Klarna Is Not A Buy Now, Pay Later (BNPL) Company

OBSERVATIONS FROM THE FINTECH SNARK TANK

Klarna—often referred to as a buy now, pay later (BNPL) company—announced a 71% year-over-year increase in gross merchandise value (GMV) in the US in 2022, making the US Klarna’s biggest market by revenue.

The Sweden-based company now has more than 8 million monthly active app users in the US, a 33% jump from its February 2022 total.

The news from Klarna elicited opposing responses. On one side was the fawning coverage from TechCrunch. An article titled Klarna Wins Over the US touted the publication’s exclusive interview with Klarna’s CEO, citing his “boyhood dream” of “making it” in America.

On the more sobering side was the Financial Times, who chose to highlight the fact the company reported a $1 billion loss in 2022, up (down?) from its $680 million loss in 2021, and Finextra, which commented:

“Klarna last made a full year profit in 2018. Since then, a costly expansionist growth policy has led to spiralling losses in the face of macro-economic headwinds. The company has been forced to undergo a year of painful restructuring which has seen its valuation slashed and the sacking of 10% of staff.”

It’s a Bad Time to Be a Buy Now, Pay Later Provider

It wasn’t that long ago that observers were citing buy now, pay later as the service that was going to kill credit cards (in fact, there was an article here on Forbes titled Inside The Billion-Dollar Plan To Kill Credit Cards about BNPL company Affirm).

Many industry observers’ sentiment has shifted 180 degrees. In a LinkedIn post, Todd Baker, Senior Fellow at the Richman Center at Columbia University wrote:

“It will take a while to figure out whether free-standing BNPL companies can thrive with higher interest rates, vastly increased competition, and greater losses. My bet is no. For retailers, it’s a fine line between paying BNPL providers to capture sales that would otherwise be lost and training consumers to routinely use BNPL, a very expensive channel for them. At some point, non-BNPL users will wake up to the fact that they are indirectly paying for this through higher prices for goods, just as cash buyers indirectly subsidize credit card buyers. But here the difference is 8% not 2%.”

Negative sentiment towards BNPL has resulted in calls for tighter regulations and—as with the entire fintech market—a significant decline in BNPL company valuations.

Don’t Call Klarna a Buy Now, Pay Later Company

Is Klarna “conquering America” or about to hit the slag heap of fintech has-beens? The real story about Klarna can’t be revealed by taking a snapshot of its current financial performance or looking at industry sentiment with buy now, pay later.

Klarna isn’t simply a buy now, pay later company. Think of it as a “commerce enablement platform.” For sure, the company has a BNPL product. But it has also developed and launched platforms for:

• Commerce search. Klarna’s search engine compares thousands of websites to help consumers find the best price for products. Its unbiased search tool gives users the ability to filter their search across stores by color, size, features, customer ratings, store availability and shipping options. With Klarna’s in-app browser, when shoppers are browsing a product page, the panel shows whether other retailers are offering a better price, faster and cheaper delivery options, or different sizes and colors. At check-out, the panel automatically looks for and applies available coupons.
• Shoppable video. With Klarna’s shoppable video, retailers share existing social content and campaigns that tell their story, create shoppable content exclusively for Klarna that inspires and converts, and partner with Klarna to be featured in curated content and campaigns. Retailers like e.l.f. Cosmetics and Keys Soulcare that use Klarna’s shoppable video platform see higher average click-through rates than they get on other social media channels.
• Creators and influencers. Klarna’s Creator Platform provides a one-stop shop for retailers and creators to work together to automate initial outreach, partnerships, and tracking sales and commissions. Retailers on the platform can connect with more than 500,000 creators and track their performance in real time, empowering them to optimize and scale their activities while maximizing sales.

Klarna Is Building a Platform Business

As I wrote in Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales:

“What’s different—and important—about Buy Now, Pay Later is its place in the customer journey. Payment options typically come at the end of the journey. Today’s BNPL services influence consumers’ choices of products and providers earlier in the journey.”

To succeed and differentiate, BNPL providers need to:

• Become shopping destinations. Afterpay, for example, announced that it will enable its merchant partners to advertise on the BNPL firm’s app to boost their promotions, products, and offers. Brands will be able to choose the products they want to promote via sponsored listing formats, and pay only when a shopper engages with the ad.
• Sharpen their sales attribution claims. BNPL providers claim that they help merchants make sales that wouldn’t have been made otherwise. Sound familiar? Visa and MasterCard made the same claims about credit cards they were launched. Today’s merchants will demand accurate attribution statistics.
• Specialize. BNPL providers will need to be masters of the customer journey. Few (if any) will be able to do that in more than just a couple of product categories resulting in specialization by product category. This is already happening with BNPL specialists like LoanStar Technologies in home improvement and Prima Health Credit in elective medical procedures.

More so than other BNPL companies (if that’s the right way to categorize them), Klarna has developed and launched capabilities to deliver on these factors.

Needless to say, a $1 billion loss in a year can’t be ignored. But Klarna is building a platform business—not simply a buy now, pay later business. In addition to its merchant and retailer services, Klarna is expanding its payments business, as well.

The Klarna Card went live in the US in 2022 with a wait list of a million consumers. The card gives consumers a way to pay over time in four, interest-free payments using a physical card with no down payment for any store or online purchase.

This is just a first step to becoming a full-fledged credit card provider. Why will Klarna be able to succeed against the likes of Capital One and American Express? Because it is: 1) capturing consumers’ shopping activity and preferences; 2) identifying consumers’ loan repayment history; 3) creating consumer payment relationships that avoid revolving debt, high interest rates, and punitive fees; and 4) developing symbiotic merchant relationships.

Sounds a little like Amazon, no? Remember, Amazon took nearly two decades to build its platform and turn a profit, and saw many huge yearly losses.

That’s not to say that Klarna is the next Amazon. But it’s too early to write off Klarna—or buy now, pay later, for that matter.