How Does Klarna Make Money? Klarna Business Model In A Nutshell

Klarna is a financial technology company allowing consumers to shop with a temporary Visa card. Thus it then performs a soft credit check and pays the merchant. Klarna makes money by charging merchants. Klarna also earns a percentage of interchange fees as a commission and for interests earned on customers’ accounts.

Origin story

Klarna is a financial technology company founded in Stockholm in 2005.

The company is perhaps best known for its buy now, pay later (BNPL) service. This enables consumers to purchase a product with no upfront cost. Instead, the product is paid off over four interest-free installments over a predetermined period. For larger purchases, Klarna users can finance their purchases over 3 years.

To onboard customers, Klarna allows consumers to shop with a temporary Visa card number known as a “ghost card”. That is, the customer does not need to provide payment details to the merchant when making a purchase. Klarna then performs a soft credit check on the card number ID and pays the merchant. Lastly, the consumer receives the product and an invoice from Klarna with payment instructions.

Klarna mission and vision

Klarna’s mission is to “make paying as simple, safe and smooth as possible.

While Klarna’s vision is to “transfer the power from the large corporations to the consumer and empower consumers to make fast and informed decisions.”

Klarna revenue generation

To drive revenue, Klarna very much relies on charging the merchant as opposed to the consumer.

Let’s take a look at some of the primary revenue drivers of Klarna.

Payment fees

The majority of Klarna’s revenue is derived from a merchant transaction and variable percentage fee. These fees fluctuate according to the payment method and country of origin of the customer. In the United States, for example, merchants must pay Klarna a 30 cent transaction fee on top of a variable fee between 3.29-5.99%.

Payment fees are also generated when customers:

  • Want to check out with a few clicks. Known as the Instant Shopping feature, Klarna charges merchants a $30 monthly product fee with a fixed $0.30 transaction fee. Merchants are also hit with a 3.29% fee for onsite transactions and a 3.79% fee for offsite transactions.
  • Want to pay in four installments. In this case, Klarna charges the same $0.30 transaction fee combined with variable fees as high as 5.99%.
  • Want to pay monthly. Here, Klarna takes a $0.30 fixed transaction fee and 3.29% in variable fees. Customers will also be charged interest throughout the loan, with annual percentage rates as high as 29.99%.
  • Fail to pay by the specified date. Late fees are charged monthly and can top $35.

Interchange fees

Klarna recently launched a bank account facility with the issuance of a free debit card to users in collaboration with Visa.

When a consumer makes an eligible purchase, an interchange fee (typically around 1%) is paid by the merchant to the card issuer. Klarna then takes a portion of the interchange fee in exchange for promoting Visa as a service to its customer base.

Cash interest

With the aforementioned bank account facility, Klarna earns money on the cash in those accounts by lending it out to other institutions.

Key takeaways:

  • Klarna is a Swedish financial technology company founded in 2005. The company is known for its innovative payment services, including BNPL functionality and other flexible arrangements.
  • Klarna makes its money by charging the merchant and not the consumer. The company only makes money from the customer when they elect to spread out the cost of a purchase over multiple months.
  • In addition to typical payment and transaction fees, Klarna also earns a percentage of interchange fees as a commission. They also derive income from the cash sitting in the accounts of their customers.

Connected Business Models

Afterpay Business Model

Afterpay is a FinTech company providing as a core service the “buy now pay later” solution. When a consumer purchases a product, Afterpay pays the seller and asks the consumer to pay 25%. The remaining 75% is paid in three, fortnightly installments that are also interest-free. Afterpay, in turn, makes money via merchant and late fees.

Quadpay Business Model

Quadpay was an American fintech company founded by Adam Ezra and Brad Lindenberg in 2017. Ezra and Lindenberg witnessed the rising popularity of buy-now-pay-later service Afterpay in Australia and similar service Klarna in Europe. Quadpay collects a range of fees from both the merchant and the consumer via merchandise fees, convenience fees, late payment, and interchange fees.

SoFi Business Model

SoFi is an online lending platform that provides affordable education loans to students, and it expanded into financial services, including loans, credit cards, investment services, and insurance. It makes money primarily via payment processing fees and loan securitization.

Chime Business Model

Chime is an American neobank (internet-only bank) company, providing fee-free financial services through its mobile banking app, thus providing personal finance services free of charge while making the majority of its money via interchange fees (paid by merchants when consumers use their debit cards) and ATM fees.

How Does Venmo Make Money

Venmo is a peer-to-peer payments app enabling users to share and make payments with friends for a variety of services. The service is free, but a 3% fee applies to credit cards. Venmo also launched a debit card in partnership with Mastercard. Venmo got acquired in 2012 by Braintree, and Braintree got acquired in 2013 by PayPal.

FinTech Business Models

Fintech business models leverage tech and digital to enhance the financial service industry. Fintech business models, therefore, apply tech to various financial service use cases. Fintech business model examples comprise Affirm, Chime, Coinbase, Klarna, Paypal, Stripe, Robinhood, and many others whose mission is to digitize the financial services industry.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"