Snoop Dogg-backed fintech Klarna is taking a page out of Amex's playbook and launching a lo...

  • Klarna is the first buy now, pay later startup to launch a loyalty program.
  • Every time a shopper uses Klarna, either via its app or with partner merchants, they earn a "vibe" point that can be collected and redeemed for rewards like gift cards for Starbucks and Uber.
  • Klarna has seen demand for its product surge amid the coronavirus pandemic, with nearly 8 million users in the US alone.
  • This launch is the latest move in Klarna's larger strategy to become shoppers go-to app, David Sykes, Klarna's head of US, told Business Insider.
  • The startup has ambitions to do more with its app, like order tracking and letting users wishlist products.
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Buy now, pay later players have seen a surge in demand amid the coronavirus pandemic from retailers and shoppers alike. And as more consumers shopping online look for ways to stretch their dollars, Klarna is eager to stretch beyond its roots as a way to help consumer finance purchases.

On Tuesday, the Stockholm-based fintech launched a loyalty program where every dollar spent toward Klarna installments payments earn users a point, called a "vibe." The program is free and will initially roll out in the US before other markets.

Points will be valued at about two cents on the dollar, and can be redeemed for things like gift cards at merchants like Starbucks and Uber.

Klarna is the first buy now, pay later player to offer a loyalty program. David Sykes, head of Klarna US, told Business Insider that while loyalty programs are common among premium credit cards, the cost of those rewards programs is often baked into annual fees and interest rates.

Globally, around 80% of Klarna's users are shopping with a debit card, which typically don't have rewards or cash-back offers.

"That reflects the problem that we're solving for," Sykes said, "Young people who overwhelmingly feel either distrustful, or locked out, or whatever it might be, when it comes to traditional forms of credit."

Targeting shoppers directly is the next evolution of buy now, pay later

Klarna, founded in 2005, is Europe's highest-valued fintech. Currently valued at $5.5 billion , it has raised over $1.4 billion to date from investors including Alibaba's Ant Financial, Dragoneer Investment Group, Sequoia Capital, and Snoop Dogg. 

Startups in the buy now, pay later space like Affirm, Afterpay, and Klarna all got started by partnering with merchants and integrating into their online checkout windows. But over the past couple of years, they've increasingly looked for ways to build relationships directly with consumers.

"We want to sit at the intersection of banking and payments and retail and shopping, and we want to make all those activities easier," Sykes said.

Klarna launched its app in June of last year. It's since seen 4.4 million downloads, and has a million monthly users, Sykes said.

"The power of the app is that we can use those retail partnerships as a customer acquisition channel, where we take those consumers, we give them a great experience, and then we transition them to our app," said Sykes.

In addition to being able to use Klarna's installments anywhere, its app offers a product wishlist, price-drop notifications, and, now, loyalty points. Klarna also has plans to roll out features like order tracking.

Klarna isn't alone in looking for ways to engage users independent of retail partnerships. Competitor Affirm, which also has its own app, launched a high-yield savings account last week . Afterpay and QuadPay, too, have rolled out consumer shopping apps , giving users the ability to buy now, pay later anywhere.

But loyalty, Sykes said, is the key to customer stickiness.

"There's a reason why American Express and Prestige and you know American Airlines all have such sophisticated loyalty programs," said Sykes. "It's because there is a clear nexus between repeat usage, engaged customers, and loyalty."

And Sykes expects that in the coming months, other buy now, pay later players will catch on.

"In 12 months time, all of those competitors that play around the space will be trying to emulate this," Sykes said.

Demand for Klarna's product is surging

Since the onset of the coronavirus pandemic, Klarna, and other players in the space, have seen a surge in demand.

"There was an upward trajectory that's been turbo-charged by COVID," said Sykes. "I don't think that's going to change. I think that element is just accelerating a trend that already existed."

Klarna currently has 7.85 million users in the US, where it launched in 2015. Affirm has over 4.9 million customers , and Australia's Afterpay, which launched in the US in 2018, now has 3.6 million active users .

For consumers, using a buy now, pay later option at checkout can help spread payments over time -- typically four installments paid over six weeks. Klarna doesn't charge users interest or fees.

Instead of charging shoppers, Klarna collects fees from partner merchants for each purchase made using its installments (typically between 3 and 5%). For merchants, Klarna says that offering installments at checkout can convert browsers into buyers and increase average purchase sizes upwards of 45%.

Klarna only charges fees to partner merchants that integrate its payment option into online checkouts. When a shopper uses Klarna's app at non-partner merchants, Klarna earns a portion of the interchange fees generated from the single-use Visa debit cards they issue in-app.

From a funding perspective, Klarna is in good shape to keep growing, Sykes said.

"We feel very well-positioned, particularly from a capitalization and liquidity perspective, to grow extraordinarily quickly," said Sykes. "We're already growing at 100% increases year-on-year."

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