Meet Klarna: The Company Leading the Global Buy Now Pay Later (BNPL) Industry

Hello Everyone - Harry here 👋

Welcome to Issue #19 of Deep Dive with Inquisition. In this issue, we’ll cover the story of Klarna, one of the world’s leading Buy Now Pay Later (BNPL) Fintech, serving over 85 million users from around the world across 575,000 merchants from over 55 countries. The company holds an valuation of $6.7 Billion according to the 2022’s company valuation. We’ll explore everything from its founding story to the strategies that have helped it become the company it is today.

Early Days of Klarna:

Klarna Bank AB, commonly referred to as Klarna, is a Swedish fintech company that offers online financial services, including payment processing for the commerce industry. Best known for its presence in the 'Buy Now, Pay Later' (BNPL) market, Klarna is one of the leading BNPL service providers globally. The company was founded by Sebastian Siemiatkowski, Niklas Adalberth, and Victor Jacobsson after participating in the Stockholm School of Economics' Annual Entrepreneurship Competition in 2005, held in Stockholm, Sweden. Klarna is backed by various investors, including Sequoia Capital, Silver Lake, Bestseller Group, Dragoneer, Permira, Visa, Ant Group, and Atomico.

Overview of the Global Buy Now Pay Later Market:

1. The BNPL market can be estimated as a $370.02 billion market.

2. The BNPL market is estimated to reach a Compound Annual Growth Rate (CAGR) of 17.06% from 2024 to 2033. 

3. Juniper Research has predicted there will be over 900 million users globally using BNPL service by 2027 with the industry having 360 million users in 2022.

4. According to The Global Payments Report 2024, Sweden has the world’s highest rate for Buy Now Pay Later (BNPL) use in 2023 with 21% of the e-commerce transaction happening through BNPL.

5. According to The Global Payments Report 2024, BNPL accounts for around 5% of e-commerce spending in the U.S., which translates to around ~$105 million during 2023.

6. According to “EMarketer”, “[a]lmost 75% of BNPL users in the US are Gen Z or Millennials”.

The Rise of Klarna: How it was first started

The founding story of Klarna dates back to 2005, when the founders were university students working at a local Burger King—flipping burgers and consistently brainstorming new business ideas. Klarna was first introduced during an entrepreneurship competition hosted by the Stockholm School of Economics as a solution to the pain point of complex and slow online payment checkouts. However, the judges at the competition deemed the idea “unrealistic,” and it failed to win.

Despite the negative feedback, the founders continued to pursue their vision of simplifying online payments. They were accepted into an accelerator program, where they pitched their initial concept of Klarna at an end-of-year networking event. An angel investor, impressed by the concept and its potential, contributed €60,000 (approximately $65,427 as of October 15th, 2024) and brought four engineers onto the team.

During this time, the founders also managed to convince a small Swedish e-commerce retailer to adopt their payment solution (BNPL). When they first launched, the founders decided to pay the merchant upfront, allowing customers to receive their products first and pay within 30 days. This model worked for several reasons:

• The merchant received the payment upfront, mitigating the risk of non-payment by the customer.

• The checkout process became simpler and more accessible for the customer.

• Customers could try the product before making a payment, lowering the risk for them.

These factors led to increased sales and a higher adoption rate of Klarna’s BNPL service; creating a win-win scenario: customers enjoyed a smoother checkout experience, while merchants no longer feared losing money from unpaid transactions.

Like most startups, Klarna didn’t gain traction as quickly as the founders had hoped. However, over time, the company continued to make progress, which allowed it to expand from Sweden into the Nordic region and other parts of Europe. Klarna consistently solved pain points for online shoppers while helping businesses drive higher sales.

Early traction in the Swedish market became a key validation point for the company and its investors. This success led to rapid expansion into the Nordic region (Finland and Norway), as well as other European countries (Germany and the Netherlands). In 2010, Klarna secured Series B funding from the major venture capital firm Sequoia Capital.

As Klarna grew, the company rebranded from “Kreditor” to “Klarna.” It also acquired the German payment service company SOFORT, creating “Klarna Group,” and expanded its presence across Europe. Klarna further broadened its services, introducing “partial payments,” which allowed users to pay in installments. This enabled Klarna to capture a new group of users and expand its addressable market.

With a mission to smooth commerce and make shopping and payment easier and safer, Klarna became one of the most trusted and popular BNPL fintech companies in the world.

How did Klarna Become One of the Biggest and Fastest-Growing Fintech inside the BNPL Market?

Never giving up. If someone asked me to describe Klarna’s success in one phrase, it would simply be: never giving up. From an outsider’s perspective, it looks like a utopian story—securing an investment of €60,000 with the investor adding value by bringing in four engineers to build the product, and eventually expanding from the Nordic/European market to the U.S. market with backing from one of the world’s biggest investors, Sequoia Capital. It all seems like a dream come true.

