The Klarna effect – inside the ‘buy now, pay later’ universe (2024)

In 2021, convenience is king, especially in ecommerce, where complex shopping processes lose you customers at the click of a mouse or swipe of a screen. In today’s Covid-19 world, every shopper and sale is more valuable than ever, so many brands and retailers are turning to “buy now, pay later” providers to entice new spenders and build loyalty with their customers.

At the epicentre of this retail revolution is Klarna, the pink-hued, boldly branded, social media-savvy Swedish fintech company that promises to help shoppers spread the cost of their purchases with no interest or fees, creating a retail experience so “smoooth” it requires three Os.

“People are changing the way they bank, shop and pay,” says Klarna CCO Luke Griffiths. “We offer a flexible, transparent payment solution, but also enrich the whole shopping experience from inspiration to post-purchase.”

Klarna has had a ground-breaking impact on retail in the 16 years since it was launched by business school friends Sebastian Siemiatkowski (now CEO), Niklas Adalberth and Victor Jacobsson. They took the idea of old-fashioned catalogue shopping and applied it to the digital world. First trialled in Sweden in 2005, it quickly expanded across Europe thanks to its fresh approach to marketing and delayed payments. It arrived in the UK in 2014 and the US a year later.

Today, Klarna is Europe’s highest-valued private fintech at $10.6bn (£7.6bn). In 2018, Swedish fashion giant H&M Group invested $20m (£14.4m) to buy a stake of less than 1%, and they are now working on a global roll-out across all H&M fascias. Danish brand house Bestseller is another investor, as is US department store chain Macy’s, and rap legend Snoop Dogg, who has fronted several Klarna campaigns.

Around 200,000 retailers worldwide are now partnered with Klarna, 10,000 of which are based in the UK, including Asos, Boohoo, Gymshark, JD Sports and PrettyLittleThing. More than 10 million British shoppers have a Klarna account – and a further 90 million worldwide, which was up 21 million in the first three quarters of 2020 alone.

How does it work? At checkout, shoppers are given the option to “pay later with Klarna”. If they pass a credit reference search, they are offered three payment choices: pay in three equal instalments over 60 days; pay in full 30 days after delivery; or a finance plan over six to 36 months. The brand or retailer receives the full payment straight away from Klarna, which handles the customer’s repayments. Interest and late payment fees only apply to the finance plans.

Although Klarna works across many retail categories, fashion has always been key to its growth. Griffiths says buy now, pay later is of particular interest to clothes shoppers as they can buy different sizes and keep only the one that fits, before the money leaves their account. And while many of fashion’s biggest names already work with Klarna, small and medium-sized brands, up-and-coming businesses and independent retailers are also reaping its benefits.

Jack Gove, managing director of contemporary label Basic Rights, says spreading payments enables his shoppers to invest in higher-quality clothing that will last: “When it’s used responsibly, we see it as a way of consumers getting out of the false economy of buying low-quality alternatives just because they’re cheap.”

Klarna also enables retailers to increase conversion rates and sales volumes. It says the option to delay payments makes consumers more likely to check out, while some even feel encouraged to spend more. Analysis of its partnership with luxury fashion brand Belstaff shows that when the Klarna logo was present on product pages of items valued at more than €350 (£305), conversions rose by 6% and average order value increased by 2%, resulting in a total transaction revenue increase of 10%.

The benefits are echoed by London-based label Percival, which has been a Klarna merchant since 2019: “Being an online-only brand, we’re constantly looking for tools that can increase our conversion and average order value,” says founder Chris Gove. “A lot of shoppers in our demographic already have a Klarna account, so seeing the logo at the checkout validates our brand and purchase journey.”

Klarna's latest video campaign, in signature playful style

Nevertheless, the rapid growth of buy now, pay later has not come without criticism. Klarna’s name has often been used as a byword for the entire sector, which has been accused of “making credit cool” and creating a debt trap for young, fast fashion-obsessed Generation Z shoppers – a side effect of its disruptive approach to branding and viral adverts that arguably target this group of consumers. However, Klarna’s average consumer is aged 33, and its fastest-growing demographic is Generation X (40-to-54-year-olds) switching from traditional credit cards to buy now, pay later options.

What is more, most of Klarna’s revenue comes not from charging shoppers extortionate fees if they fail to pay back what is owed – in fact, for its two most popular products, “Pay in 30 days” and “Instalments”, there is no interest or late fees – but from retailers who pay Klarna a flat fee starting at 20p per transaction and 3.4% of the total order value. Fees vary by product and size of retailer.

Griffiths says this is why Klarna has been proactive in challenging misconceptions and supporting greater regulation of the market: “Our biggest marketing investment of 2020 was KlarnaSense – an initiative we developed to encourage consumers to shop smarter by purchasing the right things, at the right time. We have already pledged that more than 50% of our budget in 2021 will be dedicated to supporting financial wellness and awareness.”

Klarna also assisted the Financial Conduct Authority with the Woolard Review – the report published in February 2021 that sets out guidelines for regulating buy now, pay later, says Griffiths: “We agree that regulation has not kept pace with new products and changes in consumer behaviour. We have limits in place, and run eligibility checks each and every time a consumer tries to use our product. It is essential that regulation across the industry is modern, proportionate and fit for purpose.”

As for the future, Klarna wants to spread its playful brand of financial services far and wide, which has already included a move into bricks-and-mortar stores with New Look and Schuh in the UK.

“There are Klarna products available in other markets, such as a physical card in Sweden, in-app shopping in the US and consumer banking in Germany,” says Griffiths. “So watch this space for what’s next in the UK.”

Klarna is also developing its app, which was relaunched in 2020 and now allows shoppers to create wish lists, manage repayments and monitor prices, aiming to drive them back to their favourite retailers and building even deeper loyalty between shopper, retailer and Klarna.

As Griffiths concludes: “We have lots of exciting plans ahead.”