Case Study: Building a Buy Now Pay Later Business

Introduction

The buy-now-pay-later business (BNPL) model is gaining popularity in South Africa; Payflex, 4months, and Pay Just Now are all establishing themselves in South Africa. Although there are some concerns surrounding the sustainability of the business model, the convenience it grants consumers cannot be ignored. Today we look at Klarna and what lessons entrepreneurs can learn from a BNPL startup that reached unicorn status.

What does Klarna do?

Klarna is a Swedish BNPL startup founded in 2005. Klarna enables customers to pay for products in 4 equal interest-free payments, within 30 days. Its leading investors are Institutional Venture Partners, Sequoia Capital, and General Atlantic. According to Crunchbase, Klarna is valued at over USD6.7 Billion (a significant drop from its USD45 Billion valuation). It boasts more than 147 million active users, of which 17% are USA consumers. Consumers can purchase items from the Klarna app or their favourite stores (online and physical outlets).

What is the value proposition?

Have you ever really wanted the perfect outfit but were strapped for cash? Klarna solves that issue. Klarna's value proposition is very clear: it enables consumers to buy and receive anything they want (unlike the traditional lay-by model), to pay in 4 interest-free instalments and does not adversely affect consumers' credit scores.

How do they generate money?

Klarna operates like a bank: it receives income from merchants, interest on loans, late payment fees and interest on cash. According to Klarna, commission income was SEKk 11,254 million in the 2021 financial year and interest income was USD 471 million. Furthermore, Klarna charges up to $7 for late payments and customers are not allowed to purchase other items until they have settled any outstanding fees.

What does it cost?

Klarna's financial results reveal a loss of more than SEKk 7 million for the 2021 financial year-end. Klarna's BNPL business model is very risky as Klarna pays the retailers before consumers settle the interest-free instalments.

Risks associated with the BNPL business model?

The most significant risk Klarna and similar businesses may encounter is credit risk: high-risk customers may default on payments leading to financial losses. Furthermore, Klarna also experienced a 'market risk' as its valuation plummeted by 85% due to investors' concerns.

Sources for facts and figures: Klarna media press releases