One great way to get inspiration for your own startup business model is to look at the business models of other companies. These can give you an idea of what — or what not — to do to monetize your company.
Reading case studies of business models also gives you general insights into how business works in different industries.
In this article, we will be taking a look at Klarna’s business model, a Swedish fintech company founded in 2005 with an interesting story and business model.
The Klarna Origin Story
Klarna was founded in Stockholm, Sweden in 2005 by Sebastian Siemiatkowski and Niklas Adalberth. The pair met when they were teenagers working at a local Burger King.
Siemiatkowski and Adalberth both had entrepreneurial spirits, and would frequently discuss different startup ideas, even as teens.
The two friends went on to study economics at Stockholm School of Economics, which is where they met their third co-founder, Victor Jacobsson.
The idea for Klarna arose when Siemiatkowski was working at a debt collection agency before pursuing his master’s degree. The agency primarily collected debts from ecommerce sales.
During his time at this job, Siemiatkowski spoke to merchants who said they would be willing to let the debt collection company handle transactions if they were willing to take on the risk of delinquent payments.
When Siemiatkowski presented the idea to his superiors, they were not keen on it, but the idea stuck with him.
After discussing the experience and the idea with Adalberth and Jacobsson at University, the three decided to pursue it.
They presented their first pitch for Klarna a few weeks later at an innovator’s event, but the feedback they received was negative, and they walked away empty-handed.
Fortunately, not long after this initial rejection, Klarna’s founders met Swedish angel investor Jane Walerud at a networking event.
Walerund ended up giving the trio €60,000 in seed funding in exchange for a 10% stake in the company, as well as five software developers to start working on the project in exchange for another 37% stake in Klarna.
Initially, Klarna was called Kreditor Europe AB.
In the nearly two decades since launching, Klarna has made several major acquisitions, including that of Germany-based Sofort AG for $150 million.
The company currently has more than 150 million global customers and has reached huge peaks of valuation, which we’ll get into later on in this article.
What Is Klarna?
Klarna is the original “buy now, pay later” (BNPL) financial technology platform. What this means is that Klarna allows users to purchase items from merchants without actually using their own money or credit cards at the time of purchase.
Customers have a period of up to 30 days to pay for items, or can pay off their debt in four installments, and there is no interest on these payments (as long as they’re made on time).
These zero-interest payment options are what make shopping with Klarna such a popular alternative to using traditional credit from banks for purchases.
Additionally, for larger purchases, Klarna offers financing plans of up to 36 months. Klarna’s financing payment option is the only one that entails interest fees for customers.
Klarna is primarily used for ecommerce, but the payment platform is also available in-store for many large retailers.
How Does Klarna Work?
Klarna partners with retail merchants who pay the company commission fees for each sale that comes through Klarna.
Retailers who want to partner with Klarna sign up for the service and add a Klarna payment option to their online checkout systems. In order to use Klarna, customers have to sign up for the service as well.
To onboard customers, Klarna performs an initial credit check and then, if they approve the customer, allows them to purchase items using Klarna credit.
Shoppers using Klarna do not need to provide any personal financial information when making online payments through the platform.
When a customer opts to check out using Klarna, they can then select one of the three payment options we mentioned above.
Each time someone checks out with Klarna, the payment platform performs a soft credit check (one that doesn’t affect credit score) to make sure they can still be approved for credit. These soft credit checks are typically just seconds long.
After the sale is made via Klarna, the merchant pays the company a flat fee and a percentage of the total sale cost.
This may sound like a bad deal for retailers, but they see it as a sort of marketing fee since ecommerce sites that implement Klarna payments have been shown to receive about 44% more orders and a 68% higher order volume.
Customers then receive their order and an invoice from Klarna with payment instructions according to the payment option they chose at checkout.
Klarna is a platform that benefits both retailers and consumers. It provides a safe, secure, and interest-free way to shop for customers, increased sales for merchants, and many other benefits.
Benefits of Klarna for Retailers:
Provides a simple payment service that merchants can easily set up on sites and apps.
Klarna always pays the merchants, so there is less risk of fraud.
Higher conversion rates because of less commitment for shoppers.
Allows retailers to offer financing on their sites with no risk for themselves.
Benefits of Klarna for Consumers:
Customers are not limited by payment options.
