Klarna: What is Klarna payments and How the Buy Now, Pay Later Service Works

Klarna is an international company that offers “buy now, pay later” (BNPL) services, allowing shoppers to make purchases from online and physical retailers without paying the full amount upfront. Consumers can pay for their purchases in four interest-free installments charged every two weeks, or they can pay the full amount within 30 days. Additionally, they can finance their purchases over a longer period through Klarna’s partner, WebBank. Klarna describes itself as “a global leader in the generational shift away from credit cards.”

Key Takeaways

• Klarna is a leading BNPL service founded in Sweden in 2005.

• Klarna users can split purchases into four equal installments, pay within 30 days, or opt for long-term financing.

• The company claims to work with 500,000 merchants and has 150 million consumers worldwide.

What is Klarna?

Founded in 2005 in Stockholm, Sweden, Klarna currently works with more than 500,000 merchants globally. The company says it has 150 million customers—including 34 million in the U.S.—who make over two million transactions daily. Klarna employs 5,000 people, whom it calls “Klarnauts.” Its investors include Sequoia Capital and Visa.

According to Klarna’s 2022 annual report, the company generated SEK 13.3 billion in revenue that year, with a net loss of SEK 10.4 billion.

In his letter to shareholders in the annual report, CEO and co-founder Sebastian Siemiatkowski wrote, “We are making tangible progress toward profitability, expanding well beyond e-commerce, and reducing credit losses and costs. GMV increased 22% year-over-year in 2022.” GMV stands for gross merchandise value or volume.

Klarna’s retail partners include Anthropologie, Converse, Etsy, Harley-Davidson, Harry & David, Instacart, LensCrafters, Nike, Petco, Versace, Wayfair, and many others. Retail categories include automotive, beauty, Black-owned businesses, apparel and fashion, and electronics.

Since 2014, Klarna has had offices in Columbus, Ohio, where its North American headquarters are located. Other offices include New York and Los Angeles, as well as other major cities in the U.S. and worldwide.

The BNPL model has proven popular among shoppers in recent years, and Klarna is not alone in this space. Klarna and its competitors are also attractive to retailers—especially online ones—who struggle to get shoppers to complete purchases after adding items to their carts. Industry-wide, cart abandonment rates are about 70%. Shoppers often abandon carts because they don’t want to create an account or the checkout process is too complicated. Klarna and other BNPL providers help reduce this payment friction.

How Klarna Works

Consumers must be at least 18 years old to use Klarna, and they can download the Klarna app from the App Store or Google Play.

There’s no fee to sign up, and Klarna doesn’t perform a credit check at that stage. When a consumer makes or attempts a purchase, Klarna may perform a soft credit check, which doesn’t impact credit scores.

Klarna doesn’t charge users for using its “Pay in 4” service at participating retailers. The app can also be used at other retailers for a $2 service fee.

Consumers who fail to pay their bills on time may be charged a $7 late fee after 10 days. However, Klarna says, “The total amount of late fees charged on an order will never exceed 25% of your Total Purchase Amount.” If a user is unable to pay, Klarna may hand the account over to a collection agency and report the default to credit bureaus, which can negatively affect credit scores.

Klarna can approve or deny any purchase. Reasons for denial may include the consumer already carrying a high balance or the purchase being for a large amount. Klarna suggests that linking a bank account may reduce the risk of being declined.

Since Klarna doesn’t charge interest or fees for its standard payment options, how does it make money? Primarily through participating merchants, who reportedly pay Klarna both a flat fee per transaction and a percentage of the total sale, which can vary by country and the Klarna service used. According to the National Retail Federation, in 2022 U.S. merchants paid about 5% in total costs to use Klarna or its rival Afterpay—roughly double the fees paid to credit card companies.

Does Klarna Have Any Drawbacks?

In addition to higher costs for merchants—which can in some cases be passed on to consumers—BNPL services like Klarna have raised concerns about whether they encourage overspending and taking on more debt than users can handle safely. Klarna admits its own data shows consumers tend to spend more when BNPL is available, resulting in a 41% increase in average order value.

In response to these concerns, a Klarna spokesperson told The Guardian in 2018, “We have safeguards in place to ensure our products are only offered to people who can afford them and repay in a sustainable way, without affecting their financial well-being.”

More recently, a March 2023 report by the Consumer Financial Protection Bureau found that BNPL users “are much more likely than non-BNPL borrowers to be highly indebted, use credit cards, experience delinquencies on traditional credit products, and use high-cost financial services such as payday loans, pawn loans, and check cashing.” However, it also noted that such signs of “financial distress were already evident for these consumers even before BNPL became widespread in 2019.” The report concluded that a key question for future research is whether BNPL improves or worsens the financial health of struggling consumers.

What Credit Score Do You Need for Klarna?

Klarna doesn’t specify a minimum required credit score, but it may check your credit report through TransUnion when you use the service. The company states, “When we perform a credit check, we use the information you provide to verify your identity and review your credit report to understand your financial behavior and assess your creditworthiness.”

Does Using Klarna Hurt Your Credit Score?

Using Klarna won’t hurt your credit score as long as you pay your bills on time.

What Is the Maximum Spending Limit on Klarna?

Klarna doesn’t assign users a fixed credit limit. Instead, the spending limit varies with each transaction based on factors such as the user’s balance, payment history, chosen payment option, and the specific retailer. The Klarna app shows users their estimated available “Purchasing Power.”

The Bottom Line

Klarna is a leading buy now, pay later (BNPL) service with a strong presence in the U.S. and globally. While BNPL services are convenient and growing in popularity, consumer advocates continue to question whether they worsen Americans’ debt management issues. However, recent research suggests the long-term impact—positive or negative—is still unclear.