business news in context, analysis with attitude

by Kate McMahon

I was about to hit “Secure Checkout” for a one-time $54.95 shoe purchase on the Tom’s e-commerce site when I came upon the option, “or four interest-free payments of $14 with Klarna.”

ApplePay, AmazonPay and PayPal, I know. But Klarna?

It turns out the nation that gave us IKEA, which upended the furniture industry one big box at a time, is now exporting Klarna to shake up point-of-sale lending in the U.S.

Klarna, founded in Sweden is 2005 and now valued at $5.5 billion, is relishing that role. The company consistently touts itself as “the global payment innovator and retail disruptor” staking its claim in America. And the face of a recent campaign is none other than rapper/entrepreneur and Klarna minority shareholder Snoop Dogg.

While most Americans shop with their credit cards, the practice of no-fee, no-interest flexible payment options such as deferred payments and installment plans – both online and in a store – is prevalent in Europe.

Klarna’s pitch to retailers is simple: Klarna pays 100% upfront, assumes the risk and collects from the consumer. The shopper pays Klarna 25% at the time of sale, and the rest in installments. Klarna boasts partnerships with 170,000 merchants globally, including Ikea (of course), Zara, Wayfair and Samsung. Klarna make sits money by charging retailers a small percentage on each transaction.

I have since learned the “Buy Now, Pay Later” movement has been growing in the U.S., well ahead of Klarna’s arrival. Competitors include Affirm, which counts Walmart and hot properties Warby Parker, Casper and Peloton among its partners, and AfterPay, which is allied with such millennial fashion favorites as Anthropologie, Urban Outfitters and Forever 21.

Walmart and Affirm announced their partnership back in February. Affirm is available as a payment option on online and in-store purchases ranging from $150 to $2,000, with repayment term of 3, 6, or 12 monthly installments.

Now I can understand looking into point-of-sale financing for a $2,245 Peloton (can you say wish list?) or a $1,999 Samsung TV (that would be the family wish list), but it wouldn’t occur to me to “finance” a pair of $54 shoes from Tom’s or a $95 sweater from Anthropologie. But then I fall into the “okay, boomer” category and admit this would appeal to younger consumers who are less likely to use credit cards.

Klarna and the other leading point-of-sale lenders are all structured differently in terms of pricing and flexibility. Several require you to apply for financing at check out and get quick approval or denial. But what they do have in common is their claim that point-of-sale financing is financially preferable to using a credit card, especially with some revolving interest rates north of 20%.

All the lenders contend that offering consumers more financing options at checkout makes for one happy customer, who will return. I will be interested to see if these programs are indeed as transparent as they promise, with no late fees or interest rate surprises. If so, I think we will see credit cards and banks joining the fray, and even more disruption ahead.

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