Klarna Group plc (KLAR)

Klarna has become one of the most recognisable names in consumer lending by specialising in a narrower, faster channel: shoppers filling a checkout form and choosing to split their purchase into four equal installments with no interest charge. The company does not own a traditional bank licence in the conventional sense; instead it originates credit under partnerships with partner banks and lenders, while managing the risk, collections, and customer experience for merchants and consumers. It operates as a marketplace embedded directly into checkout flows, and that placement is its entire business — Klarna makes money when a purchase happens through one of its hosted checkout flows, splitting fees with the merchant or absorbing losses when a customer defaults.

The company was founded in Stockholm in 2005 as a simpler checkout experience, initially offering invoice-based payment to Nordic customers. It gradually expanded to instalment-based lending, and by the time it reached the United States and other Western markets around 2015, the buy-now-pay-later model had crystallized into its modern form: short-term, unsecured credit that splits a purchase into a handful of small payments, each due weeks apart. By 2020, the category had exploded. Klarna raised capital at high valuations, claiming to be the most valuable fintech in Europe. It grew transaction volumes sharply, powered by merchant partnerships and marketing spend. Profitability, however, proved elusive. The business depends entirely on Klarna’s ability to price its credit conservatively enough that default losses do not exceed the fees merchants pay, a calculation that shifts whenever economic conditions tighten or consumer credit deteriorates.

How does Klarna actually make money?

Klarna earns revenue almost entirely from merchant fees. When a customer uses Klarna to split a purchase at one of Klarna’s partner merchants, the merchant pays Klarna a percentage of the order value—typically in the range of two to seven percent, depending on the merchant’s size, the country, and Klarna’s risk appetite. Klarna also collects small amounts from customers who elect to pay later (beyond the four-instalment option) or who miss a payment deadline, though this is intentionally kept minimal because the entire point of the product is to be frictionless.

The real cost Klarna faces is defaults. Each purchase Klarna approves creates a loss if the customer ultimately does not pay. Klarna uses algorithmic credit decisioning to approve or decline each customer before the purchase completes, assessing age, income, payment history (where available), and historical Klarna performance on similar customers. The underwriting has to be good enough that expected losses—the percentage of approved purchases that will eventually default, weighted by their size—stay below the fees merchants pay. If Klarna approves too many weak credits, it will lose money. If it is too conservative, it will decline purchases and merchants will route traffic elsewhere.

This tension explains why Klarna’s profitability is cyclical and highly sensitive to credit conditions. During economic expansions and periods when consumer balance sheets are healthy, defaults fall, and Klarna’s losses shrink as a percentage of revenue. When unemployment rises or consumers exhaust savings, defaults spike, and unless Klarna tightens underwriting immediately, the company can slip into losses. Between 2020 and 2023, Klarna cut merchant fees to gain market share, a common growth-at-all-costs strategy in fintech; it simultaneously saw defaults and charge-offs rise as credit conditions tightened. The combination left the company unprofitable through most of that stretch.

What makes Klarna different from a traditional credit card?

The most obvious difference is speed and placement. A traditional credit card requires a separate application process, credit checks, and approval that often takes days. Klarna’s credit decision happens in real time, embedded in checkout, and the merchant decides whether to accept the extra risk. For consumers, Klarna feels simpler—four fixed payments, no interest, no temptation to revolve balances. For merchants, Klarna is a sales lever; offering a third payment option can increase conversion because some customers will not complete a checkout without an instalment option.

Traditional credit cards carry rewards, lounge access, and other perks; Klarna offers none of these. The Klarna customer experience is intentionally bare-bones—a simple payment tool, not a lifestyle product. That keeps Klarna’s costs down but also means customer loyalty is weak; a customer will use Klarna if it is offered at checkout, but they have no reason to prefer Klarna over a card at a merchant that does not offer BNPL.

The regulatory model is also different. Credit-card networks (Visa, Mastercard) are schemes that sit between merchants and banks, taking a tiny fraction of each transaction. Klarna is a lender that originates and holds risk (or sells it off-balance-sheet to partner banks). That brings different compliance burdens—consumer-protection rules, anti-money-laundering, affordability checks—and means Klarna cannot simply scale indefinitely without finding someone to hold or fund the credit.

Who competes with Klarna?

The BNPL category drew dozens of competitors over the past five years, including Affirm, Afterpay, and regional players in every major market. Some fintech firms saw BNPL as a path to building a consumer brand; others started as pure plays. The competitive response from traditional incumbents came later: American Express, PayPal, and even credit-card issuers themselves began offering instalment options, usually with better economics for consumers (lower cost) and merchants (better approval rates, lower risk).

The category has consolidated. Several BNPL rivals that raised capital at high valuations have either gone private again, shut down, or merged. Klarna remains one of the larger players by transaction volume, but profitability rather than growth is now the defining pressure for every firm in the space. Competition on merchant fees has been severe—Klarna and rivals have had to lower or eliminate fees to merchants in developed markets, which shrinks everyone’s revenue and forces even tighter credit controls.

What would an investor watch?

The key is the spread between the fees Klarna earns and the defaults Klarna realizes. Klarna reports this in quarterly financial statements, usually expressed as a charge-off ratio—the total amount of defaults as a percentage of all credit extended. If that ratio is rising, Klarna is either loosening credit (to keep growth alive) or seeing deterioration in its existing portfolio. If it is stable or falling, Klarna has room to grow without increasing financial stress.

Merchant growth and transaction volume are secondary metrics, but they matter as a leading indicator. If merchants stop onboarding Klarna or stop directing traffic to it, transaction volume will flatten and then decline. Klarna reports these regularly in earnings releases.

Finally, capital and funding matter enormously. Klarna does not fund all of its own credit; it sells some to partner banks or securitizes it, which lets it redeploy capital into new transactions. If Klarna loses access to funding (because credit markets tighten or because investors lose confidence), the company can expand only as fast as it can generate cash internally, which pinches growth immediately. The company has raised capital publicly and privately over its lifetime, and its ability to do so again in a stress scenario is not guaranteed.

The core question for anyone studying Klarna is whether the company can reach sustainable profitability while defending market share, or whether the combination of regulatory pressure, competition, and credit cycles will compress margins faster than Klarna can grow.