Revelation or Debt Trap? The Klarna Dilemma

In 2021, Klarna’s signature catchphrase, “Get smoooth”, transformed into “Get smoooth again” — making it clear that this Swedish fintech company was ready to help consumers all over the world get back into the swing of regular life.

Using the star power of big names like Snoop Dogg and A$AP Rocky to more niche influencers like Celeste Barber and Bretman Rock — Klarna has been successfully tapping into celebrity power and influence to get its brand name and “Buy now, pay later” mission out there for years.

Originally founded in 2005 by Sebastian Siemiatkowski, Niklas Adalberth, and Victor Jacobsson, Klarna is a fintech company that provides online financial & payment processing services for the eCommerce industry — such as direct payments and post-purchase payments.

But it wasn’t until 2014 that Klarna really hit its stride — when “The Klarna Group” was officially founded. Well-funded and recently merged with German SOFORT Banking, Klarna was then able to launch its services in the US in 2015 — which signified a large turning point for the brand, as the US became its principal focus for future growth and expansion.

As of 2022, Klarna has made impressive strides — gathering more capital, roping in numerous new investors, and even launching the Klarna card in the US & UK. However, with controversy surrounding the post-payment industry’s lack of regulation and numerous privacy concerns over the years, Klarna’s journey to success hasn’t been without its setbacks.

So, how did this small fintech startup become one of Sweden’s “five unicorns” in just ten years? This brand deep dive will provide all the answers — plus, three lessons other brands can learn from Klarna’s successes and failures.

Klarna’s “Smoooth” Road To Success

Source: Impulse

In 2005, Klarna’s three founders — Siemiatkowski, Adalberth, and Jacobsson — put their idea for Klarna up for the Stockholm School of Economics’ annual Entrepreneurship Award. Unfortunately, their idea wasn’t very well received, and they lost the competition.

In an interview with Whiteboard, founder Niklas Adalberth explained:

“The problem we faced was: we were three students, we had no money whatsoever, and no tech knowledge either. I mean, I did some homepages when I was younger, but no hardcore programming. We needed money and tech, which was hard to find. There was no commercial solution out there solving our need.”

Though the founders faced a real setback with their loss of the Entrepreneurship Award, they soldiered on. And by mid-2005, Klarna had launched operations in Sweden — thanks, in great part, to Swedish angel investor Jane Walerud.

A former sales manager for Erland Systems, Walerud not only invested capital but also put the founders in contact with the tech resources they’d need to Klarna get off the ground. Adalberth recounted how it all went down, saying:

“Three weeks later, she gave us 60 000€ (in) seed money for 10% of the company and 5 techies to build our platform in exchange for 37% of the company.”

While some may argue that this was a great deal of stake to give up so early in the game, Adalberth explained that though it “was a tough decision”, they realized that they “wanted to build something big”. And to do that — and do it well — they had to be willing to give up the necessary shares.

By the end of 2007, Klarna had attracted a new investor — namely, venture capital firm Investment AB Öresund, a well-known Swedish investment company. This influx of money allowed Klarna to expand to Norway, Finland, Denmark, Germany, and the Netherlands in 2010.

Within the same year, US-based venture capital firm Sequoia Capital entered the scene and the company saw an 80% increase in revenues. 2011 was another big year of growth for Klarna — with new investments of $155 million from General Atlantic and DST Global. In May 2011, the company acquired Israeli company Analyzed, which specialized in risk management and fraud prevention.

Over the next two years, Klarna expanded to Austria and merged with German SOFORT AG when they acquired SOFORT Banking from Reinmann Investors. This marked the point when Klarna officially became Klarna Group.

Shortly thereafter in 2015, Klarna launched in the US and was dubbed one of Sweden’s five “unicorns” alongside other Swedish powerhouses Spotify, Skype, King, and Mojang. By 2019, the brand raised another $460 million in funding and reached a valuation of $5.5 billion — officially becoming the largest fintech startup in Europe.

Cut to 2020, and Klarna continued to grow. From the acquisition of fashion platform, Nuji, to establishing a global partnership with Ant Financial, the payment affiliate of Alibaba, a Chinese eCommerce brand — Klarna was on a roll.

In February 2021, Klarna launched full-fledged bank accounts for a limited number of customers in Germany — complete with a Visa debit card and German IBAN. This was a huge shift, signaling the fintech startup’s evolution into a mobile banking app, with the goal of challenging the likes of N26 and Revolut.

By June of the same year, Klarna raised another $639 million — led primarily by SoftBank Group’s Vision Fund 2. — which increased the company’s valuation to a staggering $45.6 billion.

A few months later, Klarna also rolled out a “Pay Now” option for US consumers, allowing them to pay immediately instead of paying later, and the “Klarna card”, a physical card that permitted interest-free payments in stores or online.

