Buy Now, Pay Later (BNPL) is a type of financing similar to a personal loan, where a purchase is made upfront and partial payments are spread out over time in equal installments until the full value of the purchase is paid off. It is a loan offered to a customer at the point of sale to purchase merchandise on credit, but without having to use a credit card. The payment installments are interest-free as long as payments are made on time. This is in contrast with traditional credit card purchases, which incur interest charged monthly in most cases. BNPL functionally extends the window to pay back a purchase without incurring interest.

By 2022, BNPL had become very popular. Adoption surged in the second half of 2022 due to higher living costs and rising inflation. The gross merchandise value of BNPL was expected to increase from $178.6 billion in 2021 to $899 billion by 2028. Young consumers with limited incomes value the service as an alternative digital payment and a lending option with flexible installment plans, enabling them to purchase big-ticket items. In the first half of 2022, BNPL apps saw a new record of nearly 10 million installs on the App Store and Google Play. The UK and Germany drove the largest adoption of BNPL in Europe.

Klarna is an ecommerce payment solutions platform for merchants and shoppers. For consumers, it offers several payment options, including direct payments, pay after delivery, and installment plans, including the flagship Pay In 4 program. It provides a one-click purchase experience for customers. For merchants, it helps attract, convert, and retain customers with flexible payment options and performance-driven marketing.

In 2005, Sebastian Siemiatkowski (CEO), Niklas Adalberth (former deputy CEO who left the company in 2015), and Victor Jacobsson founded Klarna, originally named Kreditor.

Siemiatkowski and Adalberth met while working together at Burger King. Both were students at the Stockholm School of Economics. Siemiatkowski, who was living on welfare checks and food stamps, also worked as a salesperson for a factoring company. This company provided loans to small businesses that needed cash to pay their invoices. While working there, he noticed that merchants wanted customers to pay via debit card at checkout to guarantee payment. This gave him an idea: what if there was a middleman who could pay the seller at checkout and collect payment from the consumer upon delivery?

Such a middleman would allow customers to pay only once they were satisfied with their order, similar to many mail-order transactions in Sweden, where trust was a large part of the culture. Following this concept, he then contemplated if a ‘buy now, pay later’ system could be applied to digital commerce. He pitched the first idea behind Klarna to his superiors at the firm and a pitch competition, but was ultimately dismissed.

Siemiatkowski returned to school with the idea to bring BNPL into the digital era with Kreditor. He recruited Adalberth and Jacobsson, a business school classmate, to help him launch the company. The team began cold calling merchants in 2005, offering direct payments, installment plans, and pay-after-delivery options.

Facing an initial lack of growth and limited access to venture capital, they decided to participate in a Shark Tank-style show in Sweden to raise capital. The team pitched their idea as Kreditor and received €60K seed funding in exchange for a 10% stake in the company and an additional 37% stake for hiring a few software developers. Klarna’s first transaction was with a bookstore in Stockholm, and in the following years, the company expanded to the rest of the Nordics, Germany, and the Netherlands. By 2010, the company rebranded as Klarna.

Klarna for Shoppers

Ways to Pay

Pay in 4 allows users to split the cost of their transaction into four equal payments that they repay over time. The split payments do not collect any interest, but Klarna does have a late payment fee. Klarna collects the first payment when a shopper checks out. The remaining three payments are collected every two weeks. Shoppers can spread the cost over six weeks without interest or fees if they pay on time. Klarna runs a soft credit check on sign-up to ensure that customers can cover the payment. By offering payments over time, Klarna makes it easier for consumers to make purchases they may not have been able to afford otherwise. Klarna also offers Pay in full in 30 days without interest or upfront fees.

Klarna Card

Klarna Card is a debit card that users can use to shop. Every purchase made using the card will be split into 4 interest-free payments. Users can enroll in Autopay or make payments manually and track all their card transactions in the app. The card has a 0% APR. Klarna charges a $4.99 monthly fee to access interest-free purchases.

Source: Klarna

Shopping App

Users can compare prices and find the best time to buy in the app. They can save products for later and get notified when the price drops. The app also allows shoppers to track and get updates on all their orders. Users can join our rewards club in the Klarna app, earn 1 point for every $1 spent with Klarna, and turn those points into brand rewards.

Browser Extension

Klarna scours the internet to find available coupons for a store and then automatically applies the best coupon for shoppers at checkout.

Klarna Stores

Klarna has aggregated shopping, featuring over 3 million products across 6K stores. Shoppers can search, browse and purchase through Klarna for discounts and pricing alerts.

Source: Klarna

Shopper Portal

Klarna also gives shoppers a portal to set a monthly spending budget and monitor account balance. In addition to general billing, Klarna auto-syncs with their retailers to give consumers shipment updates within Klarna directly. Klarna lists an inspiration feed for trend-focused purchasing. Beyond traditional seasonal categories, Klarna has curated shopping lists with titles like “Pisces pieces” and “Internet Famous”.