Removes uncertainty of ordering certain types of products online, such as clothing.
Can pay after receiving items, so there’s no risk of paying for something that doesn’t arrive.
Provides easy access to low-cost credit as an alternative to traditional credit cards.
Many businesses will use your D-U-N-S Number to access your company’s Dun & Bradstreet credit profile to help evaluate you as a partner.
When analyzing Klarna's business model we found there are four main ways Klarna makes money: interest fees, late fees, merchant commissions, and Klarna card (in-store) payments.
1) Interest Fees
For users who choose to use financing from Klarna for more expensive purchases, Klarna charges up to 19.99% APR (over a period of up to 36 months). The amount of interest each customer has to pay varies based on their credit score.
Customers do not pay any interest whatsoever if they choose either Klarna’s pay in 30 days option or the four-installment payment option.
2) Late Fees
Klarna charges late fees to customers who miss their payments for either of the interest-free payment options.
As of October 24, 2022, late fees will be calculated based on the total order value and will be divided into tiers to encourage timely payments and responsible spending. See the image below for their late fee structure.
Keep in mind that, even if customers don’t pay, Klarna still takes responsibility for paying the merchants what they are owed.
3) Merchant Commissions
As we touched on earlier, each time a customer purchases something from a retailer using Klarna, the merchant pays a flat transaction fee and a percentage of the sale cost.
The amount the merchant pays for this commission depends on which payment option the customer chooses.
For the 30 days and four-installment payment options, merchants pay a $0.30 flat fee and a percentage of the transaction up to 5.99%. For purchases made using financing, merchants pay a flat fee of $0.30 and up to 3.29% per transaction.
Note that these commission fees apply to both online and in-store sales.
4) Klarna Card Payments
The Klarna Card is a virtual credit card that shoppers can use to make in-store purchases at participating brick-and-mortar retail stores.
Users can set up a budget on the virtual card for specific retailers within the Klarna mobile app, then add it to their Google or Apple wallets to make easy payments at retail store cash registers.
As they do with online purchases, Klarna makes money off this card by charging for late payments. The company also charges a monthly fee for the card of $3.99 per month after the first year.
Additionally, since the card provides more opportunities for customers to pay using Klarna, it helps increase Klarna’s revenue from merchant commissions.
Examples of big-name retailers where customers can use the Klarna Card include:
Saks Fifth Avenue
The North Face
75,000+ other brick-and-mortar retail stores globally
Interest on Cash
Although Klarna’s business model revolves around the four main revenue streams discussed above, there’s one more way they earn some money, and that’s by collecting interest on the cash they have sitting around.
Like all large companies, Klarna has a ton of funds stored in bank accounts, and that cash earns more interest the longer it sits there. We can’t say for sure how much interest Klarna makes off their savings, but most banks pay an interest rate of around just 0.04%.
Because of the low-interest rates banks pay, interest on cash can’t be a significant source of revenue, and therefore this isn’t really a part of the Klarna business model. But, it’s worth mentioning as it’s another small way that Klarna makes money.
How Much Money Does Klarna Make?
Klarna reported $1.5 billion in revenue in 2021. Since Klarna is a privately-held company, they are not required to report their annual revenue, so it is uncertain exactly how much they are currently making.
That being said, it’s safe to say, based on past data, that Klarna is still making well over $1 billion in revenue annually.
Is Klarna Making a Profit?
Klarna’s current business model is not making any profits. While this may be surprising considering the amount of money flowing through Karna transactions, it’s not unusual for the buy-now-pay-later industry.
This sector is very capital hungry, and Klarna spends a lot of money on expanding to try and keep up with its competitors. The company reported a loss of $730 million on its revenue of $1.5 billion in 2021.
Note that amounts are in SEKk. You can find all the numbers here.
The difficulty of occupying and making a profit in the BNPL space has been compounded over the past year, as uncertain economic and political times have affected consumer behavior.
How Much Money Has Klarna Raised?
According to Crunchbase, Klarna has raised a total of $4.5 billion in funding over 27 venture rounds. The company’s most recent funding round took place on July 11, 2022. Klarna raised $800 million during this venture round.
Klarna is currently backed by a total of 68 investors, including, most recently, Canada Pension Plan Investment Board and Sequoia Capital.
