Klarna is a financial technology company that aims to change the way consumers pay for products online. It offers a "buy now, pay later" service that allows online shoppers to purchase from major retailers without paying upfront. Consumers can pay for their purchases in four interest-fee installments charged every two weeks, or pay the entire amount within 30 days. They can also finance their purchase over six to 36 months.

Klarna's Global Reach

Klarna was founded in Stockholm, Sweden, in 2005. It provides payment solutions to 205,000 merchants in 17 countries. The company says its 85 million customers make one million transactions daily. The company operates as a bank and is one of the largest in Europe. Investors include Sequoia Capital and Visa.

In August 2019, Klarna raised $460 million at a $5.5 billion valuation. Gross merchandise volume grew 32% in 2019 to reach $35 billion in sales. Operating revenue climbed 31% to reach $753 million. Klarna's partners include large brands such as ASOS, H&M, Dolce & Gabbana, Michael Kors, Ticketmaster, Sephora, Toms, Timberland, Lenovo, Ambercrombie & Fitch, Dyson, Sonos, Expedia, Air France and Bose. Retail categories include auto, beauty, black-owned businesses, fashion, electronics and health, among others.

In 2014, Klarna opened offices in Columbus, Ohio, where its North American headquarters are based. Other office locations include New York and Los Angeles, and major cities around Europe.

How Klarna Works

The "buy now, pay later" model has proven popular with online shoppers. There is no account sign-up required, though consumers may have to supply a credit or debit card, along with information for Klarna to perform a soft credit check. 

Klarna also appeals to online retailers who struggle to entice shoppers to complete a purchase after adding a product to their cart. The industry-wide cart abandonment rate is about 70% of orders. Shoppers often abandon their carts because they don't want to deal with the hassle of creating an account, or the checkout process is too complicated. Klarna helps to reduce this payment friction.

Even better for retailers, Klarna assumes the financial risk of encouraging shoppers to close the deal without payment. When the retailer ships a product, Klarna pays the merchant and then informs the consumer of their payment schedule. For installment and pay-later purchases, Klarna runs a soft credit check, which does not impact the consumer's credit score or appear on their credit report. It runs a hard credit check for those who finance their purchases. Financing is provided in conjunction with WebBank. The APR is 19.99% with a minimum interest charge of $2. Late fees are $35.

Shoppers who buy on installment are charged a late fee of up to $7 if they miss a payment. Consumers who fall behind on their payments can have their accounts turned over to a debt collection agency.

How Klarna Makes Money

Klarna does not charge interest or fees for its standard payment options, so how does it make money? It charges retailers a transaction fee. For all payment options, Klarna charges a $0.30 fee plus variable fees up to 3.29% or 5.99%.

Klarna believes retailers are willing to pay these fees because its services help to increase sales. It estimates that the ability for consumers to pay on installment boosts their average order value by 45%. Consumers who use the 30-day payment option have a 20% higher purchase frequency. Those financing their purchases tend to spend 58% more on average.

The Downside of Paying Later

Klarna markets its services toward Millennial and Gen Z shoppers, believing they demand a smooth shopping experience, and studies suggest these consumers are increasingly willing to shop on credit.  Klarna's own figures indicate that when allowed to pay on installment or with financing, consumers tend to spend more, which raises concerns about whether the service enables young shoppers to take on more debt that then can handle.

In response to these concerns, Klarna told The Guardian that it employed financial safeguards to prevent overspending. Customers could not make unlimited purchases. Thresholds were in place to ensure customers made payments on existing purchases before they could make additional transactions.

The Bottom Line

Klarna is making a splash across Europe and the U.S. with its popular "buy now, pay later" model. Shoppers enjoy flexible payment options and the chance to try before they buy a product. Retailers offload credit risk to Klarna while enjoying fewer abandoned shopping carts and higher order values. Critics worry that "buy now, pay later" services may encourage profligate spending, leading to increased debt burden among young consumers.