Failory - How Does Klarna Make Money?

Hey — It's Nico.

New month, new series of content. In September, I'll be publishing articles analyzing how different startups are making money. This week, we dove into Klarna's Business Model.

🙌 Welcome to the 619 founders who joined this week.

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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. Additionally, for larger purchases, Klarna offers financing plans of up to 36 months, with interest fees.

How does Klarna work? 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.

When a customer opts to check out using Klarna, they can then select one of the three payment options we mentioned above. After the sale is made via Klarna, the merchant pays the company a flat fee and a percentage of the total sale cost.

​Find in the article a more detailed explanation.

How does Klarna make money? They have four main channels:

1. Interest Fees: For users who choose to use financing 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.
2. Late Fees: Klarna charges late fees to customers who miss their payments for either of the interest-free payment options. The fees are $7 per missed payment and $35.50 per late month.
3. Merchant Commissions: Each time a customer purchases something from a retailer using Klarna, the merchant pays a flat transaction fee ($0.30) and a percentage of the sale cost (from 3.29% to 5.99%, depending on the customer payment option).
4. Klarna Card Payments: This is a virtual credit card that shoppers can use to make in-store purchases at participating brick-and-mortar retail stores. Klarna charges a monthly fee for the card of $3.99/mo after the first year.

Bonus: There’s one more way they earn some money, and that’s by collecting interest on the cash they have sitting around. 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%.

How much money does Klarna make? Klarna reported $1.42 billion in revenue in 2021. We don't have data for 2022 yet, but it’s safe to say that Klarna is still making well over $1 billion in revenue annually.

Is Klarna making a profit? No. 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 $1.42 billion in 2021.

How much money has Klarna raised? 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.

How much is Klarna worth? Klarna is currently valued at $6.7 billion. This represents a huge drop of 85% from the company’s prior valuation of $45.6 billion in 2021.

This drop 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.

Who are Klarna’s competitors? Biggest competitors include Affirm, Sezzle, PayPal Credit, Afterpay, Splitit, and Zip.

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.

If you want to read further about Klarna's origins, business model and competitors, check out our article.

As every week, here are 3 recommended resources:

• ​How I Made $151,328.16 Selling Colors Online: Dracula PRO is a UI theme tailored for programming. The product was purchased +2,700 times, generating +$150k in revenue. In this article, the founder shares his lessons from the journey.
• ​How to Build a Brand: What does it mean to build a brand in B2B? How can you build one? In this video, Dave Gerhardt, the current CMO at Privy and former CMO of Drift, share how he thinks about building B2B brands.
• ​Want to found a start-up? Work at one first: Startups with experienced founders are more likely to succeed, and build more valuable companies too. In this article, Lawrence Jones shares why he believes people interested in founding a startup should first join an existing high-growth one.

Hope you enjoyed this week's article and curated resources ;)

Cheers,

Nico