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this post was submitted on 28 Dec 2024
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The company I work for (in e-commerce) just recently started offering/advertising paying using Klarna.
If you don't know, (and you can probably guess given the context of this post), Klarna is a company that basically just allows users to buy now and pay over the course of a few weeks. "Buy this $100 item now and pay in four installments of $25 over four weeks" or some such. Anyone can get the app and it gives credit card numbers that will buy stuff online or whatever, and then the paying back process is that Klarna bills the customer over the course of a few weeks.
But companies can integrate with Klarna as well. When they do, Klarna makes everything work like it does with credit cards so the company doesn't have to completely retool to support Klarna as a payment method. And it's more convenient for the customer than dealing with the app and manually typing in the credit card number they get from the app.
Here's the thing, though. There's no interest charged to the customer. I think Klarna makes its money just because companies pay them money for integrations and for the ability to advertise that customers can buy now pay later and such. And at least in the case of my company's integration with Klarna, Klarna takes all the risk. They're lending customers money and hoping the customers pay it back. My employer gets the money up front and isn't out any money if the customer doesn't pay. And Klarna is huge. They're holding a whole lot of debt at any one time. And it's not secured debt or anything. And I don't think there are credit checks involved.
Really seems like a risky thing. Just like risky mortgages are. If a significant number of customers were to default on their debt at the same time (and not all Klarna purchases are $6 pizzas, some are multiple hundreds of dollars worth of debt), I'd imagine Klarna would be out of business quicker than Enron. Or maybe they'll be "too big to fail" by that point and they'll get a bailout.
Either way, it seems like a not-insignificant chunk of the economy is teetering atop the pencil-balanced-on-its-point that is Klarna. I'm not sure if there are a lot of other companies offering similar services, but if so, that just makes the economy seem that much more precarious.
This reminds me of PayPal from 25ish years ago. There wasn't a convenient way to transfer money online and they built a solution. To achieve critical mass, they offered people $10 to sign up and a $10 referral bonus (if your friend get $10 and you get $10). PayPal burned a lot of investor money to do this, but it paid off when they became the dominant payment method for eBay auctions. In short, it was a costly investment that paid off.
Klarna is trying to become the PayPal of e-commerce, displacing credit cards (and PayPal) and becoming the default means of paying online. Once they start to slow in their growth, they can do the following:
This last point is particularly powerful because they also have the bill of sale, which most payment options don't. If they offer point-of-sale systems that also collect detailed data, it would further allow them to track people.
I suspect that they are classified in a way that existing restrictions on payment networks do not apply to them. E.g., they may technically be a lending company but act as a payment network; they may be considered the customer in a transaction, that resells the item to the purchaser, etc. Lending companies aren't expected to work with the copious amounts of detailed data that stores and payment processors do (e.g., Payday Loan doesn't know I spent part of my loan on a suitcase of Bud Light). Imagine an insurance company knowing how many drinks your table bought at a restaurant, then holding it against you when you make a claim. Or having a job offer revoked because you bought a copy of the Communist Manifesto to see what all the hubbub is about.