written in partnership with Joshua M. Devine, Nicholas Morgana, Mattia Angelino and Jacopo Ceravolo from Starting Finance Club Pisa
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Klarna Bank AB is a Swedish bank founded in 2005 in Stockholm. The idea was first introduced during an entrepreneurship contest by Sebastian Siemiatkowski (the current CEO), Niklas Adalberth, and Victor Jacobsson: three students from the Stockholm School of Economics. Despite a harsh appraisal that placed Klarna last in the competition, angel investor Jane Walerud, confident of Klarna’s potential, introduced the three students to a team of programmers who helped them build the platform.
Klarna’s main goal is to simplify online payments, providing customers with the ability to buy now and pay later, a much-appreciated approach in Northern Europe. By allowing Klarna’s users to buy a product from an affiliated online retailer and perform the payment up to 30 days after the purchase, they represent, as they put it, “a healthier, simpler, and smarter alternative to credit cards”. This unique service quickly brought a twinkle to investors’ eyes. In 2007, venture capital firm Investment AB Öresund entered the company and just three years later, Sequoia Capital followed up. In that same year (2010), Klarna increased its revenue by over 80%, providing financial services in Denmark, Finland, Norway, Germany, and the Netherlands.
In 2011, a $155 million investment allowed Klarna to expand their service provisioning Austria and supporting the merging with SOFORT AG. Later in 2019, a second investment, amounting to $460 million, empowered the company to spread across the US. This led to a company evaluation of $5.5 billion, making it one of Sweden’s “five unicorns” (startup companies that had succeeded in growing internationally) along with Skype, Spotify, Mojang, and King. A more recent evaluation places the company at an outstanding $10.6 billion value, thus ranking Klarna as the first startup in Europe for capitalization, and fourth in the world.
Klarna’s primary revenue source comes from the percentage paid by shopkeepers, just like their competitors. However, Klarna’s competitive advantage relies on its simple and “smooth” payment process, requiring minimal information from customers, and thus allowing more frequent and consistent purchases. Businesses who rely on Klarna have seen a 55% increase in the number of online orders, a 44% increase in check-out conversions, and an astonishing +85% in the number of sales.
Another important stream of revenue for the company is its late payment policy. Klarna allows customers up to 30 days to finalize the payment, which may be divided into three separate installments. At the end of the 30 days period, the platform notifies the customer of their non-payment. After two more notifications, Klarna proceeds in requesting a fee proportional to the customers’ purchases.
The slogan of Klarna is “Buy now, pay later”. In fact, the company grew up like a provider of deferred payments and retail stores. However, after buying a Swedish Banking License, it pivoted its business from a B2B to a B2C model.
The Sweden-based company showed preference focusing on consumers to improve and simplify the purchase experience. This led to Klarna’s conversion into traditional services like credit cards and deposit accounts.
KLARNA: MARKET POSITIONING
Klarna is the leader of its sector, and it is destined to retain the title for many years. It takes competitive advantages from its capitalization and the support of some famous investors, like Snoop Dog, as well as other historic investors such as Sequoia Capital, Dragoneer, Permira, Commonwealth Bank of Australia, Bestseller Group, and Ant Group.
On September 15th, 2020, Klarna raised 650 million dollars, adding new important lenders like Silver Lake, and various funds managed by Blackrock and HMI Capital. The company will leverage the capital increase to continue expanding beyond Europe and the US, aiming to replace the traditional credit card system. As a matter of fact, its services are cheaper than the average credit card. Klarna does not apply interest on repayments, and it allows users to either ratify or pay in one solution, profiting off of those who are insolvent after 14 days.
As stated on their website: “The uniqueness of Klarna’s offer – providing a healthier, simpler, and smarter alternative to credit cards and a broad range of services to enable a superior shopping journey – continues to drive rapid consumer adoption and loyalty with more than 90 million consumers worldwide”.
Another competitive advantage, used to increase market share, is the flexibility of payments, which allows for increasing partners’ sales. It was observed that vendors that accept payments in four installments saw growth in inventory turnover. This is a sign that customers are incentivized to shop more frequently.
Said advantage allowed Klarna to grow together with its main partners, including companies such as H&M, IKEA, Nike, AliExpress, Sephora, Zara, and many more.
Paypal figures among Klarna’s main competitors. Yet, the first only focuses on final consumers, to the detriment of the merchants. Furthermore, the Swedish unicorn allows its customers to pay once they’ve received their purchases, generating a sense of trust and ease. The list of competitors continues with Affirm, another fintech unicorn with an impressive evaluation of almost 20 billion USD, run by former co-founder of PayPal, Max Levchin.
