Klarna

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 36th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

A big shoutout to all of you for the fantastic support and feedback. Let's keep the momentum going in the days and weeks ahead! 😊

Today’s Publisher’s Parmesan talks about Klarna, a Swedish fintech company that provides online financial services such as payments for online storefronts and direct payments along with post-purchase payments

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

The Quote󠀢 💭

The Tweet 🐦

Here is a fascinating and detailed account of the rich and colourful history of Tennis. From the early days of medieval monks and Henry VIII's passion to the revolutionary times of the French Revolution, the sport of Tennis has traversed through centuries, leaving an indelible mark on the annals of human civilization.

The Infographic 💹

For centuries the arrival of the monsoon in India has been a time for rejoicing. The annual rains, which make landfall in the southern state of Kerala in June before spreading across the subcontinent, bring respite from a scorching summer and provide nourishment to parched farmlands. In recent years, though, delight has been replaced by dread as the monsoons have brought death and destruction.

The Short Read 📝

Degrowth can work — here’s how science can help - by Nature

The global economy operates on a growth-oriented framework, emphasizing the continuous expansion of production by firms, industries, and nations, irrespective of its necessity. This relentless pursuit of growth has contributed significantly to climate change and ecological degradation. High-income economies, along with the corporations and wealthy individuals that hold sway within them, bear significant responsibility for this issue. Their consumption patterns and unsustainable rates of energy and resource utilization exacerbate the problem, further straining the environment.

It is indeed crucial to shift away from the debate between "limits to growth" and "green growth." We concur with the perspective that the question no longer revolves around whether growth will encounter limitations, but rather focuses on finding ways to enable societies to thrive without relying on continuous growth. This approach is necessary to ensure a future that is both just and ecologically sustainable. It is time to pave the way towards alternative models and strategies that prioritize prosperity and well-being while considering the limits of our planet's resources.

The Long Read 📜

The Running Novelist - by Haruki Murakami

Haruki Murakami is a Japanese writer. His novels, essays, and short stories have been bestsellers in Japan and internationally, with his work translated into 50 languages and having sold millions of copies outside Japan.

This article, written by Murakami himself, chronicles his journey from a club owner in Tokyo to becoming a professional writer. Along the way, he decided to pick up running to stay fit and ensure a long life as a professional writer. From someone who did not play any sports, he grew to love running and transformed himself into a long-distance runner in the process. The daily grind - putting in effort day in and day out - is what really helped him become a better runner and a successful novelist.

An extract from the article: When I first started running, I couldn't run for very long. I could only run for about twenty or thirty minutes. Even that made me breathe heavily, my heart beat fast, and my legs shake. I hadn't exercised in a long time. At first, I felt a little embarrassed running in front of people in my neighbourhood. But as I kept running, my body got used to it and I could run for longer. I started running with better form, my breathing became more regular, and my heart rate calmed down. The most important thing was running every day, no matter how fast or how far.

This week’s Publisher Parmesan is sponsored by Blinkist.

Key ideas from bestselling non-fiction books, distilled by experts into bitesize text and audio. Explore our vast library of over 5,500 titles and stay up-to-date with 40 new titles that are added each month. Join the reading revolution!

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Publisher’s Parmesan 🧀

Klarna

Klarna is a BNPL company that allows customers to split their purchases into instalments. Although Klarna is not currently profitable, it continues to grow and optimize for profitability. Klarna's CEO has stated that the company is well-positioned to withstand current challenges, and the company was profitable for its first 13 years.

Step right up, ladies and gentlemen, and behold the magic of Buy Now, Pay Later (BNPL)! It's like a personal loan, but with a sprinkle of wit and charm. With BNPL, you can strut your stuff and make that purchase upfront, then dance your way through equal instalments until you've paid off the full amount. It's a credit without the credit card hassle, darling. And the best part? As long as you stay on beat and make your payments on time, the interest stays far, far away, unlike those pesky traditional credit cards that love to crash the party with their monthly interest charges. With BNPL, you've got an extended window of opportunity to pay back your purchase without incurring any interest. It's like hitting the snooze button on your payment schedule, my friends.

By 2022, the BNPL craze took the world by storm, like a hurricane of financial freedom. Why, you ask? Well, the cost of living skyrocketed, and inflation decided to join the party. But fear not! BNPL came to the rescue, with its gross merchandise value soaring from a mere $178.6 billion in 2021 to a jaw-dropping $899 billion by 2028. Those young, budget-savvy consumers with a twinkle in their eyes and limited incomes have fallen head over heels for this digital darling. It's their secret weapon, a magical portal to big-ticket purchases, complete with flexible instalment plans. And let me tell you, folks, the numbers don't lie! In the first half of 2022, BNPL apps saw an astonishing 10 million installs on the App Store and Google Play. The UK and Germany, the true trendsetters of Europe, led the way in embracing this enchanting BNPL experience. So, my friends, grab your wallets and hop aboard the BNPL Express—it's a one-way ticket to financial freedom and fabulousness!"

The Beginning

Once upon a time in 2005, three ambitious individuals embarked on a journey to revolutionize the world of online commerce. Picture this: Sebastian Siemiatkowski, the CEO extraordinaire, and Niklas Adalberth, the former deputy CEO who bid farewell to the company in 2015, joined forces with Victor Jacobsson to create Klarna, a financial fairy tale that was originally named Kreditor.

While toiling away at the factoring company, Siemiatkowski made a remarkable observation. Merchants had a burning desire for customers to pay using debit cards at the checkout to ensure payment guarantees. This sparked a brilliant idea in his mind: what if there was a middleman who could pay the seller at the checkout and collect payment from the consumer upon delivery?

