Swedish buy now, pay later (BNPL) giant, Klarna, recently made headlines with its spectacular employee gathering in Stockholm, a celebration fueled by its return to profitability. The fintech company managed toachieve a small monthly net profit in May, marking a significant turnaround since August 2020. With continued profitability in its sights, Klarna is on an upward trajectory that has left many industry insiders impressed.
Founded in 2005, Klarna has been a dominant force in the BNPL sector, deriving most of its profits from its core payments product, which includes revenues from partner merchants and late fees. Klarna's US launch eight years ago initially contributed to losses, but it has since outpaced American BNPL giants Affirm and Afterpay. A Morgan Stanley note revealed that Klarna has gained acceptance among the top 500 e-commerce merchants in the US, a remarkable feat.
However, the BNPL landscape is evolving rapidly, with competitors like Apple and PayPal entering the fray. This has led Klarna to explore new high-margin revenue streams aligned with its broader vision of becoming the "world's favorite way to shop."
One such revenue stream is affiliate marketing, a practice that has been around since the early days of e-commerce. Klarna has been actively pursuing affiliate marketing since 2021, aiming to become a "discovery destination" for shoppers. Through a series of strategic acquisitions, including PriceRunner and Inspirock, Klarna enables users to search for products like "white Nike sneakers" on its app, offering a curated list of options and merchants. Merchants pay Klarna for enhanced visibility, driving higher placement in search results and push notifications. This approach has proven highly successful, with 70% to 80% of Klarna app sales originating from its search function.
The success of Klarna's marketing strategy hinges on user engagement with its app, which has seen significant growth. With 150 million global users and eight million monthly active users of the Klarna app in the US, it's clear that Klarna's app is a central component of its strategy.
Affiliate marketing is a high-margin software service, which means that as Klarna builds its marketing revenues, it can expect significant contributions to gross and net profits.
Despite diversifying into affiliate marketing, Klarna's core payments business remains its primary revenue source, constituting 57% of revenues in the first half of 2023. Klarna's ambition, however, extends beyond payments. The company aspires to become a global bank, leveraging AI to offer services like mortgages, spending analysis, and account switching.
Klarna's unique position as a company that attracts both consumers and merchants positions it as a potential rival to global payment giants like Visa and Mastercard. Klarna's "discovery destination" approach aims to foster customer loyalty as a foundation for offering expanded financial services. As it solidifies its presence in the rapidly growing US market, Klarna's valuation is expected to continue its upward trajectory, propelled by its holistic approach to the shopping journey.
Klarna's recent profitability, diversification into affiliate marketing, and ambitious vision of becoming a global bank highlight its determination to lead in the evolving BNPL landscape and beyond.
