How does Klarna make money? Here’s how

Klarna feels like one of those offers that’s too good to be true. The payment service is increasingly popping up on shopping sites, offering to let you pay for goods in instalments with no interest charges. If it’s not charging you interest, how does Klarna make money? What’s the catch? Let’s find out if there is one…

Three ways Klarna makes money

There are at least three ways in which Klarna generates income, which we’ll explore in more detail below. They are:

• Fees charged to retailers
• Late payment fees
• Interest on longer-term finance deals

Klarna fees to retailers

Retailers who offer Klarna payments pay the company a fee for every transaction Klarna processes. This is similar to the fee retailers have to pay to debit and credit card companies.

Klarna generates tens of millions of transactions every year, so the small percentage it charges in fees for each transaction add up to a rather tidy sum.

Klarna late payment fees

As we stated at the top, Klarna doesn’t charge interest to consumers on some of its payment schemes. However, it has introduced fees for those who don’t make their repayments on time.

The company will start charging a £5 fee to customers who are late with payments from 16 March. Fees will be capped at 25% of the order value with no more than two fees per order.

In an interview with City AM, Klarna’s UK chief claimed this was good for customers. “Not charging fees feels consumer-friendly, but we’re worried it drives the wrong behaviour,” said Alex Marsh. “Our data now shows that a total absence of late fees actually leads to less favorable outcomes for customers: with less reason to pay on time, customers are more likely to miss a payment.” Hmmm…

Interest on long-term financing

Klarna doesn’t charge interest when you choose to pay in 30 days’ time or pay in three instalments. However, it does offer longer-term finance deals where conventional interest rates are applied. Klarna describes this as a “small interest charge”, although it’s actually up to 18.9% APR. You can get a conventional Santander credit card with an interest rate that’s not much higher (22.9%) and Santander aren’t often confused with The Samaritans…

Does Klarna actually make money?

Not at the moment, no. Quite the opposite, in fact. The company’s annual net loss had grown to $1bn (£820m) in the last financial year, according to The Financial Times. It has previously been profitable, but it’s not expected to be back in the black until 2024 now. The company’s value has tanked in recent times, down from $46bn to $6.7bn last year. That’s a fall of 85%. Ouch.