PayPal of the Nordic - the startup that’s powering 50% of Sweden’s e-commerce.
How Klarna works.
Answer by Aileen Sim:
How it works:
Klarna allows users to make purchases online without providing their payment details to the merchants.
User provides national ID number (e.g. SSN) at checkout
Klarna does a micro-credit check with the ID number, fronts the money and pays the merchant first.
User receives goods, and a Klarna invoice with 14 days to pay via credit cards, bank transfers, cheques etc.
The primary benefit of Klarna is this: Removing the payment step greatly reduces friction in the checkout process.
This reduces “cart abandon” rate for merchants. i.e. more people buy.
The Klarna magic - What makes Klarna work:
Easy availability of an individual’s information.
In Sweden, with a user’s ID number, Klarna can obtain..
User’s address - This allows Klarna to pre-fill the user’s address, therefore creating an even easier checkout experience.
User’s credit rating (similar to FICO) to assess his credit worthiness.
Effective fraud prevention:
Goods can be shipped only to the ID’s registered address - prevents fraud from identity theft / stolen ID numbers.
Defaults are reported to the national credit bureau. Similarly to FICO, a bad credit score can have a long-term impact on one’s ability to get a mortgage and credit. This prevents users from defaulting on their payments.
Klarna owns the “entire stack”:
Klarna issues the credit to users - usually the most profitable piece in a credit card transaction - at 20-30% p.a.
Klarna is able to eventually switch users from more expensive payment methods (e.g. credit cards) towards cheaper methods (e.g. cheques, bank transfers). This lets them reduce payment collection cost, whilst still charging merchants 3%.
Klarna’s business model:
Klarna’s revenues:
Interest charged to users
Cost of capital - for funds needed to issue credit
Payment collection costs - cost of processing credit cards and bank transfers
Cost of default / bad debts - consumers who fail to pay up. Klarna insures the merchants against bad debts.
More details on Klarna’s revenue streams:
Note: Fees vary with the specific products and countries. Some of these numbers may be out-of-date but should be indicative.
1. Fees to merchants
Set up fee:
Certain products like the new Klarna Checkout has a set up fee of 3995 SEK (613.59 USD), which is currently being waived.
Monthly fee:
599 SEK (92 USD) per month for Klarna Checkout
Per transaction fee:
1.5% - 3% per transaction
Late fee / reminder fee:
- 60 SEK (9 USD) in Sweden. 135 SEK for larger outstanding balances.
- 9.95 EUR in Germany
Fees for their installment product:
- 29 SEK (4.50 USD) one-time fee in Sweden
- 1.95 EUR (2.50 USD) per month in Germany
Per transaction invoice fee:
Klarna doesn’t actually charge users this fee, but it is not uncommon for merchants to pass the fee on to users. Typically 29 SEK (4.50 USD).
3. Interest charged to users on installment plans or late payments:
Effective interest rates are pretty similar to credit card rates:
- 25-30% in Sweden
- 15% to low 20+% in Germany
Why consumers use Klarna:
Easier checkout experience
Security - Not needing to provide merchants your credit card info
Users get to receive and inspect goods before they settle up.
Option to pay by installments
Convenience - Consolidate all Klarna purchases for the month into a single invoice
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