Have you seen Buy Now Pay Later through Klarna at the checkout in major retailers and wondered- how does Klarna make money? If you’re paying zero dollars in interest in four payments, it is a valid question.
So precisely, how does Klarna make money?
Klarna is not just a payment provider. It makes money through merchant commissions, interchange fees, interest on customer accounts, and late fees.
What is Klarna?
Klarna is a billion-dollar financial technology (fintech) company that offers its customers the buy now pay later (BNPL) option. Its interest-free financing is similar to a credit card, but unlike credit cards’ monthly credit, Klarna offers four ways to make a payment for the purchase. The customer can choose to:
- split the pay into four interest-free payments, with autopay in two weeks
- pay immediately with almost all debit or credit card
- pay in 30 days interest-free or
- pay over-time for large purchases without or without interest
Background, Overview, and Evolution
Sebastian Siemiatkowski co-founded Klarna with his friend Niklas Adalbert in 2005. The duo started the company in Stockholm, Sweden, along with Victor Jacobsson.
The first-ever transaction occurred on April 10, 2005, at Pocket Klubben, a Swedish bookshop.
The “Buy now, Pay later” concept was not popular then; therefore, the founders did not receive good feedback from the judges during the innovator’s pitch at the Stockholm School of Economics. If it was not for that one man who approached and encouraged Sebastian, the company could have died before its inception. Jane Walerud was the first angel investor. The founders started the company under the name “Kreditor Europe AB,” which is rebranded as Klarna today.
It was not until 2016 the company gained international recognition. Currently, Klarna has 150 million active users and 25 million US customers and processes 2 million daily transactions. It works with over 450 thousand merchants. The company is valued at $45.6 billion. With more than 7,000 workers, Klarna is active in 20 market areas on three continents and has offices in 28 cities.
Klarna Business Model
So how does Klarna work exactly?
Klarna’s business model revolves around providing payment solutions to consumers. It offers various payment options, from interest-free pay in 4 installments, pay now or in 30 days, or pay over time with monthly interest. Klarna accepts all major debit and credit cards like Visa, Mastercard, and Discover. It does not accept prepaid cards as a payment method.
The easy-to-use Klarna app lets you shop within the app and make payments. You can check out at the store’s website using the pay with Klarna option and set up a payment plan within the app. For an in-store checkout, customers can create a digital wallet and use tap and pay to make purchases.
How Does Klarna Protect Itself?
Klarna can, at times, require its customer to pay more upfront to protect itself from bad debtors. It happens when the customer has a lot of debts (or outstanding balance) or Klarna finds the customer a high risk during a soft credit check.
Does Klarna Report to Credit Bureaus?
Klarna performs a soft credit check for anything other than monthly financing. A soft credit check does not impact your credit score and thus will not appear in credit bureau reporting.
Klarna reports any late payments and long-term financing to credit bureaus. Transunion performs the credit check, and Klarna uses WebBank to provide the funding. It is a hard inquiry and will impact your credit score. It will also show up in your credit reporting.
However, your on-time monthly installment to Klarna will not show up in your credit report. The business also does not report the outstanding loan balance and credit limit.
How Does Klarna Make Money With No Interest?
Klarna’s revenue generation techniques are unique, and you may wonder how Klarna makes money with no interest to its customer. Every business needs to make a profit.
But Who pays Klarna, and what is the secret behind Klarna’s successful business model?
Although Klarna’s interest-free monthly installment is the highlight of its marketing, interest is only sometimes free. You’re likely to be hit with late fees for missing a payment. The company also charges merchants for commissions, interchange fees, and referrals.
Let’s look into the ways Klarna makes money.
Payment Processing Fee
Klarna’s primary driving force for profit is its payment processing fees. Merchants and retailers pay a $0.3 per transaction fee in addition to a variable fee that goes up to 5.99%. The variable fee for the Instant Shopping feature is 3.29% for an on-site transaction and 3.79% for an offsite transaction.
Klarna comes with payment as well as marketing solutions for the business. It has a payment option that consumers love and contains highly engaged shoppers, over 140 million of them. The company claims to increase average order value by 41% with a 30% increase in conversion rate and up to 40% from new customers.
Interchange fees cover fraud protection, payment processing, and authorization. The merchant’s bank pays fees that range from 1% to 3.5%. The card issuers’ bank receives the interchange fee, and Klarna gets a portion of the fee for promoting the card to its customers.
Klarna also introduced a Klarna card that offers rewards and perks with no credit impact and no interest rate. The company charges a monthly $4.99 flat fee for interest-free purchases.
Interest on Loan
Klarna offers a long-term financing option on a large purchase. The financing can help you spread the purchase for up to 24 months.
WebBank (member FDIC) issues the financing product, which is not interest-free. The Annual Percent Range (APR) on the burrowed loan can go up to 28.99%.
Klarna makes a portion of its profit through late fees. It charges a late fee if no payment is issued within the due date or if the entire payment for the purchase is pending. The late payment fee may go up to 25% and stay under $7.
Klarna introduced Klarna Kosma, an open banking application programming interface (API) that helps businesses interact with different banks in a single platform. It allows its customers & merchants to connect their bank accounts and get financial insights.
Klarna charges a fee for acting as an interface between the merchants and banks.
Advertising and referral fees
Along with the payment solution, Klarna provides businesses with a marketing solution. Klarna’s app helps promote various brands to reach new customers. It offers premium ads and sponsored content through the app and Klarna-owned social media channels.
Klarna leverages its vast customer database to earn money through advertising and referral fees.
To Sum It Up
Klarna makes most of its profit through payment fees and interchange fees from its merchants. The Buy Now Pay Later payment service also makes money from its customers through late fees and long-term interest-bearing financing.
Testing a product before issuing any payment to determine if it’s a right fit makes sense. However, if you’re still struggling with finances, you should stay away from the fintech company. The interest-free installment and unregulated loan may windup an impulsive buyer into financial trouble.