In a memory deep in my brain, I’m standing in front of a large storefront with my parents, about to join the modern world and purchase a color television. Still flashing in my memory of that moment is a neon sign in the shop’s window. It flashed a siren’s call of “Buy Now-Pay Later.”
Now, Swedish fintech Klarna is the modern-day equivalent of that neon sign. It’s using artificial intelligence and big data to enable both online and brick-and-mortar shoppers to immediately gratify their consumer urges. Still the same idea — payment installments — as what brought the NBC peacock in full living color into my boyhood den. It’s just been updated.
Klarna pays a merchant for purchases on behalf of a consumer, offering a range of options to settle the balance over the course of a few weeks or months. Since its founding in 2005, it has raised a total of $1.4 billion in funding. The most recent round gave it a $5.5 billion valuation, making it the most valuable privately held fintech in Europe. The fundraising effort has garnered some star power with its draw of both endorsement and an investment from rapper Snoop Dogg.
Klarna Represents a Trifecta of Disruption
With a platform that is shaking things up in e-commerce, financial services and fintech, Klarna seems to have a winning ticket. It’s the trifecta of disruption.
CNBC ranked Klarna No. 5 in its mid-June roster of 50 top disruptive companies. That’s three spots up from its 2016 position. “Online shopping pretty much has been the only way to buy most things during the coronavirus pandemic, and Klarna is all about making it easier for consumers to do that,” writers noted at the time.
To get a sense of the fintech, look at how it works. An online shopper enters a minimal amount of information — just their email and ZIP code — to make a purchase. Klarna immediately pays the retailer, collecting the amount due from the shopper based on their choice. They can pay now, in 30 days, in four interest-free payments or across six to 36 months with interest.
Klarna makes its money primarily from the fees it charges merchants, as well as fees on the consumer purchase. It’s the firm’s artificial intelligence tools and big data sets that enable it to model consumer behavior and repay patterns to keep arrears to a minimum. It touts a solution to boost sales by ensuring that fewer shoppers abandon their carts when they reach the payment part of the shopping experience.
As for those merchants, the company boasts that it is adding a new merchant every seven minutes. Klarna is present in more than 200,000 stores worldwide and through brands like Sephora, Swedish compatriot H&M and Adidas (OTCMKTS:ADDDF).
Rivals Chase Credit Card Alternative
Klarna is not alone in the fintech space offering an alternative to credit cards. Australia’s Afterpay (OTCMKTS:AFTPY) and California-based Affirm are tough competitors, each lining up retailers and partnerships with financial services providers. Ditto for fintechs Laybuy and Clearpay. Each offers both App Store and Google Play apps to let users shop, monitor orders and make payments.
What’s attracting millennials and members of Generation Z to these buy now, pay later platforms? In large part, it’s flexibility without the hassle.
Consider this. A credit card or a personal loan is going to generate a hard credit check on the applicant. Buy now, pay later apps — again, it’s about the AI and the data — are only doing a soft credit checks, which won’t hurt a consumer’s credit score. The platforms don’t set a minimum score needed for shoppers to use them.
The two demographic groups were scarred by the 2008 global financial crisis. Gen Z has an aversion to credit cards, something that keeps strategists at Visa (NYSE:V) and Mastercard (NYSE:MA) awake at night.
They also want more personalization in their shopping experiences, such as an alert when the price drops on an item that they’re following. Klarna founder and CEO Sebastian Siemiatkowski promises his app will “transform more and more into a one-stop shopping and financial management destination.”
Attracting Big Corporate Investment
Now that Klarna stock is firmly in the “Series E” phase of its funding — far beyond the horizon seen by many companies focused on equity crowdfunding — much of money is coming from corporate investments. These corporations are making strategic moves to get a piece of the fintech — in addition to seeking investment appreciation, they’re also helping their own businesses.
Case in point, last year’s $100 million investment by Australia’s Commonwealth Bank, which gave the bank an exclusive partnership in its home turf and New Zealand. “CBA’s investment further validates the buy now, pay later sector and the increasing trend for consumers, particularly millennials, to make payments via this method,” said Ophir Asset Management’s Andrew Mitchell. The fund manager is a long-time Afterpay investor.
After mulling a similar strategic investment in the payments fintech, Visa opted in January to outright buy Silicon Valley’s Plaid for $5.3 billion, roughly twice its valuation from its previous fund round. Visa’s CEO Al Kelly at the time called the deal a “long-term” play that would position his company for the next decade.
Similarly, Chinese mobile payments company Ant Financial purchased a small stake — less than 1% — of Klarna stock earlier this year, adding its name to the investor roster that includes BlackRock (NYSE:BLK), Permira and VC Sequoia Capital.
Platforms to Buy Klarna Stock
Investing in Klarna stock now means you are likely buying in at the height of its pre-exit valuation. In short, your upside will probably not be significant, but at least you’d be inside. In the case of an IPO, you get whatever benefit comes with the start of trading.
Should Klarna exit by acquisition, there’s cash or stock that could come along. And if the Swedish fintech decides to continue in private mode, that will most likely only stoke the value of your investment.
As for how to make that investment, you have several options.
Secondary marketplace EquityZen provides a platform for accredited investors to invest in pre-IPO companies, including Klarna. Several colleagues who have startup shares from either early investments or options received as an employee have recommended this platform.
Alternatively, SharesPost is a similar platform to invest in Klarna stock and has gained a solid reputation of focusing on the needs of individual investors. That strength is part of the reason that rival Forge is acquiring SharesPost, in a $160 million deal announced in May. Were I a customer of the SharesPost platform, I would expect the merger will only boost the individual investor experience.
Neither site’s onboarding is overly burdensome, and the disclaimers don’t seem out of the ordinary.
Keep Klarna in Your Sight
Regardless of whether you invest in Klarna stock in the near future, keep the company in your sights. It reported its first-ever annual loss in 2019. And unfortunately, that probably will be seen again as it invests big in new markets, including the U.S.
Also watch for how Klarna and its ilk come into view of global regulators. Watchdogs in home-turf Sweden are worried that the apps lure consumers into a payment and fees trap.
Robert Lakin is a veteran financial writer and editor, following fintech, agtech and property tech startups. He was previously emerging markets editor for Bloomberg News in Tel Aviv. He is a contributor to the Powered by Battery blog. Robert does not own any of the aforementioned securities.
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks