Klarna is one of the world’s leading financial technology companies. The Klarna business model caters to customers around the globe by facilitating a platform through which individuals can shop freely using a temporary Visa card.
Many financial experts consider the Swedish-based company as the original creator of the modern-day buy-now-pay-later stratagem. As they are also the biggest player in terms of volume, Klarna was able to successfully execute their Initial Public Offering (IPO) in 2021. While the offering isn’t as readily available as many other IPOs, it remains quite popular, regardless.
In this article, we’ll be taking an analytical look at the business model of Klarna, how it operates, and the features that result from the execution of its services.
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The fintech company is a Swedish financial services provider that was founded in Stockholm in 2005. The masterminds of the company were Victor Jacobsson, Sebastian Siemiatkowski, and Niklas Adalberth.
Sebastian Siemiatkowski initiated the bare bones of what would later become Klarna as he was nearing the end of his master’s degree in the Stockholm School of Economics. In an interview that was later published by Forbes, Siemiatkowski mentioned that he once pitched the idea of the company to a team of innovators, and they said it couldn’t work.
Despite this, the trio went ahead with their plans and finally launched the platform. The first transaction to take place on Klarna occurred on April 10, 2005. The location was a popular bookstore in Sweden known as Pocketklubben. The company would continue to grow from there, as the co-founders went on to repeatedly tweak their existing business model.
Constant improvisations brought them to the point of creating a website that allowed consumers to conveniently order products online, with an invoice that would follow within 30 days afterward. As eCommerce was still a fairly new concept at this time, this innovation positioned Klarna to get an edge over its competitors considerably, pushing them to the forefront of retail sales.
Ownership of Klarna Bank AB is dissimilarly split amongst its three co-founders. As of 2021, before the company went public, CEO and co-founder Sebastian Siemiatkowski owned an estimated 8% of Klarna. This stake was assessed to be worth about $2.2 billion.
The second co-founder, Victor Jacobsson owned about 10% of the company. This was valued at $2.7 billion. Finally, the third co-founder, Niklas Adalberth, owned 0.4% of the online fintech establishment.
In addition to the co-founders of the company, the trajectory of the company is also somewhat influenced by investors like Sequoia Lake, Visa, Permira, Atomico, and Ant Group. A board of directors that has eight members led by Chairman Michael Moritz also influences the direction of the company to varying degrees.
The mission statement of Klarna Bank AB is to, “Make paying simple, safe, and smooth as possible.”
The fintech company also boasts a vision. This is to, “Transfer the power from large corporations to the consumer and empower consumers to make fast and informed decisions.”
The method of operation and execution that the Klarna business model employs enables the fintech company to get funds through four main income streams. These are via merchant commissions, in-store Klarna Card transactions, interest charges, and late payment fees.
As was highlighted earlier, Klarna works through the process of connecting a prospective consumer to a retailer. The fintech company charges retailers for making this type of service available to them. Because of this, every merchant that a consumer uses on this platform is expected to pay both a flat transaction fee, as well as a percentage of the total sale cost.
However, what merchants are expected to pay as commission varies, depending on the preferred payment option of a consumer.
For example, if a consumer opts for the 30-day payment option, a merchant has to pay Klarna $0.30 flat charges as well as up to 5.99% percentage of the total transaction. The same guidelines apply when a consumer chooses the four-installment payment option.
However, should a consumer pay through financing, the $0.30 flat charges still apply but the percentage of the transaction that Klarna can claim changes to only 3.29%.
It’s important to note that the above-mentioned commissions apply whether the transaction is performed online or in-store.
The fintech company also generates revenue through a virtual card that it makes available to shoppers. This virtual card can be used to make in-store purchases in certain brick-and-mortar retail stores affiliated with Klarna.
Most users leverage this resource by setting a budget on the virtual card for the specific retailer(s) they use it for, and then linking that card to their Apple or Google wallets to facilitate easier payment.
The main source of income for Klarna here is from late payments from defaulting consumers. However, because of the way the card works, it also allows the fintech establishment to considerably increase what they stand to get through merchant commissions.
Some of the high-profile retailers that consumers can use the Klarna Card in include Sephora, IKEA, Nike, GameStop, and Foot Locker.
Consumers who use financing from Klarna are arguably the major source of revenue for the company. This is because, when financing from Klarna is used to make more expensive purchases, it allows the fintech company to charge considerably higher interest rates.
As an example, for certain transactions, a consumer may be expected to pay as high as a 19.99% APR for up to 36 months. What a consumer is expected to pay interest is significantly influenced by their credit score.
It bears mentioning that users who only leverage the four-installment payment or the 30 days option aren’t expected to pay Klarna any interest at all.
Although the 30 days option and the four-installment payment option are both interest-free initially, consumers who aren’t able to meet up with their payments when due are liable to pay late payment fees. The late fees are charged on two levels.
Klarna not only charges a consumer for each time they’re late with a payment, but they also place a levy on the user for every month that they fall behind with their payments. As such, for every payment a consumer misses, they have to pay a sum of $7. For every month that they’re behind on their payment, the levy is $35.50.
As a side note, even when consumers don’t pay Klarna for the item(s) purchased, it still falls on the fintech company to take responsibility and pay the merchants for the products sold.
Here’s how the Klarna business model is designed to operate:
Due to the way that Klarna is set up to operate, it functions as a multi-sided business model. The result of this is that it features two interdependent customer segments, indispensable to each other. These are:
This fintech company provides value propositions based on four key points. These are convenience, performance, risk reduction, and increased brand respect. Here’s more on these components.
The fintech company has two main channels. These are:
This platform interacts with its customers through three main channels. These are:
Klarna utilizes four main avenues to generate funds. These are:
Klarna leverages three key resources. These are:
The two major activities of the fintech company so far are:
Klarna has three key partners. These are:
The platform’s cost structure can be broadly broken into two categories. These are:
Below, there is a detailed swot analysis of Klarna Business Model:
Although Klarna isn’t recording profits right now, the future still looks very bright for the fintech company. As the brand continues to leverage modern technology and enhance its product features, they make itself more appealing to a growing market.
Klarna’s business model canvas is undoubtedly unique, and many financial analysts are watching to see what the future has in store for the company.
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