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Klarna: The Rise of Buy Now, Pay Later & Key Considerations for eCommerce Startups

Swedish Fintech company Klarna, has revolutionised the way consumers shop today, by providing Buy now pay later (BNPL) options on 100s of eCommerce, and in-store businesses.

But how? What is it they are doing so well and how have they gained such popularity?

This blog will look to answer all of the questions, providing you with insight into how Klarna has skyrocketed so quickly, the rise of ‘Buy now, Pay Later’ and why you should consider Klarna could be the way forward for your eCommerce business.

What is Klarna?

If you haven’t heard of Klarna or used their services before then you may not even know what they do! So let’s start from the beginning.

Founded in 2005, by Sebastian Siemiatkowski, with the aim to make shopping easier and more accessible to everyone - he now owns one of the most popular and market-dominating companies globally. As technology has evolved, and since making its debut in the U.K in 2015, Klarna is now the leading global payments and shopping service - valued at $45.6 billion.

It offers flexible ways for consumers to shop and currently has 90 million active consumers, through more than 250,000 merchants, in 17 countries. There are a number of services that Klarna offers, including; Buy now, pay in 30 days, pay in 3 instalments, and direct debits.

As well as its commitment to making shopping experiences more convenient the company also has a great sustainability ethos that uses its name and funding to promote planet health, diversity and financial wellness. They have shown their commitments by trying to eliminate gender inequalities by increasing the number of their female employers from 3% in 2019, to 39% today, and donating 1% of all funding rounds to initiatives that improve the health of the planet. The companies main mission is to make shopping accessible to all and they have used this to help encourage financial wellness - by installing budgeting tools and finance overviews in the app, and their multiple payment options allow consumers to choose which way suits their financial needs more.

Another reason Klarna has been popular with consumers around the world is due to its ‘no interest’ feature. Unlike most buy now pay later services, Klarna is unique in the fact that there are no interest or late payment fees applied to purchases - again embodying their mission to create financial wellness.

When making a purchase through Klarna there are also no ‘hard’ credit checks that you could be declined for, rather a soft search that proves your identity. This will not show up on your credit history and therefore is appealing to customers in all financial situations. Simply supply a credit/debit card and make your purchase!

So this all sounds great for consumers but what is it that retailers are so keen on, and why has Klarna gained such popularity?

Why do people choose Klarna?

Retailers who use Klarna on their website will pay a small fee to Klarna on each purchase made through them - which helps Klarna continue to profit from its pay later scheme.

But this begs the question, why do retailers need it?

Well, on average, there is a 70% industry-wide cart abandonment rate for online retailers - meaning that 70% of consumers are leaving their chosen items in their online shopping carts and not going through with the purchase - this could be due to not being able to decide whether its the right purchase, a long checkout process, or having to create an account.

Klarna appeals to online retailers as their service eliminates these factors, giving consumers more of a reason to purchase, as they can try out the order before they pay - giving them time to make a decision. Its quick and easy process is also a factor that's important for consumers, as we strive for more convenience. This, in turn, will help the retailer create more sales and increase profitability overall.

So, let's look at how many people are using Klarna, and why it might be the right choice for your business.

4 in 10 brits now admit to using a method of buy now pay later, for ease and convenience, with 9.5 million people saying they would avoid shopping with an online retailer who didn't offer a buy now pay later service. With this growth in demand, Klarna has been successful in becoming the most popular buy now pay later service for U.K consumers. Since Klarna debuted its app in 2018 it has seen an increase of active monthly users by 3143% - with 460,00 active monthly users in the U.K - that's in just a year and a half!!!

So, this proves why retailers are keen to use Klarna’s services, why is it so popular with consumers?

Well, If we take a look at how Covid-19 has affected consumer shopping habits we will see that the demand for ‘Buy now, Pay later’ was heightened massively. One of the effects Covid-19 had on many people was financial insecurity, whether that be due to being furloughed, long term illness or shortened working hours. This meant that many households were on the search for some kind of liquidity, to provide them with some more security, and as many banks were cautious of providing loans, or credit cards during a time of financial unknown - many people were pushed to use buy now, pay later services. The popularity has continued throughout 2021 and is likely to remain for the new few years at least.

As the world went into lockdown we saw shops close, and online shopping became the norm for most. There was no way to try before you buy - you couldn't go into a clothing store or a tech shop and see the quality of the tv, or see if that top you wanted suits you. So, many people converted to using buy now pay later, in a way of eliminating a long refund process if they weren't happy with the item they purchased. For many, these habits are here to stay, as the use of Klarna’s services continues to grow.

Klarna’s audience

We’ve looked at the reasons why people are using Klarna and why it has grown so quickly. But it's also important to know who is using their services?

According to research, younger generations are far more likely to purchase Klarna. Klarna seems most popular amongst millennials (1981-1996) with 54% saying they use BNPL methods. Generation Z also follows closely with 50% saying they use this payment method.

And there's no wonder why that is. Klarna and other similar BNPL companies are highly active on social media and a lot of their campaigns, and the way they market themselves are targeted towards this younger audience.

