Can you build a business based on mistrust? In the experience of Swedish bank Klarna, yes, you can. Klarna started as an intermediary between online stores and buyers, who did not trust each other, and eventually grew into a global internet bank.

Frank Media has figured out how Klarna’s business model works.

Factoring in e-commerce

In Swedish, “klarna” means “clear”. “We want to be clear and comprehensible in everything we do, because life is complicated as it is,” the bank says on its website. A fintech solution, bank, e-commerce intermediary, payment provider – Klarna is given various definitions.

Klarna operates since 2005, starting as online payment service. In 2017, it received the banking license. Klarna co-founder Sebastian Siemiatkowski stated that the business was based on the idea of solving the problem of mistrust between online stores and buyers.

E-commerce was just emerging in many countries in the early 2000s: the buyers were concerned about paying online and the stores were concerned about sending the purchases without pre-payment. Klarna performed as intermediary, working by a factoring model that was adapted to e-commerce.

Klarna separated the purchase and the payment for buyers. Stores received payment for the goods directly from Klarna and the buyers paid the bank when the goods were delivered. Later, Klarna added loans to interest-free installment plans.

How it works

The basis of the Klarna business model is provision of installment plans and loans to online store customers. Klarna cooperates with 130,000 stores (online retailers usually) and offers the purchase by installment service within the partnership. The customers of online stores cooperating with Klarna have three options apart from immediate payment by card:

Pay later

The payment takes place within 14 or even 30 days from the shipment (the term depends on the store). Essentially, it is an interest-free installment plan. If the purchase is not paid for within several months after the customer is notified about it, the debt becomes overdue and it is transferred to collectors.

Slice it

The buyer can divide the purchase amount into equal monthly installments, which practically means taking a loan. The interest rate cannot exceed 18.9% a year, the Klarna website says. The loan is provided for the term of 3 to 36 months.

Pay in 3

The payment is divided into three equal parts. It is transferred from the card you indicated while making the purchase. The first installment is paid at the moment of making the purchase and the second and the third are done on the 30th and the 60th day respectively. The bank registers it as an installment plan and charges no interest rates.

The market

Klarna operates in 14 countries. The bank mostly covers DACH (Germany, Austria, Switzerland), which accounted for the half of Klarna’s profit in 2018 while Sweden and Demark accounted for 1/3 of it. In the fall of 2015 Klarna entered into the U.S. market, where it reached the turnover of USD 1bn in just a few months. Klarna operates in the UK as well, since 2017.

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