Last but not least figures Afterpay, Klarna’s closest competitor. It is an Australian company with high growth potential. The Australia-based company is planning to file a Merger and Acquisition (M&A) with Pagantis – the Spanish gateway for its European expansion plan – with the aim of limiting Klarna’s market share.
KLARNA: EXPANSION & PERFORMANCE
Klarna recently reported 12 million new active users every month, and an average of 55k downloads per day. These data are about three times higher than its closest competitors.
The company recently acquired Moneymour, one of the most promising fintech startups, enriching its know-how and importing Moneymour’s IP and best practices. This acquisition also marks the first step of Klarna’s development center launch in Milan. Klarna is also trying to establish partnerships with other electronic payment companies, like Gimme5, to simplify the management of saving and investment. The partnership with Eurofactor, instead, serves the digitalization of the credit recovery process in Italy. The keyword of the company is clear: “simplify”.
As explained thoroughly above, Klarna has had a positive impact on the life of its users, giving a whole new meaning to payments. However, an analysis of the meaning of such innovations on a European political-economic scale is required. Pros and cons coexist.
Tax evasion represents a significant burden both on the European and domestic economies. In the case of the EU, it adds up to $825 billion. Italy, Germany, and France – the three biggest economies since the UK left the EU – are on the tax evasion podium. They count respectively 190.9, 125.1, and 117.9 billion Euros lost due to tax evasion (according to 2015 figures).
Digitalization can prevent such a rate of evasion, as shown by the IMF’s 2020 study, carried by Kitsios, Jalles, and Verdier. According to the study:
“halving the distance to the digitalization frontier could raise the median VAT revenue by 1.1% of GDP for low-income developing countries, 0.7% of GDP for emerging market economies and advanced economies, and 0.4 percent for the EU.”
However, digitalization itself can offer new fraud opportunities, if economic actors take advantage of new technology to hide sensitive information. Governments are today called to address their institutional and administrative future capabilities to both control digitalization, and to take advantage of it by including it in their own taxation system. Therefore, services such as Klarna offer insights for future governmental and institutional digitalization.
Klarna, in collaboration with several cosmetic, technologic, and clothing brands, offers the possibility to pay for products in installments. Given the global economic recession due to Covid-19, this mode of payment can be beneficial in boosting consumption and, therefore, the economy.
Digitalization, Consumption, and Climate Change
However, speaking about raising our consumer impact in 2021 is quite hazardous. Political economists speak clearly when they suggest that, without a planned ‘degrowth’ in consumers’ impact, we will not be able to save our planet from climate change.
Economists have different points of view on the impact of consumption on the economy, and its effects on the environment. In orthodox economic theories, consumption has a direct, positive impact on GDP. Economic growth is one of the main indicators of a state’s wealth and it is thus advisable to enact policies that help increase GDP.
On the other hand, proponents of the degrowth theory maintain that economic growth leads to an increase in the use of energy. This prevents us from remaining within the 1.5 degrees global average temperature. Keeping this in mind, Klarna might contribute to climate change. It strengthens consumerism, giving people the chance to pay in installments for products that they might not have bought otherwise.
As much as it would represent a step forward in the modernization of European financial infrastructure, on a bigger political-economic scale, promoting consumerism might not be for the greater good.
Klarna’s Questionable Collaborations
Furthermore, and quite importantly, Klarna collaborates with brands such as Sephora, which is known to not be a cruelty-free brand. In the case of Klarna Italy, the service is in collaboration with multinational Diesel. The latter brand is known to be non-eco-friendly, with very low labor standards, and no evidence of an animal welfare policy. Champion is another brand buyable on Klarna, that:
“has set an absolute target to reduce greenhouse gas emissions from its own operations but it has not set a supply chain target. There is no evidence it has taken meaningful action to reduce or eliminate hazardous chemicals. Moreover, its labor rating is ‘not good enough’. Some of its supply chains are certified by FLA Workplace Code of Conduct in the final stage of production. It received a score of 31-40% in the Fashion Transparency Index.“ONLY – Sustainability Rating
All of the above are examples of brands that do not address the urgency of the climate crisis by engaging in ethical behavior towards our planet, animals, or its human laborers.
On a final note, even if they have offered payments in installments an effective way of stimulating economic growth during these times of crisis, huge corporations themselves, such as the ones listed above, have not registered a significant recession during the past year and a half. Addressing the need of boosting medium and small-scale businesses’ growth would be a more ethical way to embrace positive innovations, such as digital payments.