Klarna: Full-Stack Digital Bank Hidden By The Leading BNPL Business

This is one of the most asymmetric bets in the market now.

🏭 Understanding The Business

The most successful business ideas emerge from founders’ own problems or from the inefficiencies they observe in the industries they work in.

Shopify is a great example.

Tobias Lutke wasn’t trying to build an e-commerce software company. He wanted to create an online store to sell snowboards. The site would be called Snowdevil. Lutke tried to use existing e-commerce storefronts, and he found all of them terrible. This is how he noticed a need for a great e-commerce storefront provider.

The idea for this company came exactly this way, from a problem that the founder noticed through his own experiences.

However, this time he noticed the problem not thanks to his personal endeavors but thanks to his industry exposure.

It was the early 2000s.

The internet was still new, and e-commerce was even newer. Many people across the world were just discovering that they could shop on the internet and their items would be delivered to them by a logistics company.

You didn’t see the seller, you couldn’t return easily if you had a problem with the delivery, and you couldn’t be sure whether you would be charged the exact amount you see on the screen.

Naturally, nobody wanted to enter their credit card information.

It was even worse in Europe, as credit card adoption was already low.

Most people didn’t have cards, and even those who had them were rarely using them at physical checkout points. Can you imagine how hard it would be for people to put their card information on a portal, and for a product that could never be delivered?

It was almost impossible. Some type of reassurance mechanism was needed to boost the adoption.

At the time, Sebastian Siemiatkowski was working at a debt collection agency that was primarily dealing with the debts arising from buying goods on invoice. This means that delivery was first, and then the customer had to pay in generally two weeks. This was a very established way of shopping in Sweden back then.

When e-commerce started to take off, merchants needed a system that would enable invoice-shopping on the web. This is how Klarna was born.

The term “pay later” originally referred to invoice shopping, not the financing method it is seen today.

They established a company called “Kreditor” and started calling merchants, offering to install their payment system that allowed customers to delay payments. Essentially, creating a synthetic invoice-shopping.

In April 2005, they processed their first transaction with a Stockholm bookstore, Pocketklubben. They onboarded merchants one by one, and the network started to take off around 2007-2008.

As they scaled, they noticed that the name was problematic because it meant creditor. So, they rebranded to Klarna in 2010, which derived from the Swedish word "klara," meaning "to clear" or "to make clear."

This is how their rebranded website looked at the time, pretty primitive:

Fast forward 15 years, and they have expanded to 26 countries, including many major European economies, the US, Canada, and Australia.

As it scaled, their business model has also experienced substantial changes.

To understand Klarna’s business, we have to dive deeper into its value proposition and how it has evolved over time. So, what was the value proposition of Klarna and what is it now?

If we go back to the early days, the value offered was obvious—it was a way to adapt invoice shopping to online commerce, but with additional benefits.

In the classical inventory shopping model, the merchant ships the product and carries the credit risk. If customers don’t pay, it’s the merchant who suffers the loss.

Klarna’s early model in the Kreditor days changed this risk structure. Kreditor would pay the merchant fast and collect the payment from customers later on. As a result, the risk shifted from merchants to the Kreditor.

This is why it was able to charge a commission to merchants while keeping the customer side interest-free. Merchants are basically paying for:

• Increased conversion due to a trust maximizing payment channel

• No longer carrying the credit risk in the invoice shopping model

For a long time, it wasn’t thought that the primary objective was to boost the purchasing power of customers. It was ensuring high trust on the customer side and taking the risk from the merchant side.

Their critical insight was that their pay-later model was essentially mimicking closed-loop payment networks, like American Express.

The difference of American Express from other networks is that Amex is both the issuer and merchant acquirer. It issues a card to the customer, and when a payment happens, it just moves the balance from the customer’s account to the merchant’s. No connector like Visa or MasterCard required.

Klarna was positioned similarly. It was paying the merchants immediately and then charging customers’ bank accounts directly in most cases, without requiring a third-party payment method like Visa or Mastercard.

Thus, in the early 2010s, they came up with the idea of capitalizing more on this closed-loop economics by expanding Klarna payments from just BNPL to all payments and owning the checkout, much like American Express.

This is why they introduced pay-in-full in 2010 so that customers could use Klarna in all transactions, not just for invoice shopping. This way, they would own the checkout.

