late payments, unlike credit cards.
If you do not make your repayments within three months, your debts will be sent to a collection agency, which will demand repayment.
Klarna earns money by charging retailers a transaction charge each time a customer purchases on the retailer’s website.
Klarna conducted 20 million transactions in 2020, which the company claims enabled it to give its service “totally free of charge.”
Klarna customers may pay a small interest charge if they use its longer-term financing option.
Let’s take a closer look at each of these in greater depth below.
Payment Fees
Klarna earns the majority of its revenue from merchants through a combination of fixed transaction fees and variable percentage fees. The fees vary according to the payment option used by the consumer and the country.
Businesses in the United States, for example, must pay a $0.30 transaction fee. The variable cost is between 3.29 and 5.99 percent.
Klarna accepts a variety of payment methods, from cash-on-delivery to loan financing. Klarna charges retailers for its Instant Shopping solution, enabling clients to check out in just a few clicks.
- A monthly product cost of $30
- A flat cost of $0.30 per transaction
- The fee for onsite sales is 3.29 percent, and the fee for offsite sales is 3.79 percent.
Instant Shopping features Klarna’s broader payment products, including online (dubbed Checkout) and offline (dubbed In-store) payment options.
The ostensibly frictionless shopping experience enables retailers to boost conversion rates simply by eliminating friction and enabling Klarna as a trusted payment processor.
Klarna offers several financing options for individuals who are unable to pay immediately. These options include four monthly payments, financing, and pay in thirty days.
Customers can pay in four installments (two weeks separating each payment) as the name suggests. Klarna charges merchants a fixed fee of $0.30 per transaction and variable costs of up to 5.99 percent.
Klarna Financing enables customers to spread the cost of purchases over time by making monthly payments. Customers will make a minimum of three payments for up to 36 months. Klarna charges merchants a fixed cost of $0.30 and a variable fee of 3.29 percent.
Additionally, clients will be charged interest on the loan, ranging from 0% to 29.99 percent annual percentage rate (APR). This provides Klarna with an additional revenue source.
Finally, Pay in 30 days is intended for clients who wish to test a product before purchasing it. This option is primarily intended for fashion retailers such as ASOS and TOMS.
You must make the payment within 30 days of receiving it. Merchants are charged a fixed cost of $0.30 and a variable fee of 5.99 percent.
Finally, if an invoice is not paid on time, Klarna levies a late payment fee. These late payment costs are assessed monthly and can reach a maximum of $35.
Interest On Cash
Klarna, like any other bank, utilizes the funds in such accounts to lend to other entities, including other banks.
They are then paid interest by these institutions (also called Net Interest Margin). Statista reports that the net interest margin for all banks in the United States was 3.35 percent in 2019.
Interchange Fees
Klarna previously announced its intention to create a bank account in early 2021 for the German market.
Users can create savings goals, save money, and make transactions using the program, similar to their bank account.
Klarna will also provide a complimentary debit card in collaboration with payment provider Visa.
When you use your debit or credit card to make a purchase, an interchange fee is levied. The merchant is responsible for exchange fees, which are often less than 1%. Therefore, if you spend $100 on something, around $1 will go to Visa.
Klarna would then be compensated a share of the charge for promoting the card to its users. The precise percentage share is not released publicly.
What is the Funding and Valuation of Klarna?
Crunchbase reports that Klarna has raised a total of $3.7 billion in debt and equity capital across 27 rounds.
A few notable investors include Dragoneer Investment Group, DST Global, Silver Lake Partners, BlackRock, General Atlantic, and Ant Group.
Klana was valued at $45.6 billion in June 2021, making it Europe’s most valuable technology company. Furthermore, it belongs to the top five most valuable FinTech companies globally, along with Ant Financial, Robinhood, and Stripe.
What is the Revenue of Klarna?
The global revenue of Klarna is expected in 2020 to be $1 billion. This represents a 40% increase over the previous year. Klarna payment platform processed more than $53 billion in payments during the same period.
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Success Story of Klarna
Where do most revolutionary startups begin? For the vast majority of them, the answer is almost certainly not Burger King. However, Klarna’s founders are anything but ordinary.
Sebastian Siemiatkowski, acting CEO of Klarna, and Niklas Adalberth met as teenagers frying burgers and serving hungry customers at Burger King. Even back then, the pair were always debating startup concepts.
Their entrepreneurial spirit drew them to Sweden’s famed Stockholm School of Economics, where they studied Economics. As fate would have it, they met Victor Jacobsson, their third co-founder, there.
Sebastian and Niklas decided to take a trip worldwide – without flying – before beginning their master’s degrees. This would entail lengthy voyages on ships and buses. The trip’s objective was to broaden their horizons and eventually develop a company idea to start.
Contrary to popular belief, this is not how the idea for Klarna came to be. After missing their boat in Australia, the two-faced a choice between flying home or postponing their trip – and ultimately chose the latter.
When they returned to Sweden, Sebastian was too late to enroll in his master’s program, which required him to work in telesales due to the rippling effects of the dotcom collapse (and consequently a lack of possibilities).
