Klarna, a financial technology company based in Stockholm, Sweden, is changing the way consumers pay for online products. The company offers a unique “buy now, pay later” option, which allows shoppers to order online products in just a few clicks – without paying a dime upfront.

When consumers visit a website offering Klarna, they simply input their email and shipping address to purchase products. At that point, they can choose a payment option for their purchase. The payment options include paying in four, interest fee bi-weekly installments, paying the entire amount within 30 days, or choosing a financing plan.

Klarna's Global Reach

Founded in 2005, Klarna is valued at $5.5 billion as of Aug. 2019. This makes it Europe's largest fintech company. Klarna operates at 190,000 online retailers in 14 countries and has an average of one million transactions per day. Its global sales volume rose 36% in 2018 with a 36% increase in total net operating revenues.

In 2015, Klarna opened offices in New York, San Francisco and its North American headquarters in Columbus, Ohio. Klarna's clients include some of the largest online names, such as ASOS, H&M, IKEA, Expedia, Adidas, Nike, Spotify, Ticketmaster, and Lufthansa.

How Klarna Works

Klarna’s “try before you buy” model has proven to be wildly popular with online shoppers. With Klarna featured websites, consumers have only to provide an email and shipping address, nothing more. There’s no need to set up an account or type in credit card information, which makes the transaction incredibly quick and easy.

Klarna is also appealing to the online retailers themselves, who often struggle to entice shoppers to purchase a product after adding it to their cart. In fact, 74.6% of orders were left “abandoned” in online shopping carts in the third quarter of 2018, according to Statista. Some experts believe many of these online shoppers are turned off by a lengthy checkout process that requires filling out a series of fields and entering their credit card number.

Even better for retailers, Klarna assumes all of the financial risk of encouraging shoppers to close the deal without payment. When the online retailer ships the product, Klarna pays the merchant directly, then sends a message to the consumer informing them of their payment schedule. When a purchase is made, Klarna runs a soft credit check that does not affect one's credit score or appear on one's credit report like other credit checks do.

Klarna now also offers a monthly financing plan in conjunction with WebBank. It extends a line of credit, like a credit card, to its clients and runs a hard credit check. Like credit cards, an APR of 19.99% is charged if the balance is not paid in full. If monthly payments are missed, a late fee is charged.

If payment is not made on any of the payment options, customers receive three warning letters before going to a debt collection agency and non-payment does affect an individual's credit score.

How Klarna Makes Money

Klarna does not charge any interest or fees on its standard payment options, so how does it make money? It charges transaction fees to the retailers. Klarna estimates that it provides a 68% increase to average order value for retailers offering their customers Klarna's installment plan, a 20% increase in purchase frequency for customers using the 30-day payment plan and a 58% increase to average order value for retailers offering Klarna's financing plan. Therefore, it is a valuable product for retailers.

Klarna charges retailers different amounts depending on the payment option the consumer chooses. For all payment options, Klarna charges a $.30 transaction fee plus a variable rate fee of either 3.29% or 5.99%.

The Downside of Paying Later

Klarna has proven to be popular with the younger demographic who are typically short on cash. Its users are mainly under 30 years old. The "buy now, pay later" method removes the time frame of having to wait for a refund when returning items before making the next purchase. Studies show it also removes the immediate guilt of a purchase because no money has actually gone out the door, which results in increased spending habits. This has resulted in deferred payments, lack of budgeting and higher levels of debt amongst the youth.

In response to these concerns, Klarna states that they employ various financial safeguards to prevent overspending. Customers are not allowed to make unlimited transactions and that thresholds are in place to ensure that customers make payments on current purchases before they are allowed to make any additional transactions.

The Bottom Line

Klarna is making a splash across Europe and the U.S. with its popular “buy now, pay later” model. It’s a win-win for both shoppers and retailers. Shoppers enjoy the quick-and-easy ordering process and the chance to try before they buy a product. Retailers appreciate the fact that Klarna takes on all the financial risk while encouraging shoppers to make a purchase. Critics argue about the lack of budgeting with such ease of spending, leading to increased debt burdens amongst the youth.

As Klarna continues to form partnerships with more online retailers and add more offerings, the sky's the limit for this fintech company. (For related reading, see: Top 5 Books to Learn About the Fintech Industry.)