Virtual Shopping

Klarna offers a virtual shopping experience through real-time chat and live video. Shoppers can connect with in-store experts online at their favorite brands. They can start a chat on the brands’ website and get matched with an expert. They can then ask questions one-on-one to get personalized advice and discover new products. The “Ask Klarna” personal shoppers were introduced after the HERO acquisition in 2021, a social shopping platform for review integration and real-time advice and in-app content, like unboxing, product tutorials, and product displays in chat.

Source: Klarna

Klarna for Business

Payment Methods

Merchants can offer Klarna's buy-now-pay-later products, like Pay in 4, Pay in 30 days, and Financing to give their customers flexibility in how they pay.

Marketing Solutions

Klarna's marketing solutions help businesses reach a wider audience and boost revenue. Merchants can target high-intent shoppers with placements in the Klarna app, including on the homepage feed. They can get their offers in front of shoppers searching for products. Merchants can also connect their brand with Klarna's shoppers through emails, articles, in-app messaging, and push notifications. They can connect ecommerce shoppers with in-store experts for advice and inspiration via video calling or pre-recorded videos showcasing products. Klarna allows them to find and collaborate with influencers, track relationships, and maximize ROI in one place.

Source: Klarna

Sales Channels

Klarna's contactless in-store payment solution lets customers use flexible payment options while merchants get paid upfront. It also offers an in-app checkout experience. Showing shoppers the payment options early in the shopping journey makes merchants less likely to see carts abandoned at checkout.

Source: Klarna

Merchant Portal

Merchant Portal is the one-stop shop for retailers to manage daily operations and growth. They can manage how their brand is presented to consumers across Klarna channels. Using the portal, they can activate on-site messaging and add tailored financing offers to their website.

Source: Klarna

Customer

Klarna caters to individuals and businesses. In 2021, Klarna reported that its average consumer is 33 years old in the UK, with the fastest-growing age group being 41-56. In 2022, Klarna’s biggest market was the US following a 71% year-over-year increase in gross merchandise value (GMV) for US shoppers.

On the merchant side, Klarna works with brands like Nike, Sephora, Versace, and Brooks Brothers and platforms like Amazon, Instacart, Wish, and GOAT. Klarna’s integrations with no-code platforms like Shopify and Wix also act as a funnel to digital entrepreneurs searching for ways to optimize growth and payments.

Market Size

The BNPL industry has experienced rapid growth in recent years, driven by evolving consumer preferences and increased adoption of alternative payment methods. GMV of BNPL is expected to increase from $178.6 billion in 2021 to $899 billion by 2028. The global BNPL market was valued at $90.7 billion in 2020 and is projected to reach $4 trillion by 2030, growing at a CAGR of 45.7% from 2021 to 2030.

Direct Competitors

Affirm: Founded in 2012, Affirm offers an alternative to traditional credit cards by allowing customers to make purchases and pay for them in fixed monthly installments. Like Klarna, Affirm integrates with retailers, allowing shoppers to select the Affirm option at checkout and receive instant approval for a loan to cover their purchase. It offers installment plans, a card, a browser extension, and a shopping app. Affirm cut 19% of its workforce in February 2023. Affirm reported 16 million active consumers and over $19 billion in gross merchandise value as of the quarter ended March 31st, 2023.

AfterPay: Based in Australia, AfterPay is another player in the BNPL market. Founded in 2014, AfterPay also allows customer installments while paying merchants upfront. AfterPay was acquired by Block in January 2022 for $29 billion. The Block acquisition extends AfterPay’s services to all merchants who use Square’s point-of-sale services, aiding in-person installment-based payments. As of December 2021, Afterpay was offered by over 122K retailers with more than 19 million active customers.

PayPal: PayPal offers Pay in 4 and Pay Monthly plans like Affirm and Klarna. Pay Monthly was introduced in June 2022 and gave consumers a more flexible way to pay by breaking down the total purchase cost into monthly payments over 6 to 24 months. In May 2023, it said more than 32 million consumers had used its BNPL offering and that 3 million merchants offer the option.

Apple: Apple's Pay Later allows users to split purchases into 4 payments, spread over 6 weeks with no interest or fees. Consumers can track, manage, and repay Apple Pay Later loans in Apple Wallet. It can be used for online and in-app purchases on iPhone and iPad, with merchants accepting Apple Pay. It was launched in March 2023.

Credit Cards: Traditional credit card companies offer consumers the ability to make purchases and pay for them over time, similar to BNPL services. However, they usually involve interest charges and potentially other fees, making BNPL services like Klarna's more attractive to some consumers. Despite this, the widespread acceptance and familiarity of credit cards make them a significant competitor in the payment solutions market.

Klarna receives revenue from both the merchants and the consumers that use Klarna’s payment solutions. When customers pay using Klarna's BNPL or Pay in 30 days options, Klarna pays the transaction amount to the retailers after deducting its commission.