To achieve this, they rapidly expanded their merchant network. They pursued aggressive expansion on the merchant side for a few years; however, the closed-loop strategy stalled in global markets where Klarna didn’t already have an established customer base.

The reason was that closing the loop required building both the customer and merchant sides together at the same time, and it was crazy hard. Local payment methods were embedded, so it was hard to own a checkout with a closed-loop system while other processors like Stripe and Adyen were aggressively integrating other methods.

Thus, their closed-loop checkout strategy largely failed in international markets; however, this left them with a very big merchant network, unmatched by any other pay-later provider. This set them up for rapid scaling when installment loans in BNPL transactions became a thing.

GenZ and millennials grew up seeing their parents crushed under high credit card rates, especially post-2008 crisis. Thus, the advice they always got was to avoid credit card debt. They developed a natural antipathy to credit cards.

Yet, they also needed purchasing power. So, the idea of dividing pay-later transactions into interest-free, short-term installments emerged. This would expand their purchasing power without exposing them to interest rate and overutilization risks, as it was designed to be:

• Short term, 4-6 weeks.

• Smaller ticket sizes, most below $200.

• Interest-free money is still made by charging commissions to merchants, like traditional invoice shopping.

• You couldn’t accumulate a balance, as usage would be locked if you missed payments.

Thus, if providers could keep their lending pool appropriately diverse and ticket sizes small, revenue from the fees they charge to merchants could make up for the credit losses. This could actually derisk their model, as the payment from customers was expected in smaller installments rather than bigger, one-time payments.

When this model appeared, Klarna was very well positioned to dominate this realm due to the extensive merchant network that it created with a view to owning the checkout.

So, they quickly upped their capabilities and added an option to pay in interest-free installments.

Don’t confuse this with interest-bearing installments. Klarna offered some interest-bearing installments in some markets as early as 2008, but this was a structurally different business model than interest-free BNPL.

It started with interest-free 3 installments, Pay-in-3, in Europe in 2016. Just after this launch, they got a banking license in Europe to hold deposits, thus reducing funding costs. This allowed Klarna to operate profitably despite a business pivot and fast growth.

As Pay-in-3 was an instant hit in Europe, they decided to expand to the US and launched their flagship Pay-in-4 product in the US market around 2018.

In its current business model, the loans are largely funded through customer deposits to Klarna Bank. The bank acts as the direct originator in Europe. In the US, Klarna doesn’t have a direct banking license, so it has partnered with WebBank as its main originator. In this flow, WebBank originates the loan, and Klarna buys it back from WebBank.

The rest of the funds come from forward-flow agreements, warehouse credit facilities, and securitizations. But the majority of the loans, Klarna says 94%, is essentially funded through deposits.

Since Klarna previously pushed to become a default closed-loop payment network and aggressively expanded its merchant network, it has rapidly become the global leader as installment payments took off because of its availability across merchants.

Today, Klarna has 850,000 merchants in its network and over 111 million active users across 26 countries. The closest competitor, Affirm, has only 478,000 merchants in its network and is active only in three countries: the US, Canada, and the UK.

Klarna reinforces this strategic advantage with its bank. It allows Klarna to have lower funding costs and offer full-suite of financial products:

• Klarna BNPL: Flagship consumer-facing business that enables installment payments.

• Klarna Balance: Charge account to be used in Klarna purchases. Balance can earn interest in Europe.

• Savings accounts: Available in Europe as a direct offering of Klarna Bank.

• Klarna card: Could be used with a Klarna subscription or be issued for one-time use in exchange for a service fee. Following the purchase, customers can divide the balance into installments.

• Klarna checkout: The full checkout solution for merchants. It handles all payment methods (Klarna BNPL, cards, local methods) through a single integration. Primarily used in the Nordics.

• Klarna Payments: A modular integration where merchants add Klarna as one payment option alongside others. Used globally, especially where Klarna isn't the dominant checkout provider.

• Ads: Allows merchants to promote products on the Klarna app.

As you see, it’s way more than a BNPL provider. If I were to describe it, I would say it’s a mix of a full-blown neo-bank and a platform business that happens to have a dominant BNPL product.

In short, Klarna is much more than a BNPL business. It started as a facilitator of invoice shopping on the internet, then developed into a provider of an alternative financial product to boost purchasing power, and now it’s evolving into a full neo-bank with an integrated platform business, thanks to its +111 million app users.

Naturally, when faced with a financial services business, the single most important thing investors question is the durability of the business against similar models.

That’s also the case for Klarna, as it seemingly has many competitors like Affirm, Sezzle, and PayPal.

So, can Klarna beat the competition and keep thriving in the crowded financial services market?

I think it can. Let’s dig deeper into its competitive position.

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🏰 Competitive Analysis

Sometimes it’s hard to clearly see the competitive bottleneck. This is especially true for technology companies, as most of them feel replicable with the right resources. Even more so nowadays due to AI.

The best way to easily see whether something is really replicable or not is to ask yourself this one question—what would be my bottleneck if I were to replicate this business?

This is something I learnt from Buffett. He famously said:

It helps immensely to think about what your bottleneck will be if you have the resources. So, let’s do this for Klarna to understand its competitive position better.

Klarna is a lender after all. It pays the merchants before it collects payment from customers. So, the first thing you need is obviously money. But money is abundant, let’s say you have all the money, enough to build the product and lend. Would you be able to replicate Klarna, Affirm, or even Sezzle?

Well, the nuance of the business model is that you shouldn’t charge interest to your customers. Interest-free installments are the linchpin of the modern BNPL. You make your money by taking a part of the merchant's revenues because your system enables someone who wouldn’t otherwise be able to afford the product to actually buy.

You increase the merchant’s conversion rate, and also take the risk of a loan from them. This is why they pay you.

Now it started to become clear, right? You need to onboard thousands of merchants for the business to be viable. So, it’s actually more of a network business than a lending business.

When you start seeing the business through this lens, the competitive strength becomes obvious.

It’s similar to the relationship between credit card issuers, merchant acquirers, and card networks.

There are tens of thousands of issuers. Every bank is an issuer. There are similar number of acquirers, as any bank can act as an acquirer in principle. But there are only a few card networks—Visa, MasterCard, American Express, Discover, etc.

The economics of the business mandate oligopoly in payment networks. This is because the issuer and acquirer sides need to be connected only to card networks. But networks should be connected to both. Fragmentation in the network market would create unbearable frictions in card payments. You wouldn’t have the ability to use your card everywhere seamlessly.

That applies to BNPL business as well.

To succeed at scale, a BNPL provider should create both its customer side and merchant side networks. Without one, the model will hardly scale.

This is why Affirm and Klarna are dominating this market, because they started early in this sector and built their networks over time. Today, Klarna has over 800,000 merchants in its network, while Affirm has just above 400,000.

This is a very hard task to do.

First, chances are great that any merchant you want to onboard will already be either a Klarna or Affirm partner. Given that you don’t have a unique customer pool to tap into, they will be reluctant to undertake the hassle of adding another payment method.

This will prevent you from building your customer base, as they’ll likely be able to find merchants they like on Affirm or Klarna networks, and you won’t have an attractive offering for them.

This is not just a speculation. Sezzle tried building a competing network and failed.

As of the last available numbers, Sezzle has just around 50,000 merchants on its network, versus ~800,000 of Klarna, ~400,000 of Affirm.

Sezzle saw that it was really hard to compete in that path, so it pivoted. Instead of onboarding merchants, it enabled its users to divide their payments into installments when they use a Sezzle card, even if the merchant isn’t in the Sezzle network.

They still pay the merchant immediately, but the merchant doesn’t pay them any fees. So, how do they make money?

As they eliminated the need for creating the merchant side of the network, they focused on growing and monetizing the customer side. To do that, they targeted subprime borrowers who don’t even have access to Klarna and Affirm.

Sezzle allows customers to use its card if they become subscribers. So, that subscription fee is basically a premium that those customers pay in exchange for the extra purchasing power that Sezzle unlocks for them.

This means that Sezzle stopped pushing the network business and basically became more of a lender that deals with subprime borrowers in exchange for consistent premiums under the name of “subscription.”

We can easily see this by looking at the revenue mixes of these companies:

It’s clear that Klarna is the network leader while Affirm and Sezzle are closer to lenders, as 71% of Klarna’s revenue comes from the merchant side.

Even Affirm shifted to monetizing the consumer side by offering financing for big-ticket items despite its fairly big network size. When you see it through this lens, it becomes more obvious how hard it is to succeed with Klarna’s model that heavily monetizes the merchant side instead of users.

This positioning allows Klarna to easily ramp up monetization of customers by expanding interest-bearing offerings; however, the opposite doesn’t apply. You can’t easily scale your network to Klarna’s size.

In short, it’s possible to create BNPL businesses that are just different forms of lending under the hood. However, it’s really hard to create a sheer BNPL network like Klarna.

I expect this market will be similar to card networks. There’ll be a few, truly big BNPL networks like Klarna and Affirm, but many others will fall short and pivot to different business models like Sezzle has done.

Klarna’s position as a true network enables it to leverage its market power across the adjacent markets, but the same can’t be said for players in adjacent markets due to the hardship of creating this network and the economic mandate of oligopoly in double-sided network markets.

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📝 Investment Thesis

My Klarna investment thesis relies on three pillars:

1️⃣ There is a very long runway for growth.

When you look at the records, Klarna was founded in 2005; however, it was only after 2016 they started to capitalize on the interest-free BNPL model.

Klarna currently sees itself primarily as a BNPL provider that operates in the payments space.

They are currently active in 26 markets across Europe, North America, and Australia, where total retail spending was around $19 trillion last year. Given that they currently have around 2.7% take rate, their serviceable market is around $520 billion.

This means that Klarna’s current market penetration on the payments side is only 1%.

On the advertising side, their current penetration is around 0.03%, given a $570 billion global market size excluding China, and their ad revenue of ~$180 million for the last twelve months ending on June 2025.

This is already a huge market with ample growth opportunities.

Klarna has a significant competitive edge as the largest BNPL network outside the PayPal ecosystem, so it can easily exploit this runway and keep growing at strong double digits for at least a decade to come.

As long as execution doesn’t stall, there is no reason for growth to hit a wall.

2️⃣ It’ll capitalize on its neo-bank stack.

As I have said while explaining the business, one of the main differentiators for Klarna is that it already holds its own banking license in Europe. It can hold deposits, lend from the balance sheet, and offer a wide range of financial services from personal loans to investment products.

However, in the current business model, most of the revenue is still coming from BNPL as Klarna doesn’t aggressively cross-sell banking-related products. But it’s clear that their ambition is to be a full-service neo-bank for younger generations, not just a BNPL player.

It’s obvious from the investor materials that they see BNPPL mainly as the first entry point for customers. As a customer moves from BNPL to a full banking customer, ARPAC increases from $28 levels to $120 levels:

This is a huge opportunity they can easily and quickly capitalize on. They currently have only 2.2 million bank account users, which represents 2% of all customers.

Currently, blended average ARPAC is around $28. This means that each user who converts from a basic active user to a bank account user adds roughly $92 in incremental ARPAC. If they can convert 10% of their basic users to bank customers, this single-handedly boosts ARPAC to $35–36, an uplift of about 25-27%.

And ARPAC will keep growing from there on as cohorts get older.

They currently don’t have a US banking license, so they are limited to Europe when it comes to sheer banking operations. They partner with banks, but this eats away at their margins. Given that Affirm has recently applied for a bank license in the US and Klarna’s neo-bank vision is clear, I think it’ll inevitably acquire a US banking license.

When that happens, it’ll aggressively cross-sell banking products and become one of the primary neo-banks in the West.

3️⃣ They are resistant to market-specific shocks.

One of the main risks with the U.S.-based lenders is that their revenues tend to be cyclical. They do well when interest rates are low, and poorly when the interest rates are high.

Klarna is well diversified across 26 markets, so it’s unlikely that any downturn in any single one of its markets will substantially affect the business performance. For it to be affected substantially, we need a systematic shock like Covid-19, to which response and the direction in the aftermath were common both in the US and the EU.

Beyond geographical diversification, it’s also well diversified across merchant segments, so it’s unlikely to be disproportionately affected by industry recessions.

Another factor that substantially derisks the business compared to other lending models is the short loan durations. As of June 2025, 84% of all their loans were three months or less in duration, and 96% of them were one year or less.

