How Klarna makes money: Reinventing itself beyond BNPL

Klarna made headlines in 2021 with a $45.6 billion valuation, then lost over 80% of it in a year. By 2024, the company had pulled off a dramatic turnaround. It returned to profitability with $2.8 billion in revenue and over $100 billion in gross merchandise volume (GMV). Once known as a "Buy Now, Pay Later" (BNPL) provider, Klarna has evolved into a global fintech platform with over 100 million active users across 45 countries.

This article explains Klarna's multifaceted business model. It details how Klarna makes money from merchants, consumers, and financial services. We also cover Klarna’s shift from only offering Buy Now, Pay Later (BNPL) to becoming an "everyday spending partner”.

Klarna’s path to profitability is analyzed as well. Finally, we explore how Klarna's payment system works, how it boosts profit margins, and how artificial intelligence (AI)  is changing its costs.

How Klarna works

Klarna started with a simple idea: let people shop online now and pay later, interest-free. Today, it functions as a global payments network, digital bank, and shopping app.

Klarna’s services include BNPL, long-term financing, instant checkout, banking services (available in Europe), and a Klarna Card (both virtual and physical). The company also offers a "shopping super app" that helps users discover products, track orders, and receive alerts for price drops. 

For consumers, Klarna offers financial flexibility and instant credit approval within a seamless shopping experience. The available payment options include:

• Pay in 4 / Pay in 3: Interest-free installments.

• Pay in 30 days: A try-before-you-buy with deferred payments.

• Financing (6–36 months): Loans with annual percentage rates (APRs) ranging from 7.99% to 29.99%.

• Pay now: Direct payments via card or bank transfer.

For merchants, Klarna boosts conversion rates, increases average order values, and provides access to a user base of 100 million. Klarna pays merchants upfront and assumes all credit and fraud risk associated with their transactions.

At checkout, whether online or in-store, users can select Klarna and provide minimal information. The app performs a soft credit check, and the underwriting process takes place instantly. Klarna pays the merchant in full and collects repayment from the shopper in installments. Users can manage all transactions within the Klarna app, which acts as a central hub for payments, returns, and product discovery.

Several features set Klarna apart from other payment providers:

• The Klarna app: This app combines payments, rewards, price alerts, order tracking, and product discovery in one interface.

• Klarna card: A Visa-backed card that enables users to Buy Now, Pay Later (BNPL) anywhere Visa is accepted, both online or in-store.

• Banking (EU): Klarna offers high-yield savings accounts, debit cards, and international transfers under its Swedish banking license.

• AI assistant: An OpenAI-powered chatbot handles two-thirds of support queries, while AI also powers fraud detection, underwriting, and marketing.

• Merchant marketing: Klarna monetizes its app by selling sponsored placements and ads, transforming it into a retail media platform.

Klarna operates a vertically integrated platform. It underwrites credit in real time, finances loans from its balance sheet, and assumes all responsibility for credit and fraud risk. It generates revenue from both consumers and merchants involved in each transaction.

The duration of Klarna’s loans is relatively short, averaging 40 days. This brief repayment period allows for rapid capital recycling and tighter control over credit risk.

Klarna is well-integrated in the commerce ecosystem. It integrates with major e-commerce platforms including Shopify, Magento, WooCommerce, and BigCommerce. Payment partners include Stripe, Adyen, and ACI Worldwide. Klarna collaborates with PostNord, nShift, and Webshipper.

Klarna’s retail partners include a variety of well-known brands such as H&M, Airbnb, Sephora, Uber, and Walmart (through OnePay). In 2025, a partnership with Stripe significantly expanded Klarna’s reach to millions of new merchants globally.

Klarna’s revenue streams

In 2024, Klarna returned to profitability, generating $2.81 billion in annual revenue. This revenue figure represented a 24% year-over-year increase from $2.26 billion in 2023, $1.85 billion in 2022, and $1.42 billion in 2021. In 2024, Klarna processed $105 billion in gross merchandise volume (GMV) across more than 100 million active users.

Let’s go over some of the major revenue sources driving Klarna’s growth.

Merchant fees

Merchants pay Klarna transaction fees ranging from 3.29% to 5.99%, in addition to a fixed fee of $0.30 per transaction. Klarna pays merchants upfront and assumes both credit and fraud risks associated with transactions. Although these fees are higher than traditional card processing fees, merchants find the tradeoff worthwhile, as Klarna helps increase the average order value by 20–30% and boosts conversion rates by up to 44%.

Merchant fees account for 75% of Klarna's transaction and service revenue, which itself constitutes 76% of total revenue. Klarna effectively operates like a performance marketing channel — merchants pay not just for payment processing, but for improved sales outcomes.

Interest income

Klarna generates interest income from its longer-term financing products, which range from 6 to 36 months and have Annual Percentage Rates (APRs) between 7.99% and 29.99%. It also earns interest on deposits and liquid assets held with credit institutions.

In 2024, interest income accounted for 24% of its total revenue, totaling approximately $675 million, up from 23% in 2022. This reflects a shift from Klarna’s earlier focus on interest-free offerings to more profitable, interest-bearing credit products. The Walmart OnePay partnership, which offers loans from 3 to 36 months, exemplifies this strategic pivot.

