This month saw Klarna raising money at a $10bn (£7.75bn) valuation to expand its its business in the United States, according to reports by Reuters.
Last year may have ended a 14-year streak of profitability for the Swedish fintech unicorn, but the Coronavirus crisis has resulted in a strong 2020 for the firm as shoppers flocked online and looked for convenient credit to ‘buy now and pay later’. The company now boasts 85 million users and holds the crown for the most valuable privately-held fintech startup in Europe and is preparing to go public on the US stock exchange within the next two years.
It has been a rapid rise to stardom for the Stockholm-based firm, which has shaken up the payments industry with an entirely new business model over the last 15 years. Instead of competing with the likes of Stripe and WorldPay in the payment processing pace, where these payment processors compete for tiny interchange fees on each sale plus their merchant subscription charges, Klarna competes more directly will credit card issuers like Capital One or MBNA, where they can make significantly greater profits.
Klarna’s value to consumers is obvious. Without the need to apply for a credit card, anybody can spread the cost of a purchase over one to 36 months. Consumers that opt to pay back within 30 days pay no extra fees or interest rates as long as they pay in full within the agreed time-frame, whilst those that opt to spread the cost over a longer period will pay interest at a representative APR of up to 18.99% (variable) per annum. And the company offers an app for iOS and Android that lets consumers stay up-to-date with their purchases and payback terms.
If Klarna can convince more people to buy products or services by reducing the upfront cost for consumers, then it is no surprise that the company is similarly popular with retailers. Not only are these sellers able to sell their goods to consumers that may not have credit cards, but to buy via Klarna a user only needs to add their email address and postcode, removing the friction of typing out 16-digit credit cards numbers which cost businesses millions in sales every year and the seller is still paid immediately.
Critically, Klarna provides easy integration with most of the biggest ecommerce and payment technology platforms, including Shopify, Magento, BigCommerce, Salesforce, Stripe, and Adyen, making it possible for ecommerce sites to implement the technology with a few clicks, which has made the platform popular with businesses ranging from casinos, such as these, to clothing retailers and travel firms.
Behind the scenes, Klarna performs some advanced risk management to determine whether someone qualifies for their credit product, weighing variables that include details about the buyer’s past financial history, their laptop or mobile device, the time of day they are making the purchase, and importantly exactly what is being bought. This depth of information gives Klarna a far better picture of the risks of a transaction than just the financial history of a person available to credit card companies, which they believe makes their credit offers more reliable.