This allows them to quickly respond to changes in monetary policy. If policy were to tighten, they could be able reposition themselves fast, as it takes only two months to renew 74% of their loan portfolio.

In short, we are looking at a business that is dominating its own niche segment in the fintech industry and has all the stack to expand into adjacent markets across the neo-banking space.

Plus, it’s structurally more resistant to system and industry-specific shocks thanks to its market and merchant diversification. Plus, it can readjust its risk posture very fast, which actually limits the downside that is generally elevated in lending businesses.

All the conditions are ripe for this business to grow strongly in the next decade or so.

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📊 Fundamental Analysis

➡️ Business Performance

Klarna performed satisfactorily in the last 5 years.

If we look at the data in their registration statement with the SEC, we see that their revenues grew by 20% annually since 2020, while their loss didn’t grow with revenue and trended down since 2022.

There are two important things to note here.

First, Klarna was profitable for the first 14 years of its operation. They started to record a loss only after their expansion into the US in 2019. This is natural; they are trying to establish themselves in the largest consumer market in the world.

Second, profitability is likely to remain depressed in the short term as they ramp up their interest-bearing consumer financing products. They call this group of products “fair-financing.”

As per account standards, Klarna books provision for expected losses upfront but recognizes revenue over the lifetime of the loan. Loan amounts are larger in fair-financing products, which means that loans that stay on Klarna’s balance sheet create an initial drag on transaction margins.

Klarna is looking to reduce loans it holds on the balance sheet over time by forward flow agreements and securitizations. So, its transaction margins will expand over time thanks to both the collection of the payments and offloading the loans from its balance sheet.

Solid credit performance despite a larger fair-financing portfolio actually proves the temporary nature of the margin pressure. Despite increasing provision for credit losses as % of GMV, realized losses as a percentage of GMV declined both YoY and QoQ basis:

Their cumulative charge-off rates in the US for pay later products are between 0.8-1.5% for all the vintages post 2022, while cumulative fair-financing charge-off rates in the US are between 2-4.5% for the same vintages, again proving their underwriting strength.

In short, the business performed very well in the last five years, even though growth slowed after 2023.

The slowdown was natural since they focused on cutting costs and losses as they approached the IPO. Another reason was that the maturing BNPL market led them to ramp interest bearing products. They couldn’t ramp this too aggressively as the interest rates remained somewhat elevated until late 2025.

They are slowly getting into growth mode again as the management is guiding for 36-38% revenue growth in Q4 2025, which is a substantial acceleration from 33% growth of the prior quarter.

As they collect loan payments from customers and offload them from their balance sheet through other arrangements, we’ll also see expanding margins and thus improving profitability over the next 12-24 months.

Accelerating top line and expanding transaction margins are always a very good setup in fintech that tends to trigger valuation uplift. I can see this happening for Klarna over the next 12-18 months.

➡️ Balance Sheet

One common mistake I see people make often is that they assess Klarna’s financials as if it were a pure tech company. They look at the cash position, equity, EBITDA, and compare it against total debt.

This is the wrong way to look at it because it omits the fact that Klarna is a licensed bank. It holds customer deposits on the balance sheet.

So, for financial health, the relevant metrics are its equity-to-asset ratio, which tells us about its general risk appetite as a lender, and its wholesale funding to equity ratio, as this is the part that becomes problematic in a stress scenario since bank deposits tend to be stickier than wholesale funding sources.

It currently has $20.7 billion in total assets and $2.6 billion in total equity, which gives it an Equity/Asset ratio of 12.5%. Peter Lynch says that community banks should have at least 10% Equity/Asset ratio. Klarna is well above that number. So, the broader picture suggests that Klarna’s overall risk appetite isn’t stretched.

Further, its wholesale funding, i.e notes payable and other borrowings, currently stands at $2.6 billion, which is roughly equal to its total equity. However, $1.3 billion of this is treasury bill purchases that weren’t settled at the time. If we strip this off, its real wholesale funding to equity ratio is around 50%, which is a comfortable coverage.

Further, we should note that Klarna generated $381 million EBITDA for the last twelve months. Which means that its current EBITDA run-rate is enough to pay this $1.3 billion real debt under 4 years. This reinforces their financial strength.

