Klarna – merchant payments still prospering

Commentary on Klarna’s H1 results focused on its ballooning losses and the uncertain outlook for BNPL as we enter tighter credit markets. Klarna has reacted by cutting staff and scaling back investment plans. Consumer credit is outside our scope at Business of Payments but the merchant side of Klarna’s business is still a very profitable operation.

Total gross merchandise volume was up just 5% year on year to $41bn for the half year. 

The US and UK are “the main drivers of volume growth”, up 109% and 70% respectively. More of the top 100 US retailers take Klarna than either Affirm or Afterpay. Of course, all the top 100 take Visa, Mastercard, Discover and, very probably, Amex and Paypal too. Competition for “top of wallet” is fierce and not just in the US as you can see from JD Sports’ checkout below. It’s going to take a great many marketing dollars to persuade shoppers to keep clicking on your logo rather than one of the other options.

Net operating income was up 12.3% at $872m. The positive result masks a 7% fall in dollar terms in Germany and a 20.8% decline in Sweden, Klarna’s home market. With its more mature markets going backwards, there is clearly a worry that the proposition has a shorter runway than management had hoped.

One of Klarna’s strengths should be the operation of a two-sided business model. It makes money from charges to both merchants and shoppers. Net operating income from its 450K retail partners grew 8.6% to $467m in H2 while that from 150m consumers fell 9.1% to $293m. This works out as $1038 from each merchant but just $2 for each consumer. Klarna is making much more from merchant payments than consumer credit. Take rate from retailers (operating net income/GMV) was a very healthy 1.14% in H2.

Klarna was profitable until 2019; its business model brilliantly conceived to help merchants in Sweden and Germany digitise the slow and risky processes of invoice payments. Klarna’s innovation was to take title to the goods at checkout. Conversion rates went up and merchants’ credit losses went down. Happy days. 

It’s now clear that this model has been difficult to export profitably to card payment markets including the UK and USA. Klarna has been forced to adapt by focusing less on merchants and more on building a consumer brand equal to the superapps which have proved so popular in the Far East. 

The Klarna App now includes price comparison, stock checking, offers and retailer promotions. Of the 150m Klarna users, 23m have the app and growth is reportedly strongest in the USA. New features announced in H1 include video links with product experts at leading brands and an in-app loyalty digital wallet allowing access to 8,000 loyalty and reward programmes worldwide with no need for plastic cards. None of this development comes cheap.

Klarna believes that its app drives consumers to visit retailers (both online and F2F) and that it can charge merchants for the additional footfall. Marketing services revenue was up 200% in the half-year although the dollar revenue was not disclosed. 

Interestingly, Klarna has built an in-house openbanking API aggregator and is now commercialising the capability to 3rd parties as Klarna Kosma. This is a crowded field but Klarna does have the benefit of a proven A2A technology team at Sofort, the German bank payment specialist it acquired in 2014. Kosma is believed to be running at 200m/tx per annum with customers including SIBS (Portugal) and Airbank.