However, what most people don’t realize or understand is that they are too focused on the end result and not the process. The journey to Klarna’s current success was brutal for the founders and the company, from continuous internal conflicts to a major flaw in the contract with the founding engineers—resulting in giving away more than 50% of the company. Nothing was handed to them. Despite the challenges, what made Klarna the company it is today wasn’t just funding from reputable investors or millions of capital—it was the founders' mentality of not giving up.

The factors that contributed to Klarna’s growth and success include: persistence, their drive to solve a critical pain point, and their strong conviction that their idea, market, and solution would fundamentally change how transactions were conducted.

We must remember that Klarna defied the odds to become:

• One of the biggest and leading BNPL service providers globally.

• One of the few unicorn companies from Sweden.

• A company that significantly impacted how people shop in Europe, particularly in Sweden and Germany, through its product.

By leveraging these factors, Klarna not only attracted users and experienced rapid growth but also shaped the future of the BNPL service. Klarna influenced mass consumers and merchants worldwide, introducing an entirely new concept of being paid and paying.

By 2024, Klarna generated approximately $2.23 billion in revenue for 2023 and was valued at $6.7 billion in July 2022. Furthermore, in 2023, the company achieved a new record for GMV (Gross Merchandise Value), reaching $93.2 billion, a 17% increase from 2022. The U.S. market became its most dominant, generating $133 million in gross profit. Klarna has raised approximately $4.5 billion across multiple rounds from various institutional investors, including Sequoia Capital, HMI Capital, Ant Group, SoftBank, Visa, the Bank of Australia, Silver Lake, TCV, and more.

Below are the strategies that contributed to Klarna’s growth:

1. The Art of Never Giving Up:
    → Whether it was being rejected, losing more than 50% of the company shares due to a bad contract with the early engineering team members, or facing an economic downturn, constant challenges have been inevitable for Klarna and its founders. One of the most important traits for a founder is the mentality of never giving up, no matter how difficult the challenge or journey may be. The startup journey is a rollercoaster filled with highs and lows, and the founders of Klarna have exemplified the art of perseverance—a valuable lesson that can be learned from Klarna’s story.

2. Always be adaptable:
    → Klarna initially started as a BNPL service, offering payments exclusively for e-commerce purchases. However, as shifts occurred in consumer behavior, the merchant landscape, and the financial and regulatory sectors, the company adapted to these trends and evolved into a broader fintech company. Klarna now provides a seamless online shopping experience, offers credit cards in specific regions, and has even expanded into physical stores, where Klarna is accepted as a payment option. These actions demonstrate the company's consistent adaptability, leading to continuous growth — a crucial lesson for startups and companies alike: always be adaptable and responsive to market shifts while maintaining core company values.

3. Global Expansion is not an option - it is an must:
    → Whether you are a conglomerate or a startup, global expansion in 2024 and the coming years is essential. To achieve economies of scale, you will eventually need to go beyond your specific operating region. Klarna, for example, is a prime example of successful global expansion. As a Swedish company headquartered in Sweden, it initially focused on its local market before expanding into nearby markets, such as the Nordic countries and then other European nations. After building a strong track record, the company officially entered the U.S. market in September 2015 and has aggressively expanded within it, making the U.S. its largest market. This underscores the importance of continuing to pursue global expansion due to the increased opportunities available, regardless of whether you are a startup or a conglomerate. Additionally, when entering global markets, it is crucial for a company to choose a market that can significantly contribute to its growth, specifically by targeting potential users. The U.S., for instance, is an ideal market for Klarna due to its high transaction volume and strong average consumer spending.

4. Leverage partnerships to scale:
    → One of the best ways to further scale your company after building a solid foundation is by establishing and leveraging partnerships. For example, one of the major partnerships Klarna established was with Stripe. Klarna is offered as a payment option for businesses that use Stripe to receive payments from their customers. This partnership allows users of both companies to achieve the following:

   • Potentially boosting conversions and revenues for businesses that use Stripe as a payment processor due to the increased payment options available to their customers after adding Klarna.

   • Increasing market share and transaction volume for Klarna among both merchants and consumers.

   • Enhancing brand awareness for both Klarna and Stripe.

   • Increasing revenue for Klarna.

5. Make your product sticky by continuing to add value:
    → There are many fintech companies offering BNPL services. Since BNPL is not exclusive to Klarna and is not patented technology, the entry barrier for providing BNPL services can be considered low. This is why Klarna has added additional value-added services for its users, such as shipping tracking, AI shopping assistance, and shopping rewards and cashback programs. The company continues to create value beyond its core BNPL offering. This is a crucial lesson for companies: it is important not only to navigate competition but also to consistently provide value and reasons for users to continue using your product or service. Creating additional value-added services is essential.