There is no doubt that Klarna’s fresh marketing and creative branding strategy was a key factor in their rapid growth, market domination, and definition of their target consumer. Using brand ambassadors such as Snoop Dogg was a major turning point for the brand, which spoke to their audience in the best way possible. They created a brand that consumers could connect with, and became a household name quickly. They wanted to steer away from the typical ‘serious’ driven voice of a fintech company, so they could develop emotion-based relationships with their target audience. Using someone like Snoop Dogg in the ‘Smoooth’ campaign was so smart and a perfect way to show its credibility as a company, and define its audience.

Online shopping has skyrocketed since the pandemic began and with the majority of online shoppers ranging from 18-35 years old, it is no wonder millennials are Klarna’s main audience.

Why you should consider Klarna for your eCommerce business

Klarna has taken the eCommerce industry by storm, generating more sales, and creating more revenue for companies that use its service. So, if you aren't using it for your eCommerce business yet, why not?

Ecommerce is the latest retail trend, with its demand heightened due to Covid-19 - with the growth of online shopping in the U.K reaching a new high. Ecommerce was the only option for many during lockdown, but we haven't seen its growth stopping since the easing of lockdowns - with U.K consumers expected to spend a total of £141 billion online, by the end of 2021. With the increase in sales for eCommerce businesses Klarna also believes it could increase sales by a further 30%, and increase average spend by at least 34%. So if that's not a good enough reason to include Klarna in your payment methods then what is?

One thing that may put businesses off using Klarna is the thought of ‘pay later’, as they may think that they don't receive payment at once - but this is not the case. When a customer purchases through Klarna, Klarna pays the merchant the sale, and then once the customer is happy they will pay Klarna. Klarna does keep a small fee from the sale - but promises to increase your sales.

If you're finding that you're struggling to close the sale with a customer, and are noticing a high number of cart abandonment, then a BNPL service may be the way forward for you. Setting up your own short term loan service can be risky, financially and legally - so partnering with a service such as Klarna, would save you any of the risks, and hopefully help see improvements in your sales. Some of the most highly notable partners range from fashion stores such as ASOS and Missguided to electronics companies such as bose. Anyone whos anyone in the eCommerce world is using Klarna.

Though, if you are considering using Klarna for your eCommerce business it is important to look at what the future holds for the company, and how its future could affect you.

The future of Klarna

When Klarna first started it could only generate sales through its official partnerships - where their services showed up as a payment method on the website. However, since the update of their services, you can now use the Klarna app to split payments into three at any eCommerce store.

Using the app to shop products you can create a ‘one-time’ card with the value of your chosen purchase, the app will then take you directly to the online store where you will then choose to pay by debit or credit card - but instead use the details from the one-time card provided by Klarna. This is increasing Klarna’s accessibility massively, and making its appeal to consumers greater.

To help stay on top of changes in eCommerce trends, as of late 2020 Klarna opened their ‘Klarna Future Shopping lab’ - a research project that will explore and anticipate the future of what eCommerce holds.

“When we are developing our services, we always look at ways to remove friction for shoppers and retailers. With Klarna Future Shopping Lab, we want to broaden our horizon and look at the bigger picture of how shopping and retail will evolve in the coming years.”

Rasmus Fahlander, Director of Purchase Experience at Klarna

The research proves that Klarna is committed to staying on top of upcoming changes to the eCommerce world, which again increases its credibility as a stable company that will aim to benefit your business.

In the next few years, Klarna is set to begin allowing IPOS (initial public offerings) where people will be open to investing in or trade company shares. They’re yet to announce who will be allowed to invest, or how much it will cost, but it is predicted to be open to the London stock exchange, as founder Sebastian Siemiatkowski believes Brexit could be the perfect time for London to ‘solidify itself as a world fintech leader’. This change could be the beginning of many new things for Klarna so keep your eyes peeled and on top of what they're doing if you're considering partnering with them for your eCommerce business.

Key Takeaways

  • 15-year-old company Klarna is now Europe’s largest fintech company, valuing at $45.6 billion this year.
  • Klarna aims to make shopping more accessible to everyone by providing smart and flexible ways for consumers to shop, by offering BNPL services.
  • Klarna currently provides its services to 250,000 merchants, in 17 countries.
  • As well as their commitments to making shopping easier, they are also committed to creating a business that is sustainable and aims to better, financial wellness, diversity and overall planet health.
  • Covid-19 has had an effect on consumer shopping habits that saw the demand for ‘Buy now, pay later’ heighten massively. This was one of the reasons for Klarna’s growth in popularity, as it eliminates the need for in-store shopping - promoting eCommerce businesses.
  • Klarna seems most popular amongst millennials (1981-1996) with 54% saying they use BNPL methods. Generation Z also follows closely with 50% saying they use this payment method.
  • Klarna believes it can increase businesses sales by a further 30%, and increase average spending by at least 34%.
  • Notable partners range from fashion stores such as ASOS and Missguided to electronics companies such as Bose. Anyone who’s anyone in the eCommerce world is using Klarna.

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