Boosting E-commerce Revenue: The Rise of Buy Now, Pay Later Services

Table of Contents

1. Key Highlights
2. Introduction
3. What is Klarna?
4. Why Do E-commerce Businesses Use Klarna?
5. Drawbacks of Klarna for E-commerce Businesses
6. Alternatives to Klarna
7. Conclusion
8. FAQ

Key Highlights

• Financial Growth: E-commerce businesses offering multiple payment options, particularly Buy Now, Pay Later (BNPL) services like Klarna, have seen revenue increases of nearly 30%.
• Consumer Preferences: Younger generations, particularly Millennials and Gen Z, favor flexible payment options, with nearly half having used BNPL services.
• Potential Drawbacks: While Klarna offers advantages such as higher average order values and improved cash flow, merchants must also consider transaction fees and potential chargeback costs.

Introduction

E-commerce has transformed the retail landscape, creating a dynamic environment where businesses constantly seek innovative methods to enhance customer experience and boost sales. One particularly effective strategy is the implementation of Buy Now, Pay Later (BNPL) services, which allow consumers to make purchases on credit, paying in installments over time. In fact, a recent study found that small businesses offering multiple payment options can increase their revenue by nearly 30%. Klarna, one of the leaders in the BNPL space, has gained popularity among younger consumers for its flexible payment solutions. This article will explore how Klarna works, its benefits and drawbacks for e-commerce businesses, and alternative payment solutions available in the market.

What is Klarna?

Klarna is a BNPL service that enables customers to purchase goods on credit and pay for them over time. When a customer opts to pay with Klarna, the company pays the merchant the full purchase price upfront, while the customer repays Klarna in installments according to the chosen plan. This service is available for both online and in-store transactions.

Klarna offers several payment options to cater to different consumer needs:

1. Pay in 4: Customers split their purchase into four interest-free installments, with the first installment due at checkout.
2. Pay in 30 days: Customers have 30 days to complete their payment without incurring interest, with the option to pay earlier or extend the due date for a fee.
3. Pay over time: Purchases can be divided into longer-term payments ranging from three to 24 months, with interest rates varying between 0% to 35.99%.
4. Pay in full: Customers can choose to pay the entire amount at the time of purchase.

A soft credit check is performed to assess the customer's creditworthiness, ensuring their ability to make payments without impacting their credit score. Klarna's proprietary metric, Purchase Power, determines the customer's spending limit based on their credit history and payment behavior.

Why Do E-commerce Businesses Use Klarna?

Integrating Klarna into e-commerce platforms provides various benefits, making it an attractive option for merchants.

Higher Average Order Value

One of the most significant advantages of offering Klarna is the potential for higher average order values (AOV). Customers are more inclined to complete purchases when they can opt for manageable payment plans instead of paying the full amount upfront. Klarna reports that merchants utilizing its services experience up to a 23% increase in AOV, with those using Shopify's Shop Pay Installments seeing even greater increases of up to 50%.

Improved Cash Flow

Klarna's BNPL model ensures that businesses receive payment upfront, providing immediate cash flow. This arrangement is particularly beneficial for small and medium-sized enterprises that rely on consistent revenue streams. With Klarna, merchants can maintain stability in their cash flow and attract repeat customers, as users of BNPL services demonstrate a 46% higher purchase frequency compared to average shoppers.

Younger Customer Base

With nearly half of Millennials and Gen Z consumers having utilized BNPL services, Klarna serves as an effective tool for attracting younger shoppers. Offering flexible payment options resonates with this demographic's preference for financial flexibility and competitive repayment terms.

Reduced Risk

Klarna assumes the risk associated with transactions, meaning merchants receive the full purchase amount even if the customer defaults. This risk transfer allows businesses to focus on sales without worrying about potential losses from nonpayment or fraud.

Easy Integration with POS Systems

Klarna simplifies the process of integrating its payment option into existing e-commerce platforms. Merchants can implement Klarna in as little as 20 minutes, which is particularly appealing for businesses looking to enhance their checkout experience without significant technical hurdles.

Drawbacks of Klarna for E-commerce Businesses

While Klarna offers several advantages, there are also notable drawbacks that e-commerce businesses must consider before adoption.

Transaction Fees and Chargeback Fees

Merchants are subject to transaction fees for each Klarna transaction, which vary based on the merchant's agreement with the company. Additionally, Klarna charges a fee for each chargeback, which can impact profitability. Businesses should carefully evaluate these costs when considering Klarna as a payment option.

Opaque Fee Structure

Klarna does not publicly disclose its fee structure, which can create uncertainty for merchants. To understand the specific fees applicable to their business, merchants must contact Klarna directly, which can be a barrier for some businesses seeking transparency.

Alternatives to Klarna

If Klarna does not align with a business's needs, several alternatives exist in the BNPL space that offer similar services.

Shop Pay Installments

Shopify's BNPL service, Shop Pay Installments, integrates seamlessly with e-commerce platforms and provides fast payment disbursement, typically within one to three business days. Merchants utilizing this service do not incur processing fees for refunds and returns, making it an attractive choice for Shopify users.

Affirm

Affirm is another prominent BNPL service that integrates well with various platforms, including Shopify. It offers higher credit limits and extended payment plans for customers. However, like Klarna, Affirm's fee structure lacks transparency, which could pose challenges for merchants seeking clarity on costs.

Afterpay

Afterpay provides a simplified payment option with lower spending limits, making it suitable for businesses looking to streamline their payment processes. However, it may take longer for merchants to receive payment, sometimes up to five business days, which contrasts with Klarna's immediate payment model.

Conclusion

As e-commerce continues to evolve, integrating payment solutions like Klarna can offer significant advantages for businesses aiming to enhance customer experience and boost revenue. With compelling benefits such as increased average order values, improved cash flow, and a younger customer base, the appeal of BNPL services is undeniable. However, merchants must also weigh the potential drawbacks, including transaction fees and the opaque fee structure. By carefully evaluating these factors and exploring available alternatives, e-commerce businesses can determine the best payment solutions to meet their unique needs.

FAQ

What is Klarna?

Klarna is a Buy Now, Pay Later (BNPL) service that allows customers to purchase items on credit and pay for them in installments.

How does Klarna work?

Customers select Klarna at checkout, choose their payment plan, and Klarna pays the merchant upfront. Customers then repay Klarna according to their agreed-upon schedule.

What are the benefits of using Klarna for e-commerce businesses?

Benefits include higher average order values, improved cash flow, access to a younger customer base, reduced risk of nonpayment, and easy integration with existing systems.

What are the drawbacks of using Klarna?

Drawbacks include transaction fees, chargeback costs, and an opaque fee structure that requires direct communication with Klarna for clarification.

Are there alternatives to Klarna?

Yes, alternatives include Shop Pay Installments, Affirm, and Afterpay, each offering unique features and benefits for e-commerce businesses.