Challenges for Klarna:

1. Navigating through the intense competition:
    → As the company navigates the global market, Klarna is experiencing intense competition from local and global competitors like Affirm and Afterpay, which are also leading fintech companies offering BNPL services. It is crucial for Klarna to continue enhancing its value proposition for both users and merchants, as well as expanding into new regions where it has not yet established a presence, either by directly launching its service or partnering with a local competitor.

2. Navigating through the Economic Situation:
    → It will be crucial for Klarna to navigate the current economic environment due to the company’s exposure to macroeconomic factors that can significantly influence its operations.

Future of Klarna:

1. Further Expansion into Global Markets:
    → Klarna is expected to continue its global expansion, particularly into regions with high e-commerce activity and strong consumer demand for alternative payment options like BNPL. Following its success in the U.S., Klarna may target other large markets, such as those in the Asia-Pacific or Latin America.

2. Continuing to focus on its Users:
    → We can expect Klarna to focus on improving the user experience by adding new services that make shopping and payments smoother and easier. For example, the company recently introduced an AI assistant to help users with their shopping and enhance the overall experience. This kind of continuous improvement and diversification of product offerings is something the company will likely continue in the future, further refining the user experience.

Key Takeaways from the Story of Klarna:

The story of Klarna teaches us an important lesson: nothing in this world is truly “impossible.” Every successful company, founder, or individual has faced struggles throughout their journey and overcome them. For Klarna's founders, it was their first time building an investor-backed company, their first time managing employees, and their first time successfully scaling a business. In fact, they were university students with a great idea, the ability to execute quickly, and the determination to never give up.

Most people focus only on the end result of a person or company, often envying their success. However, few are willing to endure the process that leads to that success, even if there’s a guarantee they’ll achieve the same result. This reluctance comes from wanting the outcome without going through the challenges. Another lesson from Klarna’s story is the importance of trusting the process. I personally believe that trusting the process means having 100% conviction that it will work, even when faced with rejection, the constant fear of failure, and the challenges of working with both good and difficult people.

Below are the key - strategies that Klarna used to become the company it is today:

1. The Beauty behind Never Giving Up:
    → Klarna is one of the few startups from Europe to achieve unicorn status, and what makes it even more special is that it was the founders' first time creating a billion-dollar company. In fact, Klarna is one of only five unicorn startups from Sweden, making the founders' journey especially challenging, as there were few places or people they could turn to for advice on building a company as large as Klarna. From ambitious university students flipping burgers at Burger King to managing a company with billions in transactions and over 1,000 employees—this success was possible because the founders never gave up and continued to navigate their journey despite the challenges.
   A key lesson from the startup world is that successful founders never give up, not only due to their strong conviction but also because giving up simply wasn’t an option for them. Having access to every possible resource—capital, networks, and top talent—doesn’t guarantee success if the foundation isn’t there. The foundation of building or doing anything significant lies in truly understanding and embracing the importance of never giving up on the process.

2. The world is your playground:
   → Many founders are hesitant to step outside their local target markets. Whether you are a founder creating physical products or providing services to consumers or businesses (B2C or B2B), the world should always be your playground. For example, Klarna, a Swedish company, entered the U.S. market in 2015 with the ambition to succeed. Fast forward almost 10 years, and the company has indeed conquered the U.S. market, making it its largest revenue stream, despite accounting for only 5% of the regional e-commerce transactional value. The more globally you think, the more opportunities you can access after securing your local target market. Companies can tap into new customer bases, diversify their revenue streams, and enhance their overall impact. Entering the global market can be achieved through direct expansion, like Klarna, or by leveraging partnerships with local competitors, as Uber did in markets like Vietnam.

3. Identify an Win Win situation for your company and potential partner:
    → Klarna is one of the companies that has leveraged partnerships to expand into new markets and acquire customers from different regions. For example, its partnership with Stripe opened up various new opportunities for the company, highlighting the importance of forming partnerships that bring value to both parties. Another great example is the partnership between Klarna and Visa, with Visa becoming a strategic partner for Klarna's card network as well as an investor in the company. This partnership ultimately enhanced trust and expanded Klarna's network and approachability.

4. How sticky is your product?
    → Klarna started as a simple yet powerful online payment solution company, allowing users to receive products first and pay after delivery. Today, the company offers a wide range of services under its BNPL umbrella, including “Pay in 30 days,” “Pay in 3 or 4 Installments,” and “Pay Now.” Additionally, Klarna provides the Klarna card, making BNPL available in physical stores. Klarna leverages AI for a personalized shopping experience, helps users track and manage payments, and provides insights into spending habits. With its acquisition of a banking license in 2017, the company is also exploring future banking services.
   By continuously diversifying its product offerings while staying connected to its core BNPL services, Klarna has expanded into new areas, making its products sticky and increasing their value to both existing and potential users. This strategy has also helped create a competitive advantage, setting Klarna apart from its competitors.

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Thank you so much for reading!

-Harry