Inspired by the trust-driven mail-order transactions in Sweden, Siemiatkowski wondered if he could sprinkle some digital magic onto the concept and introduce a 'buy now, pay later' system for the modern age. With the help of Adalberth and Jacobsson, his business school comrade, Siemiatkowski set out to launch this groundbreaking company.

The trio rolled up their sleeves and started cold-calling merchants in 2005, offering them the allure of direct payments, instalment plans, and the oh-so-tempting option to pay after delivery.

And so, Klarna embarked on its first transaction, a magical encounter with a Stockholm bookstore. Over the years, this brave company spread its wings across the Nordics, Germany, and the Netherlands, enchanting customers with its seamless payment experience. By 2010, the time had come for a grand rebrand, and Klarna was born, stepping into the spotlight as the name we know today.

Business Model

Klarna's revenue streams flow from both the mystical realm of merchants and the enchanting world of consumers who utilize Klarna's wondrous payment solutions.

When customers choose to pay using Klarna's BNPL or Pay in 30 days options, a fascinating process unfolds. Klarna gracefully pays the full transaction amount to the retailers, but not without a touch of magic— they deduct their rightful commission from the sum.

Klarna's revenue streams are further nourished by various other sources. They collect fees through transaction processing, covering the costs associated with handling each magical transaction. Additionally, they bear the burden of chargeback costs and the risks of credit defaults tied to shoppers.

Now, let's delve into the world of merchant payments. Those who embrace Klarna's services enter a realm where transaction fees come into play. One source suggests a commission ranging from 3% to 6% of the total transaction. Another intriguing piece of information reveals that merchants pay a flat fee of $0.30, coupled with up to 5.99% per transaction for the Pay in 4 and Pay in 30 days offerings. As for purchases made with financing, merchants pay a fixed fee of $0.30, along with up to 3.29% per transaction.

Customer Base

Klarna, the master of financial enchantment, caters to both individuals and businesses alike. In the mystical land of the UK, their average consumer is a sprightly 33 years old, with the fastest-growing age group being the wise and wonderful 41 to 56-year-olds. Across the great ocean, in the vast realm of the US, Klarna's power reigns supreme, with a staggering 71% year-over-year increase in gross merchandise value (GMV) for American shoppers.

But wait, there's more! Klarna has forged alliances with prestigious brands like Nike, Sephora, Versace, and Brooks Brothers. They have even formed alliances with mighty platforms such as Amazon, Instacart, Wish, and GOAT. And let's not forget their magical integrations with no-code platforms like Shopify and Wix, providing a gateway to digital entrepreneurs seeking growth optimization and streamlined payments.

Valuation

In a dramatic turn of events, the financial tale of Klarna took a surprising twist in July 2022. The company announced a colossal $800 million funding round, but alas, it came with a significant shift in its valuation. The post-money valuation plummeted to $6.7 billion, marking a staggering 85% drop from its previous lofty valuation of $46 billion in June 2021. Oh, how the tides can change in the realm of finance!

Despite the downturn in valuation, Klarna managed to gather a formidable group of investors for this new chapter of their journey. Names like Sequoia, Silver Lake, Commonwealth Bank of Australia, the UAE's sovereign fund Mubadala Investment Company, and Canada Pension Plan Investment all joined forces, demonstrating their unwavering belief in the potential of this financial fairy tale.

Let us delve deeper into the numbers that accompany this tale. In the golden year of 2021, when Klarna was valued at an astonishing $46 billion, its revenue stood at a respectable $1.4 billion. This translated to a valuation that reached an impressive 32 times its revenue—quite the enchanting multiple, indeed. However, as the winds of change swept through the market in 2022, Klarna's valuation dropped to a mere $6.7 billion. But fear not, for its revenue did not falter; in fact, it climbed to $1.9 billion. With this shift, Klarna's revenue multiple dwindled to a modest 3.6 times. Such is the nature of the ever-evolving market conditions, my dear friend.

It is worth noting that Affirm, a close comparison in the public market realm, experienced a similar journey. Its revenue multiple journeyed from a robust 30.2 times at the end of 2021 to a more grounded 3.9 times at the close of 2022. The winds of change spare no one, it seems.

And so, the tale of Klarna's valuation rollercoaster takes its place in the annals of finance. A once towering valuation, now humbled, yet Klarna remains a force to be reckoned with. As the market conditions shift and the numbers dance, only time will reveal the next chapter in this captivating financial saga.

The road ahead…

Although Klarna is not currently profitable, the company remains focused on growth and optimizing its path to profitability. Klarna's CEO has expressed confidence in the company's ability to overcome present challenges, highlighting that Klarna operated profitably for the first 13 years of its existence.

Klarna's expansion in the US market has been driven by its app offerings, including the popular Klarna Card, which enables customers to split their purchases into instalments, even at non-partnered merchants. However, the company has also faced some costs along its growth trajectory, resulting in employee cuts last year to manage its rapid expansion.

Nevertheless, Klarna's overarching objective is to achieve profitability by the summer of 2023, while simultaneously striving for sustainable growth. The company is determined to strike a balance between financial stability and continued expansion as it progresses on its journey.

As Klarna pursues its goals, we observe its endeavours with anticipation, hoping to witness their successful path to profitability and its commitment to sustained growth. May they navigate the challenges ahead and emerge stronger in the realm of finance.

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We’ll be back in your inbox 2 PM IST next Wednesday. Till then, have a productive week!

Peeyush and Mohit

Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.