As of 2022, UK customers have access to a physical “Klarna card”, accepted anywhere Visa cards are. With a waiting list of 400,000, it’s set to be another popular feature for the brand.

A Model Open to Criticism

However, it hasn’t all been smoooth sailing for this brand. Operating in a relatively new industry, the post-payment sector has been heavily criticized for seemingly encouraging consumers to enter into hopeless levels of debt.

Dubbed a “debt trap” in the UK by The Guardian, Jane Clack — a money advisor at debt advice firm PayPlan — explained:

“This form of introduction to credit does not encourage budgeting and supports the ‘I want it now’ purchases of items people may not be able to afford. We have seen a worrying increase in the number of young people contacting us for free debt advice. It now makes up more than a fifth of our total client base.”

To be fair, Klarna is somewhat transparent that, when accounts are left unpaid for several months, they are passed over to debt collection agencies “as a last resort.” But what many consumers don’t understand is that unpaid fees will affect their credit scores — a rather large side effect of negligence in a Klarna account.

In fact, these issues created such a stir that, as of February 2021, the post-payment sector is now subject to regulation from the UK’s Financial Conduct Authority. But it wasn’t just the UK that had issues with Klarna’s business model. Back in 2014, the Swedish Consumer Agency received a large number of complaints about reminder fees and threats from debt collectors — all without ever having received a proper invoice.

The Swedish Consumer Agency found reason to investigate the above-mentioned issues, as well as how Klarna was adding credit fees for partial payments. And Adalberth even admitted in a 2013 presentation at startup conference Arctic15 that:

“That is one of our revenue streams so actually the best customer is the one that doesn't pay directly but actually get a reminder and then also debt collection because we are able to add the legal fees."

Clearly, this upset many consumers and didn’t do much to increase brand trust for Klarna. But, the issues don’t end there — the fintech unicorn has also dealt with many privacy concerns.

On top of issues with regulation, Klarna has also had its fair share of privacy issues to contend with — one being that the brand allows customer information to be auto-filled. Normally, this wouldn’t be an issue.

But, in February 2020, Der Spiegel — a German newspaper — reported that the auto-fill feature allows anyone to discover sensitive personal information of Klarna customers. For example, phone numbers, postal addresses, and dates of birth — all based only on an email address or postal code of an existing customer.

This leaves Klarna customers quite vulnerable to identity theft and fraud. Though the brand does use strong authentication when registering a new customer, all it takes afterward to make a fraudulent order is knowing a customer’s postal code and email address.

Add in some mishaps with emails being sent to the wrong people and user accounts being exposed randomly to other users, and you’ll understand why many consumers view Klarna with a healthy dose of speculation.

Still, this fintech startup has been incredibly successful over the last seventeen years, and there are many things other brands can learn from Klarna’s journey.

More Funding, More Growth

However, in July 2022, Klarna closed an impressive funding round worth $800 million with a $6.7 billion post-money valuation — with is three times higher than it was in 2018. In the brand’s announcement, CEO Sebastian Siemiatkowski said:

“It’s a testament to the strength of Klarna’s business that, during the steepest drop in global stock markets in over fifty years, investors recognized our strong position and continued progress in revolutionizing the retail banking industry. Now more than ever businesses need a strong consumer base, a superior product, and a sustainable business model.”

This investment round received strong support from Klarna’s current investors, including Sequoia, the founders of Bestseller, Silver Lake, and Commonwealth Bank of Australia. According to the brand’s statement, these include “Mubadala Investment Company, the $284bn sovereign fund of the UAE, and Canada Pension Plan Investment Board (CPP Investments) which manages over C$539bn.”

Of Klarna’s future growth goals, Siemiatkowski said:

“Klarna is the only fintech in the world that has been profitable for its first 14 years of existence. In 2017 Klarna recorded a 12% EBT margin. The last few years however we have made significant investments as we took the opportunity to transform Klarna into a global player.

“With the recent shift in investor sentiment we also now shift our focus and look forward to returning to a modus operandi of growth and profitability. The foundation for a global leader has been set.”

Clearly, this fintech startup has been quite successful over the last seventeen years, and there are many things other brands can learn from Klarna’s journey.

3 Lessons To Learn From Klarna

Source: Klarna Press Kit

1. Be Strategic With Brand Partnerships

When Klarna takes on a new partner, it’s always for a good reason. The brand has grown impressively over ten or so years, with each new partnership being a strategic choice.

From Nike to Zara to Michal Kors, Klarna’s list of partners is extensive and impressive. With over 130,000 partners around the world, Klarna has been able to expand its reach in a large part through partnerships.

For example, take Klarna’s partnership with ASOS. According to FinTech Magazine:

“Not only is this an excellent match in terms of seamless spending, but Klarna has tapped into ASOS’s 80mn active customers across 250 countries, which, when paired with its increased order average equates to increased revenue that would notably benefit both companies. With the nature of this expansion, Klarna is moving to be a contender with PayPal.”

Source: Klarna

There are hundreds of thousands of brands that Klarna could partner with — but by choosing the ones that allow the brand to expand in an intelligent manner, Klarna saves both money and effort in the long run.

The Takeaway: When looking to expand and grow your business, spend a good amount of time considering which partnerships to enter into. If done correctly, brand partnerships can help your company evolve and expand successfully.

That’s why it’s important to never accept new partnerships without first considering all the benefits and drawbacks.

2. Use Branding to Stand Out

Most fintech brands stick to a serious, no-nonsense branding approach. Reason-driven and blandly trustworthy, most brands in the financial services industry use their brand identity to inspire trust.

But Klarna took a different approach. Between 2016 to 2017, the brand underwent a transformation and launched its first “Smoooth” campaign. According to Marina Chillingaryan of :

“The bank began the process of shedding the older layers of seriousness so typical to the financial industry; it began taking solid steps away from the traditional, reason-driven marketing and growth pattern so many competitors in the field complied to — and with it, kicked off the disruption of the payment industry immediately.”

The “Smoooth” campaign itself consisted of a “series of odd, whimsical videos infused with color and animation.” It also abandoned its “cold and serious (or as they call it, boring) blue hues and instead embraced the bold imagery and the pink color the brand is recognized for today.”

Now, when comparing Klaran to other brands in the fintech industry, there’s no doubt it stands out. And this fun, light-hearted brand image and marketing approach has connected very well with Millennial customers — one of the brand’s top target audiences.

The Takeaway: When deciding on your brand image, don’t be afraid to think outside the box. While it may be risky to take a bold or novel approach to branding within your industry, it has paid off for other companies before.

Just make sure that your new approach is a well-thought-out, fully-fledged concept.

3. Focus on Fostering Emotional Connections

Creating an emotional connection with customers as an online fintech brand may seem like a tall order, but Klarna has managed to do so quite impressively. This has been mostly achieved through the company’s unique branding, positioning, and customer-centricity.

There’s no mistaking the Klarna brand — it’s bold, fun, and whimsical. And for many consumers, this strong brand identity helps foster an emotional connection. Add in the star power of Snoop Dogg — one of Klarna’s shareholders — and the “Smoooth” brand image, and you’ll see why Klarna has been able to elicit strong emotions from consumers.

To forge an emotional connection, trust is a large factor. But as are entertainment, joy, and surprise. Consider the brand’s “House of Klarna” pop-ups from 2020 in Manchester and Covent Garden.

Source: Klarna

These pop-up stores featured “major partners of the brand such as ASOS, Oliver Bonas, Topshop, Topman, House of Holland, Missguided, BEAUTY BAY, My Protein and Schuh” and showcased their products and services for Klarna customers.

According to FinTech Magazine:

“The event is not only set to create further publicity for Klarna and its partners by devoting 10 days to talks, beauty and lifestyle sessions, but to act as something of a shrine to design and great customer experiences.

“Events across the three-story building will include a number of free beauty treatments, styling sessions with the aforementioned partners and yoga”.

By launching marketing campaigns such as this, Klarna has been able to show customers that their needs and desires are front and center. These fun, whimsical events also create an opportunity for Klarna to emotionally connect with consumers in inventive, entertaining ways — further cementing their position as a favorite amount younger consumers.

The Takeaway: In order to forge an emotional connection with consumers, your brand has to stand out in some way. After all, people can’t connect with a brand they don’t even remember.

However, there’s more than one way to emotionally connect with consumers, and you should stay true to your brand’s values and ethos to do so in a genuine way.

Final Thoughts

Klarna’s “Buy now, pay later” approach to making purchases has allowed it to become a leader in its industry and staple in the lives of many consumers — primarily younger generations who prefer to try products out before making a commitment.

But, the BNPL approach has also been a cause for concern, as more and more Klarna customers are finding themselves dealing with mounting debt. Still, Klarna has managed to become the most successful Swedish fintech company ever — and has no plans to slow down any time soon.

However, to successfully utilize the lessons learned from Klarna, you’ll need access to reliable consumer data — which can be acquired using brand monitoring software. After all, how can you mimic Klarna’s customer-centric approach without any data from your customers?

With this software, you have access to accurate customer insights, an easy-to-use dashboard, and cutting-edge machine learning — all of which will help you intelligently steer your marketing strategy and make better, more data-driven decisions.

Interested in growing your brand in the fintech industry? Learn how you can get fintech industry insights.

Updated by: Cory Schröder on 29.11.22