Is Klarna legit? – Quartz
It’s another sunny, pandemic-stricken day at home, which means another day of online shopping from the couch until a vaccine runs through our veins. But these Dr. Martens Chelsea boots cost £ 150 ($ 206) and you only have £ 50. What to do?
For some people, a “buy now, pay later” (BNPL) lender like Klarna is the answer: you can get your documents now and pay them off over time. But as Gen Z-focused BNPL companies turn to the credit card industry, there is reason to be skeptical whether the burgeoning trend is healthy for consumers and merchants.
What is Klarna?
Today, Klarna is the most valuable startup in Europe. But when it launched in Stockholm 16 years ago, the company struggled to find support. In a pitch competition similar to the show Shark aquarium, with an audience of luminaries including the King of Sweden, the President of H&M and other prominent business leaders, Klarna came in last.
This month, however, the company’s valuation reached $ 31 billion, tripling in less than six months after Klarna raised $ 1 billion in its most recent funding round.
Klarna is a bank, fully licensed in her native Sweden, but also a technology company, with an application and staff of over 1000 software engineers. He is best known as a pioneer in the growing field of businesses that allow customers to purchase an item and pay it back over time in installments – usually four – often without interest or fees.
BNPL services are generally presented as an alternative to credit cards. They work in different ways, but Klarna makes most of her money by charging a processing fee to retailers who accept them, not by billing buyers. Although it also collects fees or interest on late payments, depending on the service used by the customer.
In recent years, the company and its ilk have seen their popularity grow – a trend the pandemic has accelerated by sending more shoppers online. In 2020, Klarna reported a 46% jump (pdf) in the total value of transactions processed.
Consumers appreciate BNPL options because they enjoy greater financial flexibility without having to pay for it. Avoiding interest on credit cards and being able to make purchases that they might not otherwise fit into their budget were the top two reasons buyers gave for using BNPL in a survey that CB Insights, a research firm technology, included in an industry report (pdf).
Retailers are happy to accept BNPL as it can help increase the number of buyers shopping, get shoppers to spend more, and attract new customers, especially younger ones. On a call for results last November, sneaker retailer Foot Locker said that since Klarna’s activation at all of its North American locations, the service has become one of the top three payment methods chosen by consumers. customers, with more than 2,000 transactions per day. Macy’s said in February that two-thirds of customers using Klarna to shop were entirely new to the retailer, and most were under 40 (BNPL seems particularly popular for fashion and beauty products).
But BNPL options have also raised concerns, as they make it too easy for buyers to buy things they can’t afford, and missed payments can always hurt a customer’s credit. As companies like Klarna try to shake up the credit card industry, they do so under increased scrutiny from regulators.
And it’s not always clear if BNPL is a good deal for all traders. As fintech consultant Jason Mikula pointed out during a Clubhouse discussion with Quartz, small retailers may not have the resources to determine whether the fees they are paying to these lenders, who may be about 7%, worth it. It may take some know-how and analysis to determine if a sale is really due to a payment option down the line.
Klarna in numbers
17: Countries in which Klarna operates
90 million: Total active Klarna customers
250,000: Retailers Klarna works with
$ 53 billion: Total value of transactions processed by Klarna in 2020 (pdf)
$ 1 trillion: The total value of transactions that BNPL services are expected to process by 2025 (pdf)
42%: Share of Americans who used a BNPL service, according to a survey
4x: Estimated increase in purchase volume of BNPL in UK in 2020
Klarna’s co-founders attended the Stockholm School of Economics, where they started the company before graduating. CEO Sebastian Siemiatkowski (pictured) is the only one of the three still in a managerial position at the company. Here are some details about the founding trio of Klarna:
? Sebastian Siemiatkowski
? Niklas Adalberth
- Burgers returned with Siemiatkowski at Burger King
- Left Klarna as Deputy Managing Director in 2015
- Helped start the Norrsken Foundation, which promotes social entrepreneurship
- Quote: “I don’t want to die with a bag of money in my account and I don’t want my children to grow up with a bag of money in their account.”
? Victor Jacobsson
- Nowadays, he is an advisor and private investor
- Left Klarna in 2012 as CFO
- Was a deputy platoon commander in the Swedish armed forces, according to LinkedIn
A brief credit history
BNPL is a 21st century version of a very old idea. Here is a look back at some highlights from credit history.
