Klarna enters arena with big banks as it adds financial services

Chana R. Schoenberger

Klarna, which has built a brand in the U.S. and Europe through its buy now/pay later service, will soon find out if its customer base will translate into users for more traditional banking. 

The Swedish payments and financial services company this week added retail banking services such as savings accounts in the U.S. and parts of Europe. The move comes as Klarna builds toward an initial public offering that is tentatively planned for early 2025. It also places Klarna in more direct deposit-gathering competition with banks in the U.S. and Europe.

While Klarna has long positioned BNPL as an alternative to bank-issued credit cards, it will run into a crowded market of competitors as it tries to build deposits and cross-sell financial services in the U.S. Klarna faces threats from established banks and other digital payment companies that are also adding more banking services such as PayPal and Block. 

Klarna may also find it hard to get U.S. consumers to view it as more than an installment payment option at the point of sale.

"Consumers choose BNPL as a means to complete a purchase with a merchant, not necessarily with the BNPL provider," said James Wester, director of cryptocurrency and co-head of payments at Javelin Strategy & Research. By using the new account, Klarna's consumers in the U.S. and 11 European countries can transfer funds from bank accounts to Klarna's digital wallet, which is called Klarna Balance. The wallet includes incentive marketing to encourage consumers to shop at merchants in Klarna's network and perform other functions such as obtaining refunds. 

The accounts in the U.S. will initially not be insured by the Federal Deposit Insurance Corp., making the Klarna accounts more similar to Venmo or other mobile payment wallets or apps than a savings account at a bank. If the accounts are not insured, Klarna could be at a disadvantage in the U.S. There are more than 4,400 regulated depository institutions in the U.S., according to Statista. 

"It's a hard market to operate when there are so many FDIC-insured institutions," said Ariana-Michele Moore, an advisor for retail banking and payments at Datos Insights. "Unless it offers a true savings option in the U.S., it is essentially just another payment account." In Sweden, where Klarna has a banking license, it offers interest rates of up to 3.58%. In the U.S., it isn't clear what sort of interest rate it could offer. Klarna partners with Utah-based WebBank and will likely use a bank to support the U.S. savings accounts. Klarna did not comment on its new financial services strategy.

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"Perhaps Klarna can use its BNPL merchant and merchant acquirer network to originate deposit accounts. There will always be healthy demand for fee-free short-term consumer credit," said Eric Grover, a principal at Intrepid Ventures, adding some BNPL borrowers may be receptive to opening a deposit account and setting up paycheck direct deposit. "But if I were Chase, BofA or Wells Fargo I wouldn't be quaking in my boots."

Klarna is reportedly considering Goldman Sachs, Morgan Stanley or JPMorgan Chase to lead its potential IPO. Klarna, which has not confirmed it is seeking an IPO, originally planned a public listing in 2021 but delayed going public during a time when most of the fintech industry was suffering through a correction.

As fintechs shed jobs and completed funding rounds at lower valuations, Klarna's valuation fell from $46 billion to about $7 billion between 2021 and 2022. The firm downsized and invested in new forms of artificial intelligence as part of a broader focus on streamlining the business. Its financial performance has since recovered, and Klarna returned to profitability in late 2023 after being unprofitable since 2019.

In an effort to improve its financial services game, the firm in early 2024 offered a new version of its Visa debit card that enables consumers to pay in installments with interest, replacing a $4.99-per-month debit card that supported Klarna's traditional installment lending. The updated Klarna Visa card was part of an effort to compete with other BNPL lenders that offer similar cards, such as Affirm and Afterpay. The nonbank  BNPL market is under pressure and is looking to expand revenue streams with more banks entering the market and regulators investigating BNPL fintechs over concerns about the financial health of borrowers. 

"Klarna is jumping into a very crowded market for balance-based wallets and alternative savings products," said Aaron Press, research director of worldwide payment strategies at IDC. "The concept of smoothing cash-back redemptions is a nice addition and should work well given Klarna's already extensive reach into the retail community … but I don't think it's enough to drive many consumers to change a primary, or even secondary, financial relationship to their platform."

Klarna recently said it extended BNPL credit to 37 million U.S. consumers in 2023, or 15% more than it served in 2022. That gives it an existing customer base that can be leveraged to introduce new banking services, according to Stewart Watterson, a strategic advisor at Datos Insights. 

"And having a broad range of financial services will likely be very important for Klarna's IPO potential," Watterson said. "Offering a wider range of services can help reduce reliance on BNPL and create more stable, diversified revenue sources."