Would investors be wise to invest in Klarna's financial revolution?

Klarna has enormous growth potential and plans to rewire the global payments system

Something intriguing is taking place in the fintech space that has never been observed in the financial industry before. In their largest markets, companies like Venmo, Klarna (NYSE: KLAR), and Revolut have become so ingrained in consumers' daily lives that their names are now verbs. Whereas "Venmo" is frequently used for meals between friends in the US, "Ill Revolut you" is now the standard phrase when sending money in Ireland, where 73% of people have a Revolut account. "Klarna it" has come to mean purchasing something that is beyond your means.

Users have been drawn to these companies by their ease of use, not their excellent marketing. Due to their complicated apps, exorbitant fees, and lengthy processing times for payments, Ireland's major banks have lost market share to Revolut. Their reaction to the fintech threat is instructive. Two years after their previous attempt was abandoned, Ireland's established banks are teaming up to launch a new instant payments service in an attempt to compete with Revolut. The service will enable users to send up to 1,000 messages every day when it launches early in the upcoming year. For many years, Revolut has provided that service.

This is happening all across the world. Established financial firms that are constrained by cumbersome legacy systems and a lack of willingness to take risks and undergo reform are losing market share to fintechs. Their business strategies have been based on innovative technology that allows them to scale up across entire continents without requiring a significant physical presence.

Visa is being challenged by Klarna.

Last month, Klarna went public on the New York Stock Exchange, making it the ideal illustration. The company's buy now, pay later (BNPL) product is comparable to well-known choices like credit cards and loans, but users can open accounts in a matter of minutes and handle all payments with a single app that has explicit terms for repayment. The global BNPL market is estimated by UBS to be worth £4.33 trillion, with a current penetration rate of 5% to 6%. Some markets have experienced greater penetration than others; for instance, Klarna's home market of Sweden and Germany has 20 percent of the market, while the US has only 4 percent.

With a 45 percent market share in BNPLs, Klarna is the 800-pound gorilla in the room. While industry volumes have increased from £27 billion to £217 billion, global BNPL payment volumes through the platform have increased from £21 billion in 2019 to £96 billion for 2025. However, the true potential of Klarnas is to upend the established payment network operators, Mastercard and Visa. Of all credit cards in use globally, 37% are Visa cards and 32% are Mastercard cards. These providers do not issue the cards directly; instead, the issuer, usually a bank, does. In exchange for running the underlying payment network, Visa and Mastercard receive a percentage of every transaction.

Klarna collaborates with and is part of these networks. It began promoting its own alternative two years ago, most notably through a partnership with Apple to provide the Klarna card through Apple Pay. This has created an entirely new market. Klarna established a solid reputation in the online shopping market for BNPL cards. An important step into the in-store market is the integration with Apple Pay. What really makes a difference is its convenience. All users have to do is register through the Klarna app and integrate with Apple in order to add the Klarna card to Apple. A real card is not used in this situation. After that, users can spend as much as they like, monitor their spending within the app, and arrange payments by integrating with their preferred bank account.

UBS estimates Klarna's total addressable market, including the in-store market, to be around £10 trillion. A tenfold increase in the current volume of payments made through the Klarna platform would result from the company receiving ten percent of that. Additionally, the nearly £7 trillion that travels through Visa's network each year would still be insignificant even if the group were to increase volumes to £1 trillion.

Klarna says.

Klarna's stock prices appear low.

Klarna makes money in three ways. At 80% of the gross transaction value, BNPL is the largest. The merchant is charged between 2 and 45 percent of every transaction for this service. Because studies have shown that accepting BNPL as a payment method increases transactions and spending per customer, merchants are generally willing to pay the higher fee, which is normally around 1 percent for credit cards. Aside from BNPL, customers who pay in full account for 16% of Klarnas' total customers. Here, the fee is 0 percent. In conclusion, Klarnas' financing offer, which covers purchases over a period of three to thirty-six months, currently makes up 4:7 percent of the total volume of transactions. It makes an average of 9.52 percent here.

According to UBS, the business makes a blended total take rate of 2.51% overall. After accounting for late fees, financing costs, processing and servicing costs, and the cost of credit write-offs, Swiss bank analysts have calculated an overall blended take rate of 0.83%, which will increase to 1.03% with additional fee income. According to the base case projected by UBS, Klarna will process £125 billion in payments in 2025 (BNPL, in-store, and financing), increasing to £192 billion by 2027. The bank estimates that Klarna could make £5.6 billion in fiscal 2027 on this volume, up from an estimated £3.55 billion in 2025. UBS has projected a profit of £611 million by 2027, increasing to £1.04 billion by 2029 as the group continues to benefit from growing transaction volume and economies of scale, despite the group's expected £239 million loss before interest and tax this year (Ebit). According to these forecasts, Klarna's price-to-earnings (p/e) ratio has dropped to 16 for 2029 from 33.3 for 2027. For a business that has the ability to completely transform the global payments industry and has grown to be such an important aspect of consumers' financial lives, that seems low.