18th century BC: By the time Babylonian King Hammurabi issued his series of written laws, lending property or money at interest was an established practice. Its code established regulations on such matters as maximum interest rates – 33% on grain loans and 20% on cash loans – and debt relief.
1st century BC: Roman law allowed money to be lent at interest (pdf), or usura, but compound interest prohibited, usurae usararum. The English term “usury” derived from it and originally meant charging any amount of interest, although today it refers to the imposition of excessive interest.
Middle age: Even when permitted, for-profit loans were generally viewed as predatory. In Europe, religious doctrines ultimately forbid it. The Catholic Church, for example, prohibited Christians from lending to other Christians with interest, and in 1179 adopted a proposal threatening the excommunication of those who did.
16th century: By this time, world trade and exploration created a growing need for capital and credit. In 1545, Henry VIII of England fixed a national interest rate of up to 10%.
18th century: The culture of consumption began to emerge and modern banking with it. In colonial America, where hard currencies were often scarce, credit was essential to the growth of the young economy.
19th century: Mass production created new consumer products, but they could be expensive to buy in cash. It became common to buy farm equipment, sewing machines, furniture and pianos in installments, helping to spread the idea of credit financing for everyday goods.
20th century: During the Great Depression, layaway programs allowed buyers to pay for products over time. Companies had also started issuing credit cards allowing customers to purchase products from their outlets. In 1950, Diner’s Club launched the first card allowing shoppers to make purchases at various businesses.
21st century: The boom in e-commerce is creating new buy-it-now options for online shoppers.
How does Klarna make money?
Klarna makes most of her money by charging a processing fee to retailers who accept it, not by billing buyers. The company’s net operating profit jumped to SEK 10 billion ($ 1.1 billion) last year, a nearly 40% jump from 2019.
GP Bullhound, an advisory and investment firm, invested money in Klarna in 2013. We spoke with Stockholm-based partner Joakim Dal about what he called the ‘money grabbing’ phase. lands ”from BNPL – disrupting credit cards in the same way streaming music disrupted CDs and mp3s.
(Responses have been condensed.)
How did Klarna get on your radar?
We knew the founders of Klarna from the university. The company was founded in 2005 with a simple but revolutionary idea of how to create a safer, easier way to pay online – to shop with an invoice. It’s a very safe way to pay for things online when you have little confidence, or aren’t sure if the product is right for you, or if it’s the right color – there is so much uncertainty when you buy things online.
What did Klarna use the money for?
They raised funds to expand into Germany and Austria from their main Nordic region. It was a big bet at the time. Whenever you are dealing with fintech, there is so much local preference, local regulation, that it was very difficult to know if they would be able to capture this market. It was difficult at first, just like in the US and UK, but eventually they were successful, and especially after the acquisition of Sofort, which is one of the main payment options in Germany.
How do the results of this investment compare to your expectations?
I think it paid off more than we expected. At first it was about the German speaking countries, in which they succeeded. And then the story was from the UK, the largest e-commerce marketplace in Europe, where it is now established that they are successful. And now the next market to win is the United States. In addition, the product evolved from the simple fact of being an invoice. It’s a smooth payment tool that consumers love and increases conversion for merchants.
Why is “buy now, pay later” so popular?
While the phrase “buy now, pay later” was rarely mentioned in public discussions with executives until last year, its natural alignment with shopping apps and websites has led to a surge. pandemic. Adding to the momentum (and call-outs of the results), BNPL fintech Affirm entered the public market in January, and PayPal recently launched a payment service later.
According to data compiled by Sentieo, there were a record 46 “buy now, pay later” mentions on earnings calls, conferences and shareholder meetings in February, according to data compiled by Sentieo, up from zero last April. Companies like Klarna, Afterpay and Affirm “are fast becoming household names, with growth in new users and an explosion in transaction volume,” according to CB Insights.
What’s up with Klarna’s ads?
BNPL may not seem like a particularly fancy industry, but Klarna’s ads are notoriously weird and visually interesting. We can’t stop thinking of this one featuring a fish’s journey on a slide: