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 - Buy Now Pay Later
Source: Klarna

Klarna Business Model

Klarna – The Pioneer of BNPL Payments

Klarna was the pioneer of the BNPL industry – the OG (Original Gangsta) of what has now becoming a mult-billion dollar industry.

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
Klarna – Pay in 4 – Source: Klarna

In the world’s fastest-growing BNPL market – the US – Klarna is # among the new disruptors, with Paypal and its nearly 400 Million Active Users currently leading the pack.

BNPL in the US Market
Forbes – November 2020

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.

BNPL - Total Addressable Market
BNPL TAM – Total Addressable Market

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.

Business of Fashion

Installments + Financing Option

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.

  • 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 checkat 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.

Dominant BNPL Player in Europe

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

Frontira

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.

Klarna Bank Card
Source: 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.

American Banker

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.

Business of Fashion

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.

Business of Fashion

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.

American Banker

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.

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.

Klarna 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
Klarna Business Model Canvas

View FULL PDF

Klarna’s ‘Down Round’ in 2022

Klarna was a high-flyer a year ago, having earlier achieved a lofty valuation of $45.6 Billion in Q2 ’21. In Q3 ’22, they announced a new round of funds at a $6.7 Billion valuation, an 85% decline from the year before.

In 2019, Klarna was valued at $5.5 billion, followed by $10.6 billion in 2020 and $31 billion in March 2021, before hitting the giddy heights of $45.6 billion just a few months later.

Tech Crunch

Not that valuation is everything, but this was a company that was all set to become an IPO darling in the $50B range in 2022. Now it is notorious for being one of BNPL’s brightest lights to fall, at least temporarily.

For comparison sake, Affirm (Ticker: AFRM) is down about 90% YTD (Year-to-Date) in 2022. Afterpay was acquired by Square (Block) in Q3 ’21 at the peak of its valuation but would have likely suffered a significant haircut from the nearly $30 Billion that was shelled out by Square.

BNPL Business Model diagram

The BNPL business model revolves around generating significant revenues on the merchant side of the transaction (4 – 6%), while the consumer pays nothing (assuming they pay on time). In exchange for these high fees (roughly double credit card fees), merchants bear 0 repayment risk and in many cases view the fee relative to customer acquisition in retail.

As discussed above, the original Installments option is typically what is referred to when discussing BNPL, where purchases are made for small dollar amounts and then the BNPL provider is repaid over 4 periods.

It is the Financing option that the likes of Klarna and Affirm overextended themselves on in a quest for market share. These are typically higher-value goods and carry more like a traditional loan or credit-card repayment.

Using Affirm as a proxy:

The company said in its filings that its 30-day delinquency rates, ex-Pay in 4, were 2.7%, up from 1.5% from the same quarter ending in September last year and up from 0.8% in 2021

PYMNTS

The business model fails if delinquencies are high because the relatively thin Net Margins of ~2 – 3% get eroded very quickly if delinquencies tick over a certain threshold. Using the above data from Affirm (30 day delinquency ex-Pay in 4):

  • 0.8% in 2021
  • 1.5% in Q3 ’21
  • 2.7% in Q3 ’21

We can see percentage wise (~100%) the rapid increase around or about Q3 ’21 when Affirm’s stock peaked at nearly 20X higher than what it is today.

We can guesstimate that the same thing happened to Klarna in order to suffer such a precipitous drop in valuation. Delinquencies outside of the ‘Pay in 4’ product were likely significant, and if Klarna were to be revalued at the end of 2022 it could even be below $6 Billion.

Not that this wasn’t entirely unforeseeable. There were probably many warning signs that began flashing in the latter part of 2021.

As a result, the most interesting Business Model Analytics to track going forward as the industry evolves will be around the credit portfolio of the BNPL players themselves: late of late payments and/or defaults.

Business Model Innovation – BNPL

Klarna Spotlight – Video Shopping App

Klarna’s strategy in 2022 focused on the launch of Spotlight, a video-shopping app that acts as an innovative customer acquisition funnel for its merchants.

Source: Klarna

There are three layers to the strategy of Spotlight:

  • a fluid, video-based shopping experience for its 150 Million+ customers globally (Q4 ’22)
  • an opportunity for ‘creators’ to monetize their audience(s) via video shopping
  • a unique customer acquisition channel for Klarna’s 450,000+ retailers globally (Q4 ’22)

Another innovation of Spotlight is dynamic, curated shoppable video content in the Klarna App, because today’s younger shoppers are all about moving images, hence the popularity of TikTok and YouTube.

Forbes

Live video shopping is set to boom in 2023 and beyond as an extension of eCommerce, so the move by Klarna makes a lot of sense. Their goal is to have their customers (who skew younger, the primary audience for networks like TikTok) originate their shopping-based searches through Klarna on an ongoing basis.

Part of Klarna’s platform is a module that allows retail brands to connect with creators and develop partnerships, influencer campaigns, etc. As we have seen with Video Ad networks, bringing creators to the core of the experience is the next big push by the likes of Meta (Instagram), Google (YouTube), and TikTok.

While TikTok, YouTube, and Instagram lure creators in by offering them a % of the Ad Revenue (typically 50/50), Klarna connects creators directly with retailers to run campaigns that aren’t contingent on Ad Revenue. It is a different model (performance marketing) hoping to generate similar results (ie. conversion), which is why Spotlight will compete for spend with other Video Ad Networks.

Thus after a tough 2022, Klarna has a new tool in its arsenal that can not only drive more eyeballs and wallets onto their platform, but also a new revenue stream driven by business model innovation.

Klarna Outlook – 2023 and Beyond

Klarna’s CEO has tried to set the narrative around long-term growth and – non unexpectedly – is trying to create a relatively short-term horizon for ‘monthly profitability.’

Siemiatkowski told FT his goal is for the buy now, pay later (BNPL) company to reach monthly profitability by August or September next year, although he cautioned the company could still see a full-year loss in 2023

PYMNTS

While the company is not public, those investors in the 2021 and 2020 rounds are heavily underwater, and the 2019 investors are getting close to a break-even based on the last valuation.

The company has taken in $Billions in capital and seemingly miscalculated in their U.S. expansion strategy. They expanded aggressively around Financing and moved into the U.S. impressively in 2020/2021, only to see the market crumble in 2022 for a variety of reasons. Klarna’s volumes soared in 1h ’22, meaning so too did their revenues.

Klarna’s customers bought $41 billion worth of product on its service globally in the first six months of the year, up 21% from a year ago

VOA News

Their delinquencies also soared and consequently they were forced to patch up holes in their balance sheet from larger-than-expected Credit Losses.

Klarna’s pre-tax loss soared more than threefold year-on-year to nearly 6.2 billion krona. In the first half of 2021, Klarna lost around 1.8 billion Swedish krona. U.S. Credit losses, meanwhile, rose more than 50% to 2.9 billion Swedish krona.

CNBC

1 Krona is roughly $0.1 US. So they took ~$290 Million in Credit Losses from the U.S. alone in the first half of 2022. This is very likely to be the reason they needed to raise more capital in spite of the huge valuation haircut.

Thus the question is, is anything other than a turnaround of the U.S./global economy going to save Klarna in 2023 and beyond?

  • On one hand, yes, because Klarna’s core business model looks more and more like lending (ie. Banking business model) and the credit-quality of Klarna’s customer base – who skew younger – are likely already stretched thin
  • On the other hand, no, because that same customer base is prime for the Spotlight App, and that creates an entirely new, non-lending revenue stream for Klarna

It is a very compelling strategy because:

  • video shopping looks primed to shine in 2023+
  • retailers are offered an alternative, performance-based model relative to Tiktok and Instagram
  • Klarna’s brand becomes less BNPL and more retail/eCommerce

Klarna’s outlook is filled with unknowns. While they continue to innovate and offer retailers new customer acquisition channels, they are also dealing with the specter of further credit losses and a murky outlook in the U.S. and beyond. Thus they will try to balance the unknowns with the knowns and re-right the ship in 2023 and beyond.

Klarna Bounces Back in 2023

Klarna bounced back big time in 2023 and got ‘back to black’ after going deep in the red in the previous year.

The company generated $12 million of pre-tax profit in the third quarter. That’s not much, but it’s a huge turnaround from a roughly $200 million loss a year earlier. The difference was that credit losses – the money Klarna sets aside to cover bad debt – almost halved. Meanwhile, revenue rose by 30% year-on-year, partly because of Siemiatkowski’s U.S. push.

Reuters

Their business model pivot – post 2021 – seems to have worked.

They continued to push themselves deeper into retail networks, and are leaning heavily on Spotlight as a future “AI Shopping Assistant.” The appeal to retailers goes beyond payments, with Spotlight and other related products (ie. Lens) functioning as a customer acquisition funnel.

In terms of transaction throughput, at the end of the 2023 they were a 70%/30% credit-debit mix; not purely BNPL anymore. That seems to partially explain why their credit losses stabilized so much since 2021/22.

They exit the year with 150 Million consumers worldwide and more than 500,000 retailers. The company’s CEO cites Visa and Mastercard as the more likely competition than other BNPL players like Affirm and Afterpay (Square).

BNN Bloomberg video interview

Despite its pivot towards more of a retail technology company, Klarna still makes the bulk of its top-line revenue through lending to shoppers on eCommerce platforms. Furthermore, it funds its loans via its more than $8 Billion of customer deposits, showing that it is much more of fintech bank than a consumer technology company.

Heading into 2024, they are debuting Klarna Plus, a monthly subscription service aimed at retention, with benefits such as reward points, lower fees, and loyalty incentives.

Is 2024 the year Klarna will IPO?

A recent interview with Klarna’s CEO demonstrated that there is a strong possibility the company will IPO in the US markets in 2024. The USA is Klarna’s biggest market by revenue, with a user base of nearly 40 million.

After seeing its valuation fall off a cliff in 2022, the company stabilized its business model in 2023 and is purportedly looking to IPO at a valuation north of $15 Billion in 2024.

One headwind for Klarna is the slowing consumer, as evident from slowing eCommerce sales that the company is seeing first hand. Slowing demand for consumer discretionary items, coupled with a hit to credit, would have significant effects on Klarna.

In the interview attributed above, Klarna’s CEO attributed much of the Black Friday sales growth in 2023 to “discounting:”

From Nov. 1 to Monday, BNPL has driven a total of $8.3 billion in online spending, Adobe said. Swedish BNPL company Klarna, one of the biggest BNPL providers, said U.S. shoppers placed 29.5% more orders through Klarna this Black Friday compared to last year

PaymentsDive

A slowdown in discretionary, retail online spending would likely hamper Klarna’s growth. In that event, hopefully they are able to lower credit losses and burn less than the $100 Million per month they were losing in 2021/22 .

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