Klarna works through an online platform to replace the checkout on e-commerce websites, and it is not a credit card system. The “Klarna Checkout” accepts all major credit and debit cards and provides the option to “Buy Now, Pay Later”. This feature enables customers to purchase goods and not pay for them for up to fourteen days, allowing customers time to see the product before completing the payment. Customers are sent an invoice via email that must be paid within the time frame or they will face late fees. Klarna, therefore, removes the risk from buyers and sellers by allowing consumers to pay for products after they have received them and by taking on the risk of a consumer not paying.

Merchants can opt-in for this service, allowing their customers the option of opening a line of credit to pay for purchases. This does not affect when merchants receive payment for their goods. This credit line is with Klarna, not the merchant and Klarna takes on the associated risk. Customers pay interest of 18.9% on balances that are not cleared after the end of the billing month. This credit line functions in a similar way to a credit card.

The credit facility Klarna offers is approved or rejected instantaneously at the checkout by utilizing Klarna’s affordability assessment technology. This allows customers to access credit quickly and easily for purchases made online.

Once a consumer has purchased using Klarna further purchases can be made with one-click. This improves the conversion rate resulting in more sales for the merchant.

Founded in 2005 to make it easier for people to shop online, Klarna has raised a total of $327 million since its original angel investment of $80,000. The company began life as an entry into the Stockholm School of Economics’ annual entrepreneurship award. The idea was rejected but the three founders Sebastian Siemiatkowski, Niklas Adalberth, and Victor Jacobsson decided to proceed with their idea and the business has since grown into a multi-billion-dollar company.

The Swedish firm continues to grow and began expansion to the US in 2015. That year, Klarna has been valued at $2.5 billion, making the fintech company join the unicorn club (i.e. startup companies that had succeeded in growing and attracting international investments–worth $1 billion or more). In 2018, Klarna reported that it has more than 60M users and over 130,000 online merchants using its payment solutions.

Klarna has two main customer groups: e-commerce merchants looking to enhance their website payment options and consumers looking for added security, speed and/or simple access to credit when purchasing products online. Total end-customers: 60 million. Total number of merchants: 130,000. In 2018, an average of 1 million transactions per day was made using Klarna.

Learn more about the Product Business Model

A dyadic transactional relationship where your good or service can be designed and delivered without prior interactions with the customer.

Engagement  — Value Creation Proposition

How Klarna creates value for e-commerce merchants (businesses):

  • Provides a payment service that is simple to set up on web sites and mobile apps;
  • Reduces the risk of fraud as Klarna takes responsibility for payments;
  • Increases conversions–the number of people who complete purchasing after searching and/or adding products to the basket because of the simplicity of the payment service and the additional credit facility;
  • Speeds and simplified to ‘one-click’ payment methods for customers while accepting a wide range of payment options–minimizing the number of customers unable to purchase on the site;
  • Offers financing for no extra cost or risk to merchants, increasing the likelihood of purchases.

How Klarna creates value for consumers:

  • Speeds up payment process;
  • Allows payment after delivery – reducing risk of transaction;
  • Easy instant access to credit with competitive interest rates;
  • Allows consumers to manage their payments; for example, to aggregate different purchases into a single payment and invoice, or to pay at the end of the month.

There are strong network effects, as the more e-commerce merchant are brought on board, the more consumers can use Klarna’s credit facilities to make purchases and vice versa.

Delivery — Value Chain
How Klarna works for e-commerce merchants (businesses):
Merchants sign up for both the “Checkout” and “Payment” service by contacting the firm by email or telephone. Once signed up merchants can manage their account online via the Klarna website.

How Klarna works for consumers:
Consumers can only sign up for Klarna when they purchase a Klarna affiliated with the e-commerce site. The options available to consumers on a particular merchant’s website will be dependent on the services and conditions the merchant has selected. The option to “Pay After Delivery” is available to all customers that pass the instantaneous affordability assessment but the option to take out a Klarna credit line with “Buy Now, Pay Later” is available only if the merchant has opted for this service.

Monetisation — Value Capture
Klarna makes money by charging fees for e-commmerce merchants and consumers who pay late and working as a payment processor.

Fees for e-commerce merchants (businesses):
Klarna charges merchants a set-up fee, monthly fee and a small percentage of each transaction. The details of these fees are dependent on the contract held with each business but are reported to be in the region of $600 for setting up fees, $90 per month and 1.5% – 3% for each transaction. These fees are comparable to competitors Stripe and PayPal who charge 2.9% + $0.30 per transaction. However, the monthly fee charged by Klarna is more expensive than PayPal that charges $30 per month and Stripe who do not charge monthly fees. Klarna does not charge for implementation of “Klarna Payment,” allowing customers to “Buy Now, Pay Later”. Merchants do not gain directly from customers choosing to pay using credit as Klarna retains interest payments and any fees charged.

Fees for consumers:
Klarna does not charge consumers to use its “Pay After Delivery” service providing they repay their debt within 14 days of the purchase. Late payment results in additional fees (£8 UK $10 US per missed payment deadline max three deadlines until further action was taken). Klarna charges interest of 18.9% APR on purchase made through “Buy Now, Pay Later” if the balance on the account is not cleared by the end of the billing month. This product is comparable to a credit card in its function.

The US bank WebBank provides the credit for these transactions; Klarna then purchases the loan from WebBank. This is necessary as Klarna does not currently have a banking license and cannot originate loans (Klarna applied for a Swedish banking license in winter 2015).

Digital Technology
Klarna leverages technology to develop the next-generation products and services that change the way consumers and merchants interact with each other.

The company uses AI to increase customer engagement, for instance by helping consumers with tailored shopping tips and suggestions. This means that in the future, the company’s business model may change to “solution” or “multi-sided”.

Disclaimer — Written by Thomas Murray under the direction of Prof Charles Baden-Fuller, Cass Business School in 2016. Revised and updated by Francesca Hueller under the direction of Prof Charles Baden-Fuller, in 2019. This case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. The information contained here should not be used for investment advice and is simply indicates the individual’s understanding of the company’s business models as of November 2019. © 2019