How Does Klarna Make Money? What You Should Know Before Using It

If you’ve shopped online lately, you’ve likely come across Klarna and other buy now, pay later (BNPL) services. Klarna allows you to split more expensive purchases into four interest-free installment payments. The Swedish startup offers financing and “pay after 30 days” plans.

At first glance, these can seem like a great payment option. After all, you may not have the cash on hand to make that purchase right now. But splitting the cost into four separate payments can make it seem more manageable.

As they say though, if something sounds too good to be true, it probably is. Klarna’s business model may offer convenience for shopping with online retailers, but this doesn’t mean it’s the best way to make purchases. 

So, how does Klarna make money? The answer can help you understand why you may be better off avoiding it and other BNPL services like Affirm or Afterpay.

First things first: Making money from retailers

Klarna primarily makes its money from the retailers who partner with it. So, when you purchase from Macy’s, Sephora or another e-commerce retailer, the retailer is charged merchant fees. This is typically a fixed 30-cent fee, plus an additional percentage of the transaction amount, based on the type of transaction.

Klarna also makes money through interchange fees (transaction fees paid by merchants when a credit or debit card is used) thanks to a special promotion that offers free Visa debit cards to its users. Merchants pay a small fee to the card issuer on eligible purchases using these debit cards, and Klarna takes a cut.

While these payment solutions may seem like they aren’t the best deal for retailers, many retailers continue to partner with Klarna and other BNPL services because these services encourage people to spend more money at their stores. For the companies, increasing their total sales is worth the cost of slightly smaller profits on each item sold.

Making money from shoppers

Klarna likes to advertise it has no transaction fees or interest charges for shoppers. But this doesn’t mean it can’t make money directly from you.

Klarna charges a fee of up to $7 for late payments or missed payments that haven’t been paid within 10 days of the due date. Late fees are limited to a maximum charge of 25% of your installment payment, and if your installment payment was $10, the maximum is $2.50.

That may not seem like a lot, but it can add up surprisingly fast — and easily, since Klarna’s four installment payments must be made over six weeks. 

For example, let’s say you have your Klarna account linked to your credit card. You have an upcoming installment payment of $100 due, but your credit card balance is so high that an additional $100 charge would push you over your credit card limit. When Klarna tries to process the charge, it won’t be able to go through. So, instead of just owing Klarna your installment fee, now also you’ll owe them the late fee.

You similarly run the risk of incurring late fees with other payment methods — like if you make a purchase with your debit card and you don’t have enough money in your bank account to make a payment, or if you forget to make a payment on your PayPal account. The more installment payments you owe, the easier it can be for this to happen!

Klarna also says that it may report late payments to credit bureaus, which could hurt your credit score.

Though not used as often as its other services, Klarna offers customers financing. Exclusively available for larger purchases, Klarna financing programs range from 6 to 36 months and charge interest fees of up to 19.99% APR. If you buy a product through Klarna financing, you’ll pay the original price tag for the item you bought, plus interest on the loan.

How does Klarna make money? By enticing you to spend more than you need

While Klarna’s fees for late repayment may not seem like a big deal, the real problem with using the Klarna app and other similar financial services is that they can trick you into spending more than you had planned — or more than you can afford.

Spending $1,000 for a TV can seem a lot less expensive when you sign up for a payment plan where you “only” pay $250 every two weeks. But all that money is still coming out of your account. 

If your Klarna account is linked to your credit card, you’ll also wind up paying interest to the credit card company on any part of the balance you don’t pay off after receiving your monthly statement.

It can be all too easy to focus on how much money you have to pay now and forget about the higher total amount you’ll still owe later. However, if you make many purchases through Klarna all at once, you could find yourself facing an overwhelming number of installment payments in the weeks ahead.

Even if you have a high enough credit limit to avoid maxing out your credit card, this can still cause problems for your account. A high credit utilization ratio lowers your credit score, making other lenders less willing to lend to you. And the more credit card debt you accumulate, the harder it will be to pay off your balance in full. Even if you avoid paying extra fees to Klarna, you’ll still give a lot of extra money to your credit card companies through interest fees.

Klarna doesn’t care about your credit card debt, especially since most of its revenue comes from retailers. The more you spend, the more the company earns, even if it causes you to buy more than you can afford.

Avoid Klarna and other BNPL services for financial peace of mind

As convenient as BNPL services like Klarna may seem, there is no getting around the fact that Klarna works by enticing you to spend a lot more at checkout than you normally would. Even when dividing a large purchase into multiple payments, the money still comes out of your bank account sooner or later. And if you link Klarna to your credit card, you could easily add insurmountable levels of credit card debt to your account.

Because of this, saving up is wiser, so you can pay for larger purchases up front rather than using Klarna or other financing options. This will make it easier to stay out of debt and help you learn to control your spending and savings habits. You won't risk overspending or have to worry about credit card interest or late fees.

The question “How does Klarna make money?” is ultimately not nearly as important as ensuring that you are in control of your shopping habits, rather than letting a fintech company get you to spend more than you should.

If you’re struggling with excess credit card debt as a result of using Klarna or other point-of-sale services, Tally† may be able to help. Combining your higher-interest credit card debts into a single, lower-interest payment can reduce your debt and gain control over your financial situation.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.