Consumer fees (late fees)

Klarna charges consumers late fees of up to $7 or 25% of the installment amount, as well as insufficient funds fees of up to $27. The company refers to these as “reminder fees,” noting that they only impact a small percentage of users.

Still, consumer fees accounted for 16% of transaction and service revenue, adding up to an estimated $337 million in 2024. While Klarna reports that 99% of loans are repaid on time, this revenue stream is significant in its margin structure and may also draw regulatory scrutiny given the growing reliance on what some perceive as "mishap fees."

Advertising & marketing services

Klarna generates revenue by selling in-app ad placements, creating branded content, and earning affiliate commissions from outbound traffic. This ad-driven model taps into Klarna’s behavioral and transactional data to deliver targeted marketing campaigns.

Advertising contributed to 8% of transaction and service revenue in 2024, or about 6% of total revenue, down from 11% in 2022. Klarna’s estimated ad revenue for 2024 is approximately $168 million. The company aims to evolve into a retail media platform, similar to Amazon or Shopify, by helping brands acquire customers within its ecosystem.

Interchange fees

Klarna collects small interchange fees—around 1% on average—when users pay with Klarna’s debit or credit card products, mostly in Europe. Merchants who accept Klarna Card transactions pay these fees.

While Klarna does not specifically break out interchange revenue, it is included under "interest income" and "other" revenue categories. At this time, interchange fees represent a minor contributor to revenue but have growth potential as the use of Klarna Cards expands.

Klarna’s cost centers

Despite robust revenue growth, Klarna’s path to profitability required aggressive cost-cutting across nearly every part of its business. Between 2022 and 2024, the company reduced total operating expenses by optimizing staffing, slashing marketing costs, and replacing expensive software tools with AI-driven alternatives. 

Below is an overview of Klarna’s main cost centers.

Fixed costs (product development, infrastructure, and R&D)

Klarna’s fixed costs encompass technology infrastructure (cloud services, engineering tools, internal systems), along with product development and research and development (R&D). A large portion of these costs is directed toward fraud prevention and enhancing AI capabilities.

Klarna’s research and development (R&D) spending was $430 million in 2022. It dropped slightly to $389 million in 2023, before rising again to $444 million in 2024. While tech and R&D costs decreased as a percentage of revenue, they increased in absolute terms due to Klarna’s strategy of investing in artificial intelligence (AI).

The company reduced licensing fees by replacing third-party software-as-a-service (SaaS) tools, such as Salesforce, and redirected spending toward proprietary technology and AI-driven product features. However, Klarna later reversed some of these decisions. 

Variable expenses (credit losses and payment processing)

Klarna’s variable expenses mainly include credit losses and fees paid to card networks, such as Visa and Mastercard, as well as payment processors like Stripe. In 2024, Klarna reported credit losses of roughly $495 million (SEK 5.4 billion), which is a 35% increase year-over-year.

Despite this rise, the credit loss rate remained low at just 0.49% of gross merchandise volume (GMV). Klarna mitigates risk through short loan durations, averaging around 40 days, combined with real-time underwriting.. The increase in losses was driven by a 13% rise in loan volume, rather than a decline in credit quality. After accounting for these variable costs, Klarna still earns a net transaction margin of $1.55 per $100 in GMV.

Staffing and overhead

Between 2022 and 2024, Klarna reduced its headcount by approximately 40%. It replaced 700 customer service roles with AI-driven automation while maintaining customer satisfaction through a hybrid model that integrates both AI and human support. The company hired back some of the support staff due to user backlash. 

Revenue per employee rose to $650,000 in the first half of 2024, reflecting a 73% year-over-year increase. Klarna also restructured its workforce to focus on technical roles, leading to a bundling of many overhead and compliance expenses.

Marketing and growth 

Klarna significantly cut back on marketing from its blitz-scaling days. Sales and marketing expenses decreased from $1.14 billion in 2022 to $891 million in 2023 and then further to $812 million in 2024.

As a percentage of revenue, marketing spending decreased by 16 percentage points during this period. Klarna utilized AI tools to reduce its reliance on agencies, optimize spending, and enhance campaign efficiency. Growth is now increasingly fueled by owned channels such as Klarna’s app and checkout ecosystem.

One-off or sunk costs

Klarna has incurred several non-recurring costs associated with preparing for its initial public offering (IPO) and restructuring. In the first quarter of 2025, the company reported a $99 million net loss, mostly due to a one-time equity payout tied to the IPO.

In 2023, Klarna also incurred $69 million in restructuring costs, primarily due to layoffs and organizational changes. While Klarna paused its IPO plans in April 2025 due to market volatility, it had already incurred many associated legal, audit, and compensation costs.

Klarna’s competitors

The BNPL market has exploded over the past five years, resulting in an influx of new entrants and consolidation. Klarna's biggest competition comes from other consumer-focused BNPL platforms and payment giants that add installment features to their services. Each competitor presents unique strengths, revealing the success and challenges of Klarna’s strategic decisions.