Other notable investors include Commonwealth Bank of Australia, BlackRock, Dragoneer Investment Group, DST Global, Silver Lake Partners, General Atlantic, and Ant Group, among many others.
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How Much is Klarna Worth?
Klarna is currently valued at $6.7 billion, according to TechCrunch. This represents a huge drop of 85% from the company’s prior valuation of $45.6 billion in 2021.
For further comparison, Klarna was valued at $5.5 billion in 2019, then at $10.6 billion in 2020, before its valuation skyrocketed in 2021.
The latest drop in Klarna’s valuation is perhaps a correction of the market, although the company has downplayed the sharp decline in press releases, chalking it up to the recent stock market downturn and pandemic-induced uncertainty.
Many of Klarna’s biggest competitors have experienced similar drops in valuation in recent times, so perhaps we will see Klarna’s valuation shoot up again with time.
Who Are Klarna’s Competitors?
Klarna’s biggest competitors include Affirm, Sezzle, PayPal Credit, Afterpay, Splitit, and Zip.
Affirm is a BNPL platform founded in 2012 and headquartered in San Francisco, USA. One of the company’s co-founders, Max Levchin, was also a co-founder of PayPal.
Affirm gives users the option to decide how much they will pay later for products over a period of 3 to 36 months, depending on what they are approved for.
Shopify, WalMart, BigCommerce, Zen Cart, and Amazon are some of Affirm’s most notable partners.
Founded in 2016 and headquartered in Minneapolis, USA, Sezzle has a strong presence in North American markets. However, it is also available in Europe, in countries such as Germany, Austria, Belgium, France, the Netherlands, Italy, Spain, and the UK.
Sezzle was originally launched as an automated clearing house (ACH) payment system, but later transitioned into the BNPL industry because of rising demand.
Unlike Klarna and other BNPL services, Sezzle does not allow customers to decide their payment terms.
In 2022, Sezzle became the first BNPL company to go public.
You’re probably familiar with fintech giant PayPal, founded in Palo Alto, USA in 1998 by Peter Thiel, Max Levchin, Ken Howery, Luke Nosek, and Yu Pan.
In terms of competing with Klarna, PayPal offers users a line of credit, formerly known as “Bill Me Later,” as well as its proprietary BNPL service, “Pay in 4,” which just launched in June of 2022.
PayPal’s Pay in 4 lets customers purchase items at the point of sale using loans that they can pay back in 6 to 24 months. Users have the choice to make payments every two weeks or every month, but PayPal doesn’t charge late fees, so it’s unclear how they enforce this.
Since it’s so new, PayPal Pay in 4 is currently only available in limited regions, which include the US, the UK, Germany, France, Italy, Spain, and Australia.
Afterpay is an Australia-based BNPL company that was founded in 2014. In addition to the Australian market, Afterpay serves markets in the US, the UK, Canada, and New Zealand.
Unlike Klarna, Afterpay does not check its users’ credit scores as a condition for loaning them money. They also don’t report credit delinquency to the authorities.
In August of 2021, US-based fintech company Square (now known as Block) acquired Afterpay for $29 billion.
Splitit is headquartered in New York City, USA, and was founded in 2021. The platform lends people money at the point of sale, which they pay back over a certain period according to their preferences.
Unlike most of the BNPL services that compete with Klarna, which are focused on B2C sales, Splitit is more tailored towards B2B sales. Their users include businesses and suppliers.
Companies can also request general business credit loans from Splitit, which makes it a popular alternative to going to banks for business loans.
Zip is another BNPL company headquartered in Australia. Founded in 2013, Zip offers customers zero-interest payments and is not particularly strict about credit checks.
Depending on the user’s preference, they can pay Zip back for purchases over four payments made either weekly, bi-weekly, or monthly. The full amount must be paid back within six weeks total.
Wrapping Up on Klarna’s Business Model
Klarna is a prime example of how fintech companies are leveraging modern technology to transform the way retailers and consumers interact and provide an alternative to traditional banking services.
The fact that Klarna’s business model is not currently profitable is not unexpected, as the company has to reinvest profits to expand and keep up with the competition.
Klarna’s business model has earned them high valuations for the past few years, and it will be interesting to see what happens with the company over the years to come.
Many businesses will use your D-U-N-S Number to access your company’s Dun & Bradstreet credit profile to help evaluate you as a partner.