Ever wondered about Klarna's money-making strategy with their interest-free payment options? The company has grown into the largest Buy Now Pay Later service with 147 million active users. Their business model has proven quite profitable despite offering services that appear free.
The company struggled with losses but finally turned things around with an $8.9 million profit in the third quarter of 2023 – their first profitable quarter in four years.
Merchant fees, not consumer interest, drive Klarna's revenue model. The company charges businesses a commission of 3.29% to 5.99% plus $0.30 per transaction. These rates are substantially higher than what traditional credit card processors charge.
The company gets more revenue through interest on longer financing programs that can run up to 36 months with rates reaching 19.99% APR.
Late payment fees and expanding banking services add to their income streams. This approach works well – Klarna reported $549.9 million in revenue for Q2 2023, showing a 30% increase from the previous year.
How does Klarna make money?
Merchant fees are the life-blood of Klarna's money-making strategy. The company takes a different path from traditional credit providers. While others depend on consumer interest, Klarna makes money in multiple ways and gives most consumers interest-free payment options.
Overview of Klarna's profit model
Merchant fees power Klarna's profit engine and make up 57% of the company's total revenue in 2024. Merchants pay a fee between 3.29% to 5.99% plus a flat $0.30 for each transaction. These fees are higher than what traditional credit cards charge, which usually ranges from 1.5% to 3%.
Klarna also makes money through:
- Interest on financing plans: Longer financing options (6 to 36 months) come with interest rates up to 19.99% APR
- Late payment fees: These depend on order value and range from $2 to $8 for each missed payment
- Klarna Card transactions: The company gets interchange fees (usually 1-3%) when customers use their virtual card
- Retail media advertising: Their app and merchant tools bring in about $180 million through displayed ads
Klarna's revenue take rate grew by 21 basis points to 2.54% in early 2024, up from 2.33% in 2023. This growth comes from more payment volume and new services like Klarna Plus.
Why Klarna doesn't charge consumers interest
Klarna's most popular options—Pay in 4 and Pay in 30 days—let consumers pay without any interest. This is different from regular credit cards, where 56% of users pay interest and 42% face fees.
The company shifts the cost from consumers to merchants. Klarna states, "Because there is no interest, our business model relies on customers repaying us on time, unlike credit cards". Merchant fees help cover the cost of interest-free consumer lending.
This setup rewards responsible lending. Klarna profits most when customers pay on time since they don't make money from revolving balances or interest on short-term plans. They check eligibility carefully before approving purchases and limit services for late payers—something credit card companies often avoid since they profit from late payments.
The role of merchants in Klarna's revenue
Merchants accept Klarna's higher fees because they get great value. Studies show stores that use Klarna can sell up to 44% more and increase order values by 20-30%. Many retailers, especially online stores, find these benefits worth the extra cost.
Klarna ties merchant fees to performance rather than just processing payments. Their business strategy shows that "Klarna boosts conversion and basket size, and merchants pay for the incremental lift". This creates a partnership between Klarna and its merchants.
The company's average loan term of 40 days helps money move quickly. Their impressive 99% repayment rate shows how well they balance making payments easy while staying financially sound.
This merchant-focused approach has helped Klarna build what they call a "commerce network" that brings together distribution, capital, and consumer behavior in one system.
1. Merchant fees: Klarna’s primary income source
Merchant fees make up the biggest part of Klarna's revenue. These fees are the financial backbone that lets them offer interest-free deals to consumers.
The numbers tell the story – Klarna's financial reports show these fees bring in about 57% of their total income. This is a vital part of their money-making strategy.
How Klarna charges merchants per transaction
Klarna uses a simple but profitable way to charge merchants.
Each transaction through their platform costs:
- A percentage fee between 3.29% and 5.99% of the sale amount
- A flat $0.30 fee per transaction
These rates are higher than what you'd pay with regular payment methods. Regular credit card companies charge merchants 1.5% to 3% per transaction. Klarna's fees can be double what standard payment processors charge, yet retailers keep signing up quickly.
A merchant's actual percentage depends on their sales volume, how risky their industry is, and which Klarna payment options they want. The "Pay in 4" option usually costs less than longer financing plans.
Why merchants are willing to pay higher fees
Merchants happily add Klarna to their checkout pages even though it costs more than traditional payment processing. The main reason? Klarna takes on all the money risks.
Once they approve a purchase, merchants get paid right away, whatever happens with customer payments later.
Klarna also works smoothly with online stores. Merchants see these higher fees as smart investments because their sales usually improve.
Impact on conversion rates and order value
The best reason merchants accept Klarna's higher fees is the boost in performance.
Klarna's data shows businesses that use their payment options see:
- Sales completion rates jump up to 44%
- Average orders grow by 20-30%
- More young shoppers start buying
That's why many stores think the extra cost is worth it when they look at their increased revenue. Klarna presents its fees as marketing costs that help businesses grow, not just payment charges.
