Last week, Swedish buy now, pay later (BNPL) scaleup Klarna gathered 4,000 employees in Stockholm. Social media footage showed people decked out in bandanas and Klarna Pink, including some Minions.
The celebration was also intended to celebrate the return to profitability of fintech. Klarna posted a small monthly net profit in May, its first profit since August 2020, but expects profits to increase further in the coming months.
Since its founding in 2005, most of its profits come from its core payments product, which derives revenue from partner merchants and late fees. Eight years after its launch in the US, Klarna has lost ground to US BNPL giants in its acceptance into the top 500 US e-commerce merchants, after years of increasing losses, according to a Morgan Stanley memo. It is said that it has surpassed both Affirm and Afterpay.
But Klarna has largely succeeded in offering consumers installment plans at online checkout, and competitors from Apple to PayPal are flocking to it. As BNPL's costs increase and competition intensifies, Klarna is developing alternative high-margin revenue streams alongside its broader vision of becoming the world's favorite way to shop.
“Looking at the BNPL space more broadly, it is only a matter of time before BNPL becomes the standard payment service everywhere. For example, companies like John Lewis are launching their own BNPL products.” , says Jeff Tigissen, FinTech Partner at Bain.
“So if you are a BNPL provider, you need to think very carefully about how you open up new revenue streams right now,” he says.
Affiliate Marketing: A Growing Revenue Stream
One of the emerging revenue streams for Klarna is affiliate marketing. This is a practice that dates back to the early days of e-commerce and has grown in popularity since Amazon launched its program in 1996. In affiliate marketing, a seller pays a third party platform, such as Amazon or Klarna, to generate leads for their products.
The company said in its 2022 annual report that its overall “marketing revenue” more than doubled that year, but did not provide exact numbers. However, it said its “affiliate marketing revenue” in the fourth quarter was SEK 1.6 billion ($144 million), representing 10% of its global revenue for the same period.
Klarna said that for the six months to the end of June 2023, 16% of its net operating profit came from “other” income. This is the category in which Klarna classifies marketing income and Klarna card exchange income.
A source close to the company told Shifted that Klarna's card exchange revenue is “negligible”. This may suggest that the startup's marketing revenue is contributing significantly to the overall total.
For comparison, Amazon's ad revenue accounted for just over 7% of its total revenue in Q2 2023, or just over $37.7 billion.
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Klarna started getting serious about how to monetize affiliate marketing in 2021, fulfilling what one former employee described as its goal of becoming a “discovery destination” for sales.
In 2021, the fintech company made seven acquisitions, including price comparison site PriceRunner, travel planning site Inspirock, and marketing companies Toplooks and Search Engine Marketing.
These allow users to use the Klarna app to search for “white Nike sneakers,” for example, and receive numerous suggestions for different Nike models, as well as sellers including prices and delivery schedules from sellers, including non-partners such as Amazon. You will be able to get a list of. Everything can be paid with Klarna.
Merchants pay Klarna for other forms of visibility, such as appearing higher on listings and being featured in push notifications to consumers. About 70% to 80% of sales through the Klarna app come from the search function, a person familiar with the strategy told his Sifted, adding that the company is ramping up its affiliate marketing proposition. Masu.
The success of Klarna's marketing strategy depends entirely on the people using the app. According to Klarna, as of December 2022, there were 150 million Klarna app users worldwide, 8 million monthly active users in the U.S., and 30 million downloads, with “demand for the Klarna app rapidly increasing”. Klarna believes that this has driven growth in the US.
“When Klarna sells software to merchants to help them with affiliate marketing, it costs them very little. It's not like a financial service, it's not a product. It's a high-margin software service,” says Klarna. says one of its key investors. .
“So when revenue goes up, it quickly goes down to gross profit and net profit.”
Visa and Mastercard's road to rivalry
But increasing affiliate marketing revenue is only part of Klarna's journey to becoming a bigger financial services company. The company's core payments remain its bread and butter for now, accounting for 57% of its revenue in the first half of 2023.
“Payment solutions are an important business for Klarna, and marketing is just a bonus,” says Joakim Dal, partner at GP Bullhound.
One investor who joined Klarna's cap table in 2021 said his support for fintech was due to its “infrastructure-like ubiquity” in the Nordic countries. In their eyes, that means fintech could eventually rival Visa and Mastercard on a global scale. He is one of the few that can attract both sellers and consumers.
“It is very difficult for any company to acquire many customers,” they tell Sifted.
“But it's really difficult to get a lot of consumers and sellers at the same time. Pure money alone won't do this, and it's always a chicken-and-egg problem.”
Klarna has not been shy about its ambitions to become a fully global bank.
In the company's latest financial report, CEO Simiatkowski said AI opens up the possibility for customers to have their “most trusted financial advisor” on their phone. , mentioned mortgage loans, spending analysis, and account switching as services included.
“Six months ago, this was a vision. Now it is a reality that we are actively shaping,” he wrote in the report.
And Klarna's former UK head previously told Shifted that Klarna wants to become “one of the five truly global retail banks”. He thought two of those companies would be Apple and Amazon.
Klarna builds customer loyalty by being the first to offer these enhanced financial services by being a 'discovery place' for customers to shop, compare prices and even receive discount alerts. Analysts say this is especially important in the rapidly growing U.S. market.
A source close to the company told Shifted: But when you own the entire shopping-to-pay process, you become something else. There is no upper limit on the valuation value. ”
Khurana did not respond to several requests for comment for this article.
