Klarna: Sweden’s tech maverick has a dangerous urban legend brewing. How to kill It before it getsout of hand.
- Mary Ariyo
- Mar 19
- 6 min read
Europe does not do tech well. Europe does not do tech as well as the US, however, there has been
one particular area where Europe has been able to strongly compete with and beat the US... Fintech.
Revolut’s Nikolay Storonsky was quoted saying “We are three/four years more advanced compared
to US companies in terms of product, in terms of regulation, in terms of size. US companies should
learn from Europe.” It would have been difficult to find many who would have disagreed with any
part of that statement at the beginning of last week but following on from the Wirecard scandal,
fintech companies (payment platforms in particular) who have been given free rein by EU
regulators are now more likely to question. Given that this blog focuses primarily on the fashion
industry, we thought it might be worth taking a look at the European payment giant Klarna. In order
to examine its practices, potential flaws and propose a remedy to help the business ward off the
heavy hand of EU regulators.
Klarna Business Model
Klarna offers an e-commerce payment service to 205k merchants and a ‘buy now pay later’ service to 85 million consumers. For merchants the beauty (value) in Klarna’s business
model is best seen in its ability to; (1) speed up and simplify the purchasing process, (2) increase
conversions (the no. of people viewing, adding and then actually buying products) and (3) eliminate
costs and risks that the merchant might otherwise have incurred from setting up a financing
platform. For consumers the beauty of the service is best characterised by; (1) the ease of access to
a line of credit, (2) the fact that it enables consumers to manage payments and (3) it eliminates the
likelihood of a card being rejected when shopping.
For both of its customers, Klarna aims to make the e-commerce experience. ‘smoother’, through a
type of simplicity that anyone who has ever bought anything online can appreciate. But like any
other business, Klarna is expected to return a profit. In search of profitability the business initially
partnered with BURBERRY, signing up to be the engine behind the fashion house’s “See now buy
now” strategy which aimed to enable consumers to instantly pre-order items as they appeared on the runway and pay for them in instalments (prior to the delivery of the goods). Unfortunately the
Klarna based model did not appear to gain much traction, with BURBERRY eventually pairing up
with WhatsApp & WeChat before ending the initiative at the beginning of the Ricardo Tisci era. As
a result, Klarna sort out alternative partnerships, which would give the business access to more
consumers who would feel comfortable using their service.
In 2017 this birthed Klarna’s partnership with ASOS, in which both companies agreed to offer a pay after delivery service in order “to create the best shopping experience possible, by empowering customers with choice and flexibility”. Inthe following years, it gave rise to partnerships with PrettyLittleThing, Boohoo and JD Sports to name a few. In Klarna’s 2019 annual report the business announced increases in YoY volumes(32%) and revenue (31%) respectively with gross merchandising volume amounting to over $35 billion and total operating revenue net $753 million. An incredible achievement, had Klarna been a public company the equity markets would have responded very well.
Assuming the platform were public, understanding the makeup of Klarna’s (end-user/shopper)
consumer base (something we are very curious about) would have been much easier. In the absence of this information we sought to do the next best thing, take a selection of 7 Klarna’s partner
merchants (ASOS, Boohoo Group [Missguided, PrettyLittleThing & Boohoo], Gymshark,
Superdry, Sephora, Hollister & Rue21) and calculate based on publicly available information about
their target audiences, who Klarna’s consumers are. By our estimation, the average consumer using
the platform based on the above companies is between 18-29 (average adjusted based on the
availability of credit for under 18s).
Company | Age |
ASOS | 16 - 34 |
Boohoo Group (Boohoo, Missguided, PrettyLittleThing) | 16 - 30 |
Gymshark | 18 - 25 |
Superdry | 16 - 40 |
Sephora | 18 - 34 |
Hollister | Under 22 |
Rue 21 | 11 - 17 |
Klarna (est) | 15 - 29 |
These consumers spend £200 on average each time they use the platform and choose to either delay the payment for 30 days or split into 3 payments. Objectively speaking there is nothing wrong with Klarna, it’s consumer base or the companies that it chooses to partner with but when we began to see what the conversations on twitter around the platform look like a trend became apparent...
“These sites like Klarna and Clearpay are a disaster waiting to happen not gonna lie, the way brands
relentlessly promote you to pay using them too... people are spending beyond their means and
getting into debt, similar to a gambling addiction. They need less positive exposure imo” said one
Twitter user
“If you’re looking to buy a house, I’m told multiple Klarna payments on your bank statements are viewed by mortgage lenders is much the same way as payday loans, Have heard from a couple of people who’ve been declined because of this” warned another
“It’s taking all my willpower not to stick £70 trainers on Klarna, let it be September’s problem.”
One reflected
“That pay later with Klarna is gonna get me in bad debt, I have a spending problem 😂 😂 ” joked
another
Klarna is developing a reputation as a tool that is leading young, often ill-informed consumers into
debt. The perception of the repercussions from using this site is extreme, consumers are going as far as comparing Klarna’s service to payday loans and Brighthouse. An FT article published in 2018
asked whether the platform is creating a debt trap. To put it simply for a lot of people there is
something worrying about the service. Klarna’s disclaimers are as explicit as that of any other credit
card on the market, it goes as far as sending out notifications on its app, via text and across email.
Despite this Klarna appears to be holding all the blame when things go wrong for consumers, this is
due it’s decision to carve out the business’ USP as owning the entire financing process (as opposed
to qualifying it alongside their merchant partners). This decision has hurt their image and will
continue to weaken consumer trust in the business. Klarna must adjust it’s offering if it intends to
thrive in the long run and be able to boast about the ease with which consumers return to use the
service.
Solution
Klarna should agree with each merchandising partner a series of company-specific entry
requirements before offering financing. For example, Klarna and PLT could calculate a minimum
spending requirement based on a maximum no. of items that a consumer must spend in order to use
their service. This could be based on the value of the most expensive item available on the website
+ £X ( the average price of a garment listed) amount for 3/4 items. On the PLT website right now
the most expensive item is a Silver Diamanté Chain Halterneck Dress & Bandana Set on sale for
£73 (down from £100), assuming the brand set the rule using the full price PLT and the average
price was £25 Klarna’s services would not be available to anyone spending less than £125 on 4
items. By introducing such a standard and keeping it private from consumers Klarna would, in
essence, be able to weed out the consumers that some might argue probably cannot afford to use the service. Would introducing such a rule hurt Klarna’s revenue? Yes, but only with merchants that
cater to consumers who higher risk. With consumers using Klarna to buy a sofa on Wayfair or a
handbag from Farfetch this is less likely to be an issue.In the coming months and years, when Klarna prepares to IPO the business will have to prepare itself for the microscopic examination of its consumer profiles and the potential icebergs it may hitdue to service. It is in the interest of the business to seek out solutions that give investors confidence that the business will not fall victim to negative turn in public sentiment or go bust from lending to clueless millennials and Gen Z’s.
Sources:
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