This fee system creates a perfect match between Klarna and store owners – everyone wins when sales go up and customers spend more. This partnership approach has helped Klarna grow faster, and now they work with more than 500,000 stores worldwide.
2. Interest from long-term financing
Klarna's business model goes beyond just interest-free options. The company makes much of its money through interest charges on long-term financing plans. These extended financing options create a steady stream of income, while shorter payment options stay interest-free.
How Klarna offers 6 to 36-month plans
Customers can spread their payments over longer periods with Klarna's flexible financing options, which typically run from 6 to 36 months. The process works much like traditional loans. Customers make their first payment a month after their order processes, then continue with monthly payments.
These financing options work best for bigger purchases when people need extra time to pay. A customer buying something for $1,000 might pay $173.53 monthly over 6 months at 13.99% APR. Klarna teams up with WebBank (member FDIC) to handle these financing products. This creates a well-laid-out lending solution that goes beyond typical Buy Now, Pay Later services.
APR rates and credit score influence
Interest rates on Klarna's long-term financing options range from 0% to 35.99% APR.
The specific rate a customer gets depends on several things:
- Customer's credit score and history
- Purchase amount and merchant
- Chosen repayment term length (6-36 months)
- Previous payment history with Klarna
Long-term financing plans might need a hard credit check, unlike Klarna's short-term options that only need a soft check.
This can affect your credit score. Since June 2022, Klarna reports to major credit bureaus like Experian and TransUnion. Your payment behavior with these financing arrangements can help build or hurt your credit score.
Revenue from interest-bearing loans
Interest-bearing loans bring in much of Klarna's money – about 22% of their total revenue ($675 million in 2024). Most of these loans – 74% issued in 2023 – lasted 6 months or less. This shows Klarna prefers shorter-term financing even for their interest-bearing products.
Interest income grew to SEK 4.8 billion in 2023, up 17% from the previous year. A good chunk of this money came from interest earned on liquid assets held with other credit institutions, not just from consumer financing.
These financing options help Klarna broaden its revenue streams beyond merchant fees. The company now has a more balanced business model. Merchant fees remain their biggest source of income, but interest from long-term financing plays a vital role in their overall strategy to stay profitable.
3. Late payment fees and penalties
Klarna makes money through late payment fees, which they started charging in March 2023. They ended up adding these fees after being one of the few Buy Now Pay Later (BNPL) providers that didn't charge them. The company made this change after finding that fees help customers pay on time.
Tiered late fee structure
Klarna uses a well-laid-out system for late payment charges based on what customers spend:
- Orders over £20/€30 come with a £5 fee
- Orders under £20 won't face fees higher than 25% of what was spent
- Customers won't pay more than two late fees for each order
The company gives customers some breathing room with these fees. They wait 7 days after a missed payment before charging anything. During this time, customers get at least four reminders to help them stay on track.
These late fees are working well – Klarna says on-time payments have gone up by 55%. This shows that fees can help people pay on time while bringing in money for the company.
Snooze fees and repayment flexibility
Customers who know they might struggle to pay can use Klarna's "snooze" feature. This lets them push back their payment date once for each order. Payment plans with financing often have stricter rules about extensions.
Anyone having money troubles can reach out through Klarna's app or call their support line (0808 189 3333). The team works with customers who are struggling before sending anything to collectors.
How Klarna manages default risk
Default risk management sits at the heart of Klarna's business since they take on all financial risk from merchants. After sending several payment reminders, they might send unpaid debts to collection agencies.
The Customer Recovery Program, launched in 2023, helps reduce defaults. Through this program, Klarna reaches out to customers who haven't paid in a while. They offer to cut 50% off outstanding balances rather than sending the debt to collectors.
On top of that, Klarna came up with a creative way to encourage good payment habits. They added a financial awareness test to their app. Anyone who passes gets their late fees waived for six weeks. This shows how Klarna's approach is different from traditional lenders who often profit when customers struggle financially.
4. Klarna Card and in-store payments
Klarna Card and in-store payment solutions create major revenue streams beyond their online payment options. These solutions give the company new ways to make money and expand their service reach.
How the Klarna Card works
The Klarna Card works as a charge card that needs full balance payment each month without interest. All the same, customers can pick "pay over months" plans with 3 or 6-month installment options for purchases over $30.
These financing options bring in substantial revenue through a 28.99% variable APR on financed payment plans. This creates extra income from card users who need flexible payment options.
Approved customers get instant access to a virtual card they can add to digital wallets like Apple Pay or Google Pay for tap-to-pay purchases. The card's virtual and physical versions work anywhere Visa is accepted. This expands Klarna's money-making opportunities beyond their usual merchant partnerships.
Monthly and transaction-based fees
The new Klarna Card has dropped all annual and monthly fees, unlike its previous version that charged $4.99 monthly.
