Klarna

Affirm

Klarna

Klarna makes money from merchant fees and consumer interest. Merchants pay Klarna 3-6% of each transaction — they're willing to pay because Klarna increases conversion rates by 30%+ and average order values by 45%.

On "Pay in 4" (interest-free installments), Klarna makes money purely from merchant fees. On longer financing (6-36 months), Klarna charges consumers interest up to 25% APR.

Klarna also earns revenue from its shopping app (affiliate commissions when users discover and buy from merchants), and from its Klarna Card.

Affirm

Affirm makes money from two sources. First, merchant fees — when a retailer offers Affirm at checkout, Affirm charges the merchant 5-8% of the transaction value.

Merchants pay because Affirm increases average order values by 85% and conversion rates by 20%. Second, consumer interest — on longer-term loans (6-48 months), Affirm charges interest ranging from 0% to 36% APR depending on the buyer's credit profile.

The 0% APR loans are fully subsidized by the merchant.

Klarna

Sebastian Siemiatkowski, Niklas Adalberth, and Victor Jacobsson were students at the Stockholm School of Economics. In 2005, they entered a startup competition with an idea: let people buy things online and pay later.

At the time, online shopping was still new and most people were terrified of entering their credit card details on the internet. The idea was simple — Klarna would pay the merchant immediately, and the customer would get an invoice with 14-30 days to pay.

The competition judges hated it. The idea was dismissed as financially irresponsible and the team didn't win.

But Siemiatkowski pressed on. Swedish e-commerce was growing fast and merchants were desperate for any way to reduce cart abandonment.

Klarna's "pay after delivery" model was a hit because it shifted the risk — customers could receive the product, try it on, and only pay for what they kept.

The first customers were Swedish e-commerce merchants selling fashion and home goods. Klarna handled the invoicing, fraud detection, and collections.

Merchants saw conversion rates jump because customers were more willing to buy when they didn't have to pay immediately.

Affirm

Max Levchin was one of the original PayPal Mafia — he co-founded PayPal with Peter Thiel and Elon Musk. After PayPal sold to eBay for $1.5 billion in 2002, Levchin built several companies including Slide (sold to Google for $182 million).

But he kept coming back to the same idea: consumer credit was fundamentally broken.

Credit cards were designed in the 1950s and hadn't meaningfully changed. They used opaque pricing — minimum payments that stretched debt over decades, late fees that punished the most vulnerable, and interest rates that compounded until people owed three times what they originally spent.

Levchin thought technology could do better.

In 2012, he founded Affirm with a radical proposition: transparent lending. When you buy something with Affirm, you see the exact total cost upfront — the principal, the interest, and the exact number of payments.

The total never changes. There are no late fees.

If you miss a payment, Affirm pauses your ability to buy more but doesn't charge you extra. The idea was to make lending honest.

Klarna

Klarna grew by being embedded at checkout. The strategy was to sign up the biggest online retailers and become a payment option alongside Visa and PayPal.

Once Klarna was at checkout, consumers discovered it organically. The "Pay in 4" button became ubiquitous across fashion, electronics, and home goods retailers.

The Klarna app became a growth engine beyond checkout. By building a shopping app where users could browse products, discover deals, and track deliveries, Klarna turned from a payment method into a shopping destination.

The app has 35+ million monthly active users who start their shopping journey inside Klarna before even visiting a retailer.

International expansion was aggressive. Starting in Sweden, Klarna rolled out across Europe, then into the US, UK, and Australia.

The US became the biggest growth market — American consumers were especially receptive to Pay in 4 as an alternative to credit cards. By 2023, Klarna had 34 million US users.

Affirm

Affirm grew by landing big merchant partnerships. The breakthrough was Peloton in 2019 — when Peloton offered Affirm financing at checkout for its $2,000+ exercise bikes, both companies exploded.

A huge portion of Peloton purchases were financed through Affirm. Then came Walmart, Amazon, Shopify, and Target.