So, there is nothing to be particularly concerned about with Klarna’s finances. It’s being managed with an adequately conservative mindset.

➡️ Capital Allocation & Profitability

On the capital allocation side, for any business that includes banking/lending, what I would look at is return on equity. This is because I would like to understand how much profit the business generates on the shareholders' capital at risk. I would also care about net interest margin as it shows the profitability of the underlying engine.

For the first nine months of 2025, it lost $247 million versus an average equity of roughly $2.3-2.4 billion. Annualized, that's approximately negative 14%. Well-run consumer lenders typically target 15-25% ROE at maturity.

That may sound concerning, but it’s actually not. Why? You may ask.

Look at the net interest margin. Klarna earned $670 million in interest income and paid $457 million in funding costs for the nine months, leaving $213 million in positive net interest spread.

The lending engine works.

Annualized against an average consumer receivables book of roughly $9 billion, its NIM is approximately 3%, which is below mature consumer lender standards but acceptable for a fast-growing neobank still ramping its higher-yielding products.

What’s currently creating the drag is not the profitability of lending but the provision for credit losses of $545 million that overwhelms Klarna’s spread entirely.

As I discussed earlier, provisions are elevated because of the fair financing ramp and the accounting mechanics that front-load losses.

As fair financing seasons, revenue outgrows provisions on the existing book, and securitization moves more loans off-balance-sheet, this drag will fade, and ROE will turn positive.

Wrapping this up, we are looking at a fast-growing neo-bank that happens to have the market-leading BNPL product. Its revenue mix is currently shifting toward interest-bearing products, which creates a temporary drag on profitability. However, its balance sheet and underlying business engine are solid.

Over time, as it collects payments from borrowers, the fair financing product will become profitable, provided that net interest margin and net charge-off ratios hold. When this happens, it’ll inflect to GAAP profitability and will likely get a re-rating by the market.

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📈 Valuation

I generally like to value companies using a DCF, but we are looking at a company that is sensitive to rates, so DCF isn’t the best choice here. Thus, I’ll use multiples.

I have three scenarios: bear, base, and bull.

Here are the underlying assumptions for each one of them

• Bear: 18% annual growth by 2030, 12% net-margin, 6% dilution, 15x exit multiple

• Base: 20% annual growth by 2030, 14% net margin, 5% dilution, 20x exit multiple

• Bull: 25% annual growth by 2030, 15% net margin, 4% dilution, 25x exit multiple

Here is the valuation range we get running above the numbers:

The stock is already trading at $18 per share today, meaning the market is being pretty pessimistic about Klarna. I think this is a very attractive valuation for a company that already dominates its core market and is well-positioned to expand to literally every market across the fintech space.

I like it here.

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🏁 Conclusion

Most opinions I see about Klarna are making two main mistakes:

• Thinking of the BNPL segment as a commodity.

• Confusing the current profitability delay with an operational issue.

The way Klarna does BNPL is very different than a lending business, and it’s more similar to card networks in its nature, given that it connects to both customers and merchants in a closed loop, much like American Express.

So, only the part that is out of this closed loop can be thought of as a commodity. If you try matching the network, you’ll fail.

And even for the commodity part, I wouldn’t say it’s easy to scale. The market is already segmented. Sezzle is holding up by acting as an entry point for sub-primes that Klarna and Affirm reject. Any entrant needs to be even more sub-prime than Sezzle to scale, and it’s an extremely risky business that doesn’t attract much investment.

Second, its current profitability lag is driven by the ramp of the fair-financing product. As this business matures, Klarna’s margins will expand considerably.

Beyond its current operations, it can easily expand to almost all markets in the financial services space thanks to its full-blown neo-banking stack. It already holds a banking license in Europe, and I believe it’s inevitable that it’ll also get one in the US.

The market is currently valuing it based on an extremely bearish scenario. However, I should note that stocks can always go lower on a bad momentum. If the market turns south and drops by, let’s say 10%, I can easily see Klarna going down to $12 levels.

Thus, I’ll buy a part of my target position now and then will wait for a correction. I target around ~3-4% position size. I’ll buy half of it this week, and then wait.

If things go even moderately well for Klarna, the current price promises a 3-5x return in the next 5 years. I think this is really attractive given how rare opportunities are in this market.

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That’s all friends!

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