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May 12, 2021

Business Model Canvas – Klarna

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Founded in 2005, Swedish-based Klarna is the original BNPL (buy-now-pay-later) player. They are the biggest by volume in the world and are planning to IPO in the latter half of 2021. We dig into the Business Model Canvas behind Klarna.

Klarna #BNPL #Credit

Among the sea of disruptors in the BNPL space, Klarna started working on these next-gen credit products in 2005 well before anyone else really knew it existed.

BNPL allows consumers to ‘Pay in 4’ interest-free, no-fee installment payments – 1 payment every 2 weeks until the amount is repaid. The pain point is both on the merchant side of transaction and the consumer side of the transaction. Merchants like it because it is partially a Marketing Cost that brings in additional revenue in the form of higher Conversion Rates, AOV (Average Order Value), and Loyalty; and Merchants also loathe the Interchange Fee typically charged by banks and payments networks. Consumers like it because they can make purchases with no interest (assuming they pay back on time).

Klarna – Pay in 4
Business Model Canvas – Payments

In the world’s fastest-growing BNPL market – the US – Klarna (>15M US users) leads the pack, along with Afterpay (9.3M Active US users), Affirm (5.4M Active US Consumers), and PayPal (3.3M Unique Active BNPL users, globally).

BMi – BNPL

As we will see below, each BNPL player is somewhat different, so we look at the Klarna Business Model Canvas in the context of this nascent industry that currently only accounts for only about 1% of the transaction volume mix, but is expected to grow to more than $1 Trillion in transaction volume by 2025.

How does Klarna make money?

Since BNPL is a hybrid between a Credit (interest rates) and a Payments (interchange fees) product, Klarna makes its money by charging merchants a % of each transaction that includes the payment processing fee and the fee to actually loan the customer the money.

Credit card applications have dropped 50 percent while over $100 billion worth of credit card debt has been paid off. Consumers are [recognising] that traditional credit cards are not a great business model.

BoF

Klarna – like Affirm – offers both the typical Installments option (4 payments, interest free) for smaller purchases and the Financing option that functions more like a loan product and allows the consumer to make payments, on typically larger purchases) over 36 months. Klarna also has its own ‘Pay in 30 Days‘ product that allows customers to have a 30-day window to pay for the product given the potential for returns, etc.

Business Model Canvas – Affirm

For the Pay in 4 and 30 Days to Pay products, Klarna takes a transaction fee from the merchant of $0.30 + 5.99%. For its Financing product, Klarna takes a transaction fee from the merchant of $0.30 + 3.29%. For Pay in 4 and 30 Days to Pay, the consumer pays nothing (no fees or interest) as long as they make their 4 payments on time every 2 weeks. Interest and penalties apply to missed payments. For the Financing product, consumers pay a pre-determined interest rate that is contingent on the amount they are pre-approved for and their credit score.

Of the four major players in the market – Paypal, Klarna, Affirm, and Afterpay – Klarna and Affirm are unique in that they offer higher limits ($10,000 and $30,000 respectively) for higher-value merchants, but perform some form of soft credit check at a minimum. Paypal and Afterpay, on the other hand, are capped ($600 and $2,000 respectively) and rely less on credit checks. These merchants offer more of a pureplay BNPL product (4 interest-free payments over 2 weeks), whereas Klarna and Affirm are becoming progressively more like lenders and banks.

It is no secret that Klarna is the most known BNPL player in the European market, and with over 250.000 merchants

EU Fast-Growing BNPL

Klarna has its roots in Europe, where the market is also rapidly growing. The characteristics of the US market and the EU market are different; however, because BNPL players like Klarna are looking progressively more like Challenger Banks, the home-market advantage starts to matter.

Tech Crunch

Klarna began offering a bank account in Germany … consumers will get a German IBAN number and can access ATMs and direct deposit. The launch shows Klarna has potential to follow a similar path to Revolut, N26 and Monzo, all European payment companies that expanded into digital financial services while potentially exploiting innovation and market gaps at retail banks and credit unions.

Klarna’s Bold New Business Model

With its ~90 Million users and 250,000+ merchants in more than 17 countries, the company has the ability to scale-up quickly to compete with other Challengers. The 1-2 combo between a credit and savings product may help them compete on the margins with other Challengers while maintaining a competitive advantage due to the high take rates of BNPL players.

Community-Centric or Commercial Partner Strategy?

Given that each major BNPL players’ main customers are merchants – from a business model perspective – each one has a set of unique partnerships with certain retailers and Klarna is no exception. One example where Klarna is unique in this regard is in their ‘Try Before You Buy’ program powered by their 30 Days to Pay product.

Try Before You Buy is similar to the old consignment sales concept that used to exist in boutiques, where VIP customers could come to the store, select items, walk straight out and pay for the items they kept at the end of the month.

BOF

The commercial-partner strategy right now, however, is happening on the back-end. Affirm has a partnership with Shopify, while Afterpay has a partnership with Adyen. Each of these partnerships gives the respective BNPL player scale across both Adyen’s and Shopify’s respective merchant networks. The integrations will enable plug-and-play BNPL for merchants across their respective markets, meaning that the market size will rapidly increase.

Klarna has these types of partnerships with eCommerce giants Alipay and Amazon.

We’re seeing it in China, with Buy Now Pay Later accounting for 50 percent of Alipay’s total volume, and we have seen Amazon already beginning to experiment with [this solution] as part of the Amazon Prime Wardrobe offering.

BoF

In addition to the eCommerce partnership with Amazon, they are also using AWS to build their own banking infrastructure.

Klarna has its own core processing system built with Amazon Web Services, enabling it to support conventional banking products. The company, which is based in Sweden, also has a Swedish banking license.

KLARNA’S BOLD NEW BUSINESS MODEL

As we can see, commercial partnerships are essential to Klarna’s strategy, both in relation to its current business model in BNPL/credit and potentially its future business model in banking.

Fundraising and Valuation

Klarna recently raised $1 Billion in Q1 2021 at a $31 Billion valuation. The company had previously raised more than $2 Billion before that.

Klarna Bank AB said it raised $1 billion at a valuation of $31 billion, triple the price investors gave the Swedish payments firm during its last funding round, following rapid growth in its U.S. business.

Bloomberg

The company has talked about a Direct Listing, possibly as early as later this year.

Finance: SPACs – Direct Listing – IPO

Klarna Business Model Canvas

A business model is defined as:

“the rationale of how an organization creates, delivers and captures value.”

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

Explained - components of the canvas
Business Model Canvas - Index

Value Proposition

The original Buy-Now and Pay-Later (BNPL) player.  

30 Days to Pay and Pay in 4 products are the traditional BNPL model of no-interest, no fees

Financing product is available for higher-value items

Savings Accounts on the horizon, Challenger Bank model

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