Affirm

Affirm focuses on transparent, interest-bearing installment loans ranging from 3 to 36 months. Affirm avoids late fees and emphasizes predictable payment plans. Its interest income and gain-on-loan-sale model give it a higher take rate of around 7.3%, compared to Klarna.

Affirm has established a strong presence in the U.S. through partnerships with companies such as Amazon and Shopify. Its consumer-first approach and lack of hidden charges appeal to shoppers wary of traditional credit. However, its user base is considerably smaller than Klarna's, with only 16 million active users. Its merchant network is also less extensive, with 303,000 partners compared to Klarna’s 724,000.

In terms of scale, Klarna processed nearly four times more Gross Merchandise Volume (GMV) than Affirm between Q4 2023 and Q3 2024 — $102.9 billion compared to $28.6 billion. Despite the significant difference, both companies generated nearly equal revenue during the same period, with Klarna earning $2.60 billion and Affirm $2.53 billion. This highlights the monetization gap driven by Affirm’s interest-based model.

Affirm has committed to reaching Generally Accepted Accounting Principles (GAAP) profitability by mid-2025. To that end, it laid off 19% of its workforce in 2023 and has been expanding its retail presence. Affirm has also ventured into adjacent financial products, such as a browser extension and a debit card.

Afterpay (Block)

Afterpay operates a pure-play Buy Now Pay Later (BNPL) model, offering interest-free "Pay in 4" installments. Its revenue comes from merchant fees, which tend to be higher than Klarna’s, at around 6% per transaction.

The company has gained substantial traction in Australia, New Zealand, and the United States, particularly among younger shoppers and fashion-forward retailers. Its integration with Block’s Cash App and Square ecosystem gives it a significant advantage in omnichannel commerce. However, Afterpay lacks long-term financing options and its app is less feature-rich compared to Klarna’s.

Despite its global presence, Afterpay’s scale remains smaller than that of Klarna. In fiscal year 2024, Afterpay brought in approximately $600 million in revenue, which is less than a quarter of Klarna’s topline. Its merchant network and GMV are also significantly smaller, limiting its ability to compete on volume.

Block continues to integrate Afterpay into its broader suite of products, embedding BNPL at the point of sale and within Cash App. The company is focusing on expanding its physical retail presence and improving cross-platform coordination. However, regulatory scrutiny around late fees in Australia may create pressure to adapt its fee model going forward.

PayPal (Pay in 4)

PayPal’s BNPL offer is an add-on within its digital wallet, providing both "Pay in 4" and "Pay Monthly" plans. Unlike standalone BNPL providers, BNPL is just one feature in PayPal’s broader ecosystem and not its core business.

With over 400 million users and access to 35 million merchants, PayPal offers seamless checkout integration at scale. Its brand trust and ubiquity have driven the rapid adoption of BNPL without requiring consumers to switch to a new platform.

However, Klarna has an edge in product depth. PayPal lacks a robust discovery-driven app, offers limited shopping features, and doesn’t engage users beyond the transaction. As a result, BNPL remains more of a peripheral feature for PayPal rather than a driving force for user engagement.

While standalone gross merchandise volume (GMV) data for PayPal’s BNPL is limited, it is likely one of the largest processors by volume in the U.S. Nevertheless, Klarna remains stronger in Europe and provides a more comprehensive consumer ecosystem.

Recently, PayPal has expanded its Pay Monthly plans to include financing terms ranging from 6 to 24 months and has added support for in-store BNPL transactions. The company is also deepening integration with Venmo, aiming to attract younger U.S. consumers.

The future

Klarna’s next phase focuses on repositioning itself from a BNPL provider to an “everyday spending partner.” The company is doubling down on expanding its product offering and app engagement. This includes promoting the use of Klarna Card, embedding more loyalty and discovery features, and emphasizing its value beyond just point-of-sale financing.

The financial outlook is cautiously optimistic. Klarna achieved its first full-year profit in 2024, earning $21 million. Operating leverage improved thanks to workforce automation and marketing efficiencies powered by AI. Revenue per employee surged, and Klarna has indicated plans to maintain cost discipline in the future. At present, there are no immediate funding needs reported.

Klarna filed confidentially with the SEC in late 2024 and later submitted a public F-1 in March 2025. However, the initial public offering (IPO) was paused in April due to macroeconomic uncertainty, particularly related to U.S. tariff volatility. Despite this setback, Klarna appears to be IPO-ready and is aiming for a valuation between $12 billion and $15 billion when market conditions stabilize.

Klarna’s long-term vision is to become a comprehensive commerce and finance platform. The company aims to compete not only with other BNPL providers, but also with credit cards, retail media networks, and digital wallets. It continues to build proprietary infrastructure in shopping, banking, and advertising to create a cohesive and holistic ecosystem for its users.

As Klarna moves forward, several milestones will indicate the effectiveness of its strategy. Key factors to watch include the timing of its IPO relaunch, the expansion of financial tools like the Klarna Card and savings accounts, changes in BNPL regulation, and the growth of its retail media business. These developments will help determine whether Klarna can transition from merely a checkout option to a core utility for everyday spending.