Note: I am not a financial advisor. This is not to be considered financial advice.

On August 6, 2019, Klarna became the most valuable EU-based fintech startup after a valuation of $5.5 billion. Founded in 2005, the company’s payment processing platform is well-known throughout Europe for bringing better customer experiences to the e-commerce shopping experience by allowing users to purchase items on some of the world’s largest online retail stores via standardized installments. Here’s what you need to know about Klarna’s product, partnerships, user adoption, and market outlook.

4 Klarna Payment Options For Customers

Pay Now: One payment, completed immediately

Pay Later: One payment, completed in 30 days

Slice It In 4: 4 installments, completed in 6 weeks

Slice It: 3 or more installments, completed in 3 to 36 months

Availability and costs vary between specific nations. You can find up-to-date details on the company website.

Positives and Negatives for E-commerce Store Owners

+ Reducing Cart Abandonment

One of the biggest issues with e-commerce is that many customers who are interested in buying products tend to abandon carts during the checkout process. What is the reason behind this? In many cases, customers see the total amount due and decide that it is more than they are willing to pay. Because Klarna allows customers to pay in installments rather than upfront, it reduces the friction of the buying process. This, in turn, means fewer abandoned carts and more sales for larger amounts. According to the Klarna website, order value increases by 68% when customers pay with installments. Additionally, 44% of users would have abandoned their cart if they weren’t able to purchase items in four installments.

- Payment Processing Fees Are Still High

One of the biggest issues that most businesses face today is the prevalence of high fees required by credit and debit card processors. Even though paying 3% might not seem like that much, e-commerce store owners know that this missed revenue can quickly add up. The disappointing thing for e-commerce has always been that other forms of payment (i.e. checks and cash) require zero fees. However, these have never been practical for online sales.

For some store owners, Klarna actually charges higher fees than payment processors. In the US, for example, the company gets 5.99% + $0.30 per transaction on the “pay later” option and 3.29% + $0.30 on the “slice it” option. Yes, that means that e-commerce store owners might pass on this expense to customers. In other nations, however, this amount is much smaller. In Klarna’s home country of Sweden, fees are 2.79%+ 5.9 SEK for pay later and 0.99%+5.9 SEK for slice it.

Merchants can install the Klarna WooCommerce plugin on 25 sites for free. It comes with an analytics dashboard as seen above. Klarna is also supported by other major e-commerce platforms.

Positives and Negatives for Customers

+ Payment Installments Made Simple

For customers, the biggest allure of paying with Klarna is the simplicity of payment installments. In the past, companies have used zero-interest specials as a way to attract new customers who otherwise might not be willing to pay the additional high-interest fees over time. These campaigns can be quite successful. Nonetheless, until recent years, this hadn’t caught on as the default standard for how customers pay for items online. Klarna makes payment installments a permanent fixture in e-commerce, which helps customers with smaller budgets and those wanting to purchase big-ticket items.

+ Payments Are More Secure

Identity theft and stolen debit/credit cards are a major issue in e-commerce. Even with continued improvements to cybersecurity, consumers are still at risk. Klarna has employed a somewhat simple solution: ID-based address verification. One must use a registered government ID number (i.e. SSN for the US). The items bought via Klarna can only be sent to the address associated with that specific cardholder. The worst-case scenario seems to be… if someone steals your identity and purchases items via Klarna, the package will still arrive at your address. Then, you would simply return it and get your money back.

On the flip side, this does create some inconvenience if you move and need change shipping addresses. You are able to change your address via Klarna’s app, but the company must then run a check and approve the new address. If the address is not approved, you will receive an error message when trying to order new itmes.

+ Transparent Interest Rates

Have good credit? Klarna takes this into account. Users have the option to pay for items in 3–36 months and know the required interest rates upfront. The instant credit decision is super innovative. Prior to Klarna, the alternative solution was just to hope the interest rate from your credit card company wasn’t sky-high. Klarna’s transparency also seems to allow for more accountability on the part of customers. After all, customers already know exactly what they will have to pay in the future, so it’s possible to estimate whether or not an e-commerce purchase will be within budget based on current savings and projected income.

Klarna states that interest rates are based on various factors, including an individual’s credit score. The good news is there is no minimum credit score requirement. Even if you don't’ have a credit history, Klarna lets you use its payment financing option.

- Your Credit Score Won’t Be Impacted

Standard credit card companies typically allow you to improve your credit score by paying bills on time. With Klarna, paying installments on time won’t increase your credit score. As a result, it also doesn't help you to decrease interest rates.

- Fees Carried Down to the Customer?

As mentioned in the “Payment Processing Fees Are Still High” section above, Klarna does charge a substantial amount for its services, especially in the United States. It’s possible that additional fees could mean that e-commerce store owners who use the service will decide to eat the costs. However, store owners might choose to increase the prices of items in their stores. Perhaps, though, fewer abandoned carts will create a net positive for store owners, preventing price increases altogether.

Klarna has four payment options: pay now, pay later, slice it in 4, and slice it. The image on the left shows the ‘slice it in 4’ option.

Major Partners

Klarna has partnered with all of the top e-commerce store software platforms. Examples include BigCommerce, WooCommerce, Shopify, Magento, and Salesforce Commerce Cloud. Ultimately, working closely with these companies means that Klarna is an easily-accessible payment option for non-technical store owners. WooCommerce, for example, has a free plugin for Klarna. At the very least, e-commerce store owners can test whether having this payment option yields better sales results by comparing it to existing payment options.

Notable Companies That Use Klarna

Notable companies that use Klarna include H&M, Adidas, IKEA, Expedia Group, ASOS, Pelotan, Abercrombie & Fitch, Michael Kors, Nike, AliExpress, Superdry, Sephora, Spotify, Wayfair, Gymshark, Samsung, Zara, Topshop, The Hut Group, Steve Madden, Boozt, Daniel Wellington, Bugaboo, Rue21, TOMS, Sonos, Agent Provocateur, Lufthansa, ETSY, ACNE Studios, Daniel Wellington, and KLM, Turkish Airlines.

Snoop Dogg, who is an investor of Klarna, is featured in a company video that has over 15.8 million views.

Current Market Outlook/ Plans to Expand

As of 2019, Klarna serves over 60 million consumers and 130,000 merchants partners. It has one million transactions daily and is approaching $1 billion in annual revenue.

Klarna is only available for merchants based located in 10 nations/ two continents as of August 2019. These include Europe (Sweden, Finland, Norway, Denmark, UK, Germany, Austria, Netherlands, and Switzerland) and North America (United States). This number will soon increase, however.

The Commonwealth Bank of Australia, which took part in the August 2019 financing round, agreed to an exclusive partnership to support merchants in the Australian and New Zealand markets.

The number of competitors in this space is increasing. Affirm and Afterpay are established companies with similar products. Singapore-based Grab is another well-known company that launched its own pay later service pilot phase in July 2019.