The company now makes money through:
- Interest charges on financed payment plans (28.99% APR)
- Interchange fees (typically 1-3%) from card transactions
- Cash back partnerships with over 200 retailers (offering 1-10% cash back)
This approach lets Klarna profit from card transactions without upfront consumer costs. It fits perfectly with their overall business strategy.
Expansion into physical retail
Klarna has pushed strongly into brick-and-mortar retail through strategic collaborations. Recent partnerships with payment providers Adyen and Clover have brought Klarna's payment options to more than 550,000 physical terminals across North America, Europe, and Australia.
This move into stores has paid off well. Retailers report 118% higher average order values when customers use Klarna. Plus, 75% of Klarna's in-store shoppers come from the Millennial and Gen Z demographics. This creates valuable customer acquisition opportunities for physical retailers and brings in more revenue streams for Klarna.
5. Other revenue streams: App, banking, and interest on cash
Klarna has broadened its money-making channels beyond the core revenue sources we discussed earlier. The company now makes money from app-based advertising, expanded banking services, and interest on cash reserves.
Revenue from Klarna's shopping app
Klarna reshaped its payment app into a detailed shopping platform that gets more and thus encourages more income. The company earned over $180 million in advertising revenue in 2024. These numbers show Klarna's successful progress into a hybrid between eCommerce and fintech.
Brands pay for premium placement and visibility on Klarna's digital marketplace.
The app's 31 million monthly active users create revenue through:
- Native advertisements and sponsored product placements
- Affiliate marketing commissions from retailers
- Klarna Plus subscription service priced at $4.99/month
The shopping app processes about 2 million transactions daily, which creates multiple opportunities for monetization.
Banking services and interchange fees
Klarna launched its Balance service in August 2024 across the US and 11 European countries. Users can store money, receive cashback rewards, and manage refunds in one account through this banking-like service.
Klarna's European banking license allows the company to offer interest rates up to 3.58% on deposits. The US operation works differently – Klarna partners with WebBank and doesn't offer interest on balances.
The company also makes money from interchange fees when customers use virtual cards linked to their Google or Apple wallets. These fees range from 1-3% per transaction.
Interest on idle cash reserves
Like traditional banks, Klarna earns interest on its cash reserves. The company's consumer deposits exceeded $9.5 billion as of December 2024, and even modest interest rates create meaningful income.
Bank interest rates hover around 0.04%, making this revenue stream a smaller part of Klarna's total income. Yet it adds to the company's broad approach to making money.
Conclusion
Klarna generates 57% of its revenue from merchant fees while providing interest-free payment options to consumers. The company's business model smartly shifts costs from shoppers to retailers.
Retailers happily pay premium fees between 3.29% to 5.99% per transaction that go beyond standard payment processing rates because they see higher conversion rates and larger average order values.
The company has grown beyond merchant commissions to create multiple revenue streams. Their financial success comes from interest charges on extended financing plans, late payment fees, interchange fees from their Klarna Card, and advertising revenue from their shopping app.
This strategy has helped the company become profitable after years of losses.
Klarna's model works well because it creates perfect incentives. The company profits most when users make timely payments, unlike credit card companies that benefit from customers carrying balances.
This key difference helps them create payment solutions that benefit consumers' financial interests while generating substantial revenue.
Critics once doubted whether interest-free payment options could turn a profit, but Klarna has proven them wrong. The company has evolved from a simple payment processor into a complete financial ecosystem with 147 million active users and over 500,000 merchant partners.
Their return to profitability in 2023 shows that consumer-friendly payment options can coexist with business success.
FAQs
Q1. How does Klarna generate revenue without charging interest to consumers?
Klarna primarily makes money through merchant fees, charging businesses 3.29% to 5.99% plus $0.30 per transaction. This allows Klarna to offer interest-free payment options to consumers while still generating significant revenue.
Q2. What are the potential drawbacks of using Klarna for purchases?
While Klarna offers convenient payment options, it can lead to overspending and accumulating debt. Late fees on missed payments and high interest rates (up to 35.99% APR) on extended financing plans can make purchases more expensive over time.
Q3. Does Klarna report payments to credit bureaus?
Yes, since June 2022, Klarna reports payment history to major credit bureaus like Experian and TransUnion. This means that using Klarna can potentially help build or damage your credit score, depending on your payment behavior.
Q4. What happens if I miss a payment with Klarna?
If you miss a payment, Klarna provides a 7-day grace period before applying late fees. They send at least four reminders during this time. After that, late fees are charged based on the order value, with a standard fee of £5 for orders over £20/€30.
Q5. Can I use Klarna for in-store purchases?
Yes, Klarna has expanded into physical retail through partnerships with payment providers. You can use the Klarna Card, which functions like a charge card, for in-store purchases. Additionally, Klarna's payment options are available at over 550,000 physical terminals across North America, Europe, and Australia.