Each major retailer partnership brought millions of new consumers.

The "no hidden fees" message cut through. In a world where every financial product has fine print, Affirm's transparency was refreshing.

Levchin made honesty the brand. Every ad, every checkout screen, every email showed the exact total cost with zero surprises.

Consumers who had been burned by credit cards were drawn to a product that treated them like adults.

The Shopify integration in 2020 was a game-changer. Shop Pay Installments, powered by Affirm, made BNPL available to hundreds of thousands of Shopify merchants instantly.

Overnight, Affirm went from needing individual merchant partnerships to being embedded in an entire e-commerce ecosystem.

Klarna

The valuation collapse was humiliating. Klarna raised at a $46 billion valuation from SoftBank in 2021.

One year later, they raised a down round at $6.7 billion — an 85% haircut. It was the most dramatic valuation drop in fintech history.

Employee stock options were underwater. Siemiatkowski had to lay off 10% of the workforce.

The entire BNPL category went from hot to radioactive in months.

Credit losses are the existential risk. Klarna is lending money to consumers who want to buy things they can't afford to pay for right now.

When the economy slows, defaults rise. Klarna's credit losses hit $1 billion in 2022.

The company had to tighten underwriting significantly and pull back from riskier markets. The tension between growth (approve more loans) and profitability (reject risky borrowers) defines every quarter.

The IPO in 2025 was a comeback story but with caveats. Klarna went public at $15 billion — a major recovery from the $6.7 billion trough but still less than a third of its 2021 peak.

The company finally turned profitable by slashing costs with AI (replacing hundreds of customer service agents with AI chatbots) and tightening credit standards. But investors remain cautious about the BNPL model's long-term sustainability.

Affirm

Peloton dependency almost sank the company. At its peak, Peloton accounted for nearly 30% of Affirm's revenue.

When Peloton's business collapsed after COVID — demand evaporated, the stock crashed 95%, and the company laid off thousands — Affirm lost its biggest customer practically overnight. The stock fell from $170 to $9.

Affirm has since diversified, but the Peloton lesson was brutal.

Credit risk is the fundamental challenge. Affirm is lending money to consumers.

If the economy goes into recession and people stop paying, Affirm takes the losses. Delinquency rates have crept up as the post-COVID economy normalized.

Unlike banks that have decades of lending data and massive balance sheets, Affirm is still proving its underwriting models work through a full economic cycle.

The BNPL category has attracted regulatory scrutiny. The CFPB has warned that buy-now-pay-later products can lead to debt accumulation — consumers stacking multiple BNPL loans across different providers.

Affirm argues its model is fundamentally different from competitors because it underwrites every transaction and never charges late fees, but the regulatory risk applies to the entire category.

Klarna

Pay in 4 is the signature product — split any purchase into four interest-free payments over six weeks. Pay in 30 lets customers receive the product first and pay within 30 days.

Financing offers longer-term payment plans with interest for larger purchases. The Klarna App is a shopping destination — browse deals, track orders, manage payments, and earn cashback.

The Klarna Card is a physical Visa card that lets users Pay in 4 anywhere. Klarna Creator is a platform for influencers to earn commissions sharing products.

Klarna AI is their customer service chatbot that handles two-thirds of support queries.

Affirm

Affirm Pay-over-Time lets shoppers split purchases into biweekly or monthly payments at checkout. Affirm Pay-in-4 is the interest-free option — four payments over six weeks with no interest.

The Affirm Card is a physical debit card that lets you use Affirm anywhere Visa is accepted, not just at partner merchants. Affirm Savings is a high-yield savings account.

The Adaptive Checkout technology shows each customer personalized payment options based on their credit profile in real time.

Klarna

Sequoia Capital, SoftBank, Silver Lake, GIC, Atomico, Commonwealth Bank of Australia, Heartland

Affirm

Khosla Ventures, Lightspeed Venture Partners, Founders Fund, Spark Capital, GIC, Baillie Gifford