Klarna is an international company that offers "buy now, pay later" (BNPL) services allowing shoppers to make purchases from online retailers and physical stores without paying the entire amount 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 purchases over a longer period with a Klarna partner, WebBank. Klarna refers to itself as "the global leader in the generational shift away from credit cards."
Key Takeaways
- Klarna is a leading buy now, pay later (BNPL) service, founded in Sweden in 2005.
- Klarna users can either split their purchases into four equal payments, pay them off in 30 days, or arrange for longer-term financing.
- The company says it currently works with 500,000 merchants and has 150 million consumers worldwide.
What Is Klarna?
Klarna was founded in Stockholm, Sweden, in 2005 and now works with more than 500,000 merchants worldwide. The company says it has 150 million customers, 34 million of them in the United States, who collectively make more than two million transactions daily. It has 5,000 employees, whom it refers to as Klarnauts. Investors in Klarna include Sequoia Capital and Visa.
According to Klarna's 2022 annual report, the company had 13.3 billion SEK (Swedish Krona) in revenue for that year, with a net result of -10.4 billion SEK.
In a "To Our Shareholders" letter in the annual report, Sebastian Siemiatkowski, the company's CEO and a co-founder, wrote that, "we are making concrete progress towards profitability, simultaneously driving growth well ahead of e-commerce and reducing credit losses and costs, with GMV up 22% in 2022 YoY." GMV is an abbreviation for gross merchandise value or gross merchandise volume.
Klarna's retail partners include Anthropologie, Converse, Etsy, Harley-Davidson, Harry & David, Instacart, LensCrafters, Nike, Petco, Versace, Wayfair, and many others. Retail categories include auto, beauty, Black-owned businesses, clothes and fashion, and electronics, among others.
Since 2014, Klarna has had offices in Columbus, Ohio, where its North American headquarters are based. Other office locations include New York and Los Angeles and other major cities in the U.S. and around the world.
The BNPL model has proven popular with many shoppers in recent years, and Klarna is far from alone in this space. Klarna and its competitors also appeal to retailers, particularly online retailers that 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 and other BNPL providers help reduce this payment friction.
How Klarna Works
Consumers, who must be 18 or older, can download the Klarna app at the App Store and Google Play.
There is no charge to sign up, and Klarna will not perform a credit check at that point. When the consumer makes a purchase, or attempts to do so, Klarna may perform a soft credit check, the kind that has no effect on someone's credit score.
Klarna charges no fees to consumers who use its "Pay in 4" service at participating retailers. They can also use the app at other retailers for a service fee of $2.
Consumers who don't pay their bills on time can face a late fee of $7 after 10 days, although Klarna says, "the total of late fees charged on an order will never exceed 25% of your Total Purchase Amount." If the person defaults on the debt, Klarna may turn their account over to a collection agency and report the default to credit bureaus. If that happens, it will have a negative effect on their credit scores.
Klarna can approve or reject any given purchase. Among the reasons it might reject a transaction, Klarna says, is if the consumer is already carrying a large balance or if this particular purchase involves a large amount of money. Klarna says consumers can reduce the risk of this happening by linking their bank accounts to Klarna.
Since Klarna does not charge interest or fees for its standard payment options, how does it make money? Primarily from its participating merchants, who reportedly pay Klarna both a flat fee per transaction plus a percentage of the total purchase, which can vary depending on the country and which Klarna service the consumer chooses to use. According to the National Retail Federation in 2022, merchants in the United States pay about 5% in total costs to use Klarna or its rival Afterpay—twice as much as they typically pay in swipe fees to credit card companies.
Does Klarna Have a Downside?
In addition to higher costs to merchants, which may in many cases be passed on to consumers, BNPL services like Klarna have raised concerns about whether they encourage people to overspend and take on more debt than they can safely handle. Klarna says its own figures indicate that when allowed to use its services, consumers tend to spend more, resulting in a "41% increase in average order value."
In response to these concerns, a Klarna spokesperson told The Guardian in 2018, "We have safeguards in place to ensure that our products are only offered to those who are able to afford it and who will be able to make repayments in a sustainable way, without impacting their financial well-being."
More recently, a March 2023 report from the Consumer Financial Protection Bureau noted that BNPL users were "much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers." However, it added that such "markers of financial distress were apparent for these consumers even prior to the widespread usage of BNPL starting in 2019. An important question for future research is whether BNPL improves the financial health of consumers in distress or exacerbates these differences."
What Credit Score Do You Need for Klarna?
Klarna doesn't specify a minimum credit score that it requires, but it may check your credit report through the credit bureau TransUnion when you use it. "When a credit check is performed," the company says, "we verify your identity using the details you provided and we look at information from your credit report to understand your financial behavior and evaluate your creditworthiness."
Will Using Klarna Hurt Your Credit Score?
Using Klarna won't hurt your credit score unless you fail to pay your bills on time.
What Is the Maximum Spending Limit on Klarna?
Klarna users aren't assigned a predetermined credit limit. Instead, their limit can change with each transaction, based on such factors as their outstanding balance, past payment history, the payment option they choose, and even the particular retailer. The Klarna App shows their current estimated "Purchase Power."
The Bottom Line
Klarna is a leading buy now, pay later (BNPL) service with a strong presence in the U.S. and around the world. While BNPL services are convenient and growing in popularity, consumer advocates question whether they may be exacerbating the problem that many Americans have keeping their debts under control; however, a recent study concluded that their effect, positive or negative, has yet to become clear.