He eventually found work at a debt collection organization whose major objective was to recover unpaid invoices on behalf of e-commerce merchants. In the early days of the internet, consumers regularly failed to pay their invoices, resulting in credit loss for online merchants.
Sebastian was informed by the business owners that if his employer could tolerate the risk, they would allow him to handle the transactions. Being the entrepreneur he is, Sebastian approached his boss with the proposal, but he was uninterested.
He was eventually admitted to the Stockholm School of Economics, where he studied alongside Niklas and Victor Jacobsson. After informing the guys about his prior work experience (and consequent rejection), they decided to explore the idea curtly.
A few weeks later, the team pitched the first version of Klarna at an innovator’s pitch — and received an extremely negative response, arguing that the concept would never work.
Fortunately, they met Jane Walerud, one of Sweden’s most successful angel investors, at a networking event. Three weeks later, she offered the guys 60,000€ in seed capital (in exchange for a 10% stake) and five software developers in exchange for another 37% stake.
Six months later, and with less than half of the 60k capital remaining, the company was profitable. Klarna maintained a steady growth rate throughout the next few years. In 2010, Klarna became Sequoia’s first investment in a European technology business (heading its $155 million round).
When competition materialized, FinTech just acquired it. Klarna, for example, acquired Germany-based Sofort AG for $150 million in 2013. Klarna has since purchased six other businesses.
Klarna ultimately chose to leap into the big leagues in 2015 by expanding into the United States. The corporation first invested $100 million in the United States, which became a significant growth engine.
Klarna faces significant competition in the United States from competitors such as Affirm and PayPal (traditional credit card companies). Thus far, the corporation has established a 7.85 million-strong user base in the United States.
Another significant push was the firm’s expansion into physical retail. Klarna announced its first physical location collaboration in 2016. Today, FinTech collaborates with retailers such as Sephora and Macy’s to offer customers more payment options throughout the checkout process.
Klarna got a banking license a year later, enabling them to expand beyond payment processing. Until far, Klarna has refrained from providing consumer banking products, owing largely to space’s strong competition (including the likes of Chime, Revolut, N26, and more).
Klarna, despite being hailed as one of Europe’s model companies, has nevertheless encountered its share of difficulties over the years. In 2012, two company officials (one co-founded and then-CEO Niklas Adalberth) were detained in a New York hotel for suspected molestation (involving a 19-year-old lady).
Additionally, the company made some poor business judgments. In 2017, it introduced Wavy, a peer-to-peer payments app, to compete with Venmo. Only two years later, the app was discontinued.
Additionally, Klarna has been under fire from consumer advocacy groups and debt charities for promoting poor financial decision-making that results in large liabilities.
Ironically, if clients are unable or unwilling to pay, Klarna will refer them to a debt collecting firm.
In January 2021, the United Kingdom’s government declared that companies offering ‘Buy Now, Pay Later’ services will face harsher regulations in the future. These firms will be required to do more extensive background and credibility checks in the future.
To that end, Klarna has been concentrating its efforts on repositioning itself as a super financial app. For example, in February 2021, it introduced a bank account for its German consumers, directly rivalry with companies like N26.
This enables Klarna to analyze a user’s credit score and the likelihood of default more accurately by obtaining an overview of available cash, financial statements, and salaries, among other information.
Klarna now collaborates with over 200,000 retailers in 17 countries. To date, 90 million users have used their service. The corporation, based in Stockholm, employs over 4,000 workers in 16 global locations.
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SWOT Analysis of Klarna
Strengths of Klarna
Klarna’s quick financial installment strategy has numerous benefits: There is no enlistment requirement. A pre-filled exchange structure is advantageous. The funds are transferred promptly from the customer’s account to the shop as a direct payment.
Klarna’s instant installment method has various advantages:
- You do not have to enroll.
- An easy method for pre-populating exchange structures
- Payments received directly from the shop are immediately transferred.
- An installment payment with staggered verification through the web and with a confirmation code.
- The merchant does not have access to private web-based financial details.
Cons of Klarna
Currency conversions are costly. The typical charge starts at 2.95 percent, which may seem excessive to some.
Refusal to extend credit to clients. Klarna will, without a doubt, deny credit to some clients when it conducts the credit checks. This may lead to some dissatisfied customers blaming the retailer rather than the installment processor.
What is the secret behind Klarna? When you use one of Klarna’s no-interest installment plans, you don’t have to worry about a trick. You’ll pay your installments in full and on time every month. The process of cheating works in the same way as using a Mastercard.
Key Takeaways from Klarna Business Model
The Swedish company Klarna was founded in 2005. The organization provides innovative payment options, making BNPL one of the best-known.
Klarna generates revenue by charging merchants, not consumers. Klarna earns money from the consumer when the customer chooses to spread the purchase expense across several months.
Klarna makes a commission on a percentage of interchange fees in addition to standard payment and transaction costs. The second source of revenue is cash in the accounts of their customers.
