How Klarna Lets You Pay Later With No Interest

Klarna, a financial technology company based in Stockholm, Sweden, is changing the way consumers pay for online products. The company offers a unique “buy now, pay later” option, which allows shoppers to order online products in just a few clicks – without paying a dime upfront.

When consumers visit a website powered by Klarna, they simply input their email and shipping address to purchase products. If shoppers decide they want to keep the products when they receive them in the mail, they have 14 days to pay Klarna back using any payment method of their choice Otherwise, they can return the products.

Founded in 2005, Klarna is currently worth a whopping $2.25 billion. The successful fintech company dominates internet transactions in Sweden, its home country, where it now processes an unprecedented 30% of all online sales. Klarna continues to expand across Europe, where it is available in 17 countries – and now the fintech unicorn is conquering the U.S. 

Last year, Klarna opened offices in New York, San Francisco and its North America headquarters in Columbus, Ohio, which quickly grew from just a few employees to 85 workers. Within the next three years, the company expects to have as many as 500 employees at its Columbus location. In 2015, Klarna also scored its first U.S. clients – Overstock.com and Shoes.com – and the fintech company continues to pick up new partners.

Klarna’s “try before you buy” model has proven to be wildly popular with online shoppers. With Klarna-powered websites, consumers have only to provide an email and shipping address, nothing more. There’s no need to set up an account or type in credit card information, which makes the transaction incredibly quick and easy.

Klarna is also appealing to online retailers, who often struggle to entice shoppers to purchase a product after adding it to their cart. In fact, nearly 74% of orders were left “abandoned” in online shopping carts in the third quarter of 2016, according to Statista. Some experts believe many of these online shoppers are turned off by a lengthy check-out process that requires filling out a series of fields and entering their credit card number.

Even better for retailers, Klarna assumes all the financial risk of encouraging shoppers to close the deal without payment. When the online retailer ships the product, Klarna pays the merchant directly, then sends a message to the consumer allowing 14 days to pay or return the item. Throughout the process, the Klarna name remains invisible to the shopper.

But how exactly does it work behind the scenes? Klarna uses cutting-edge computer programming that quickly determines if a shopper is a legitimate person and has good credit based on his or her email and shipping address. If a shopper doesn’t cough up the cash after multiple requests for payment, Klarna works with a collections agency. However, Klarna’s North American CEO, Brian Billingsley, says the fintech’s overall loss rate is lower than that of major credit card companies.

Earlier this year, Klarna announced the launch of its own credit product, which means the company can now extend a line of credit online. This way, online shoppers in the U.S. and Europe (in 18 countries total) can actually take out loans from the company to pay for products. A number of major online merchants, including Bigcommerce, Shopify, OpenCart and Cybersource, will offer credit lines through Klarna.

While Klarna already has a banking license in Europe, the company is working with a lender called WebBank to make loans in the U.S. However, Klarna has future plans to purchase its own bank in the U.S.

Klarna is making a splash across Europe and the U.S. with its popular “buy now, pay later” model. It’s a win-win for both shoppers and retailers. Shoppers enjoy the quick-and-easy ordering process and the chance to try before they buy a product. Retailers appreciate the fact that Klarna takes on all the financial risk while encouraging shoppers to make a purchase.

As Klarna continues to form partnerships with more online retailers across the U.S. and add more offerings, the sky is the limit for this fintech company. (For more on this, read Here’s Why Fintech Will Continue to See Rapid Growth (GS, BBVA) and Top 5 Books to Learn About the Fintech Industry.)