Klarna also collects revenue via transaction processing fees, chargeback costs, and credit default risks associated with shoppers. Merchants using Klarna's services pay a transaction fee. One source estimates this to be a 3% to 6% commission on the total transaction, while another states that for the Pay in 4 and Pay in 30 days offerings, merchants pay a $0.30 flat fee and up to 5.99% per transaction; for purchases made with financing, they pay a flat fee of $0.30 and up to 3.29%. Klarna’s payment plans are free for consumers up front, but customers can pay up to $7 in late fees per product purchase.

Source: Klarna

Klarna was profitable from its founding until 2018. In July 2022, Klarna said its UK volume had grown 8x since 2018, reaching 18 million consumers with 22K retail partners. It also claimed it had close to 30 million users in the US and that its volumes more than tripled YoY from 2020-2021. The US became Klarna’s largest market by revenue as of December 2022. As of February 2023, Klarna said 150 million consumers use its app globally and that its network had over 500K retailers globally. It also said that more of the top 100 US retail partners use Klarna for consumer acquisition and marketing than for payments.

Klarna laid off 10% of its workforce in 2022.

Source: Klarna

In July 2022, Klarna announced a $800 million round at a $6.7 billion post-money valuation, representing an 85% drop from a $46 billion valuation it received in its previous round in June 2021. The July 2022 round included investors like Sequoia, Silver Lake, Commonwealth Bank of Australia, the UAE’s sovereign fund Mubadala Investment Company and Canada Pension Plan Investment.

Klarna’s 2021 revenue, when it was valued at $46 billion, was $1.4 billion. That means Klarna was valued at 32x revenue multiple in 2021. In 2022, its valuation dropped to $6.7 billion and its revenue was $1.9 billion, so its revenue multiple had dropped to a mere 3.6x amid changing market conditions. The closest public market comp for Klarna is Affirm. Affirm’s revenue multiple went from 30.2x at the end of 2021 to 3.9x at the end of 2022.

Source: Koyfin

International Expansion and Bank Licensing

Klarna's expansion into the US and other global markets presents a significant opportunity. With international bank licensing, Klarna can offer its services to a broader customer base and tap into new markets. Klarna has invested heavily in US marketing and brand awareness campaigns to support this growth. This includes collaborations with celebrities and influencers and traditional and digital media advertising. Additionally, Klarna is committed to maintaining high regulatory compliance standards in all its markets, including the US. The company has a dedicated team to ensure compliance with all relevant laws and regulations.

Appealing to Gen Z and Young Adults

As Gen Z and young adults gain increased spending power, they seek more flexible payment solutions. Klarna has observed a surge in the adoption of its services among this demographic. Over 61% of respondents aged 18 to 24 reported using a BNPL service in 2021, a significant increase from the approximately 38% recorded in a previous survey conducted in 2020. This trend highlights the growing popularity and acceptance of Klarna's payment options among the younger demographic, signaling a substantial market opportunity.

Partnerships with Retailers

Continued partnerships with retail companies present another key opportunity for Klarna. Since Klarna’s payment offerings are embedded in retailer partners’ checkout pages, Klarna captures users as shoppers flood to their favorite retailers. By partnering with high-profile brands and retailers, Klarna can increase its visibility and reach, thereby attracting more users to its platform.

Expansion into New Financial Services

Klarna's plans to expand into new financial services present significant growth opportunities. The company plans to offer savings accounts, investment products, insurance products, mortgages, pensions, and crypto services. By offering a wider range of financial services, Klarna can become a one-stop financial platform for its users, increasing user engagement and revenue.

Path to Profitability

Klarna's business model relies heavily on consumer spending, which can be volatile and subject to economic conditions. The company has been investing heavily in growth and expansion, which has resulted in significant losses. Klarna's path to profitability is uncertain and will depend on its ability to continue growing its customer base and transaction volume while also managing its costs effectively.

Internal Agility

As Klarna continues to grow and expand into new markets, it will need to maintain its internal agility to respond quickly to changes in the market and customer needs. In September 2022, Klarna joined the round of major tech layoffs with a 10% staff cut. Klarna attributed the layoffs to changing economic climates and different attitudes around scaling. Now, Klarna must continue to scale with less employees and successfully engage the remaining workforce.

Encroaching Competition

The payments and retail banking market is highly competitive, with many established players like PayPal and newer entrants like AfterPay. Klarna faces competition from other BNPL providers, traditional banks, and tech companies entering the financial services space.

Klarna is a BNPL company that allows customers to split their purchases into installments. Although Klarna is not currently profitable, it continues to grow and optimize for profitability. Klarna's CEO has stated that the company is well-positioned to withstand current challenges, and the company was profitable for its first 13 years.

Klarna's US business is scaling thanks to its app offerings, including the Klarna Card, which lets customers split purchases into installments, even at merchants that aren't partnered with Klarna. However, Klarna's growth has come at a cost, as the company cut employees last year to keep up with growth. Overall, Klarna's goal is to return to profitability by the summer of 2023 while also optimizing for continuous growth this year and beyond.