Klarna joins the race for top-of-wallet status in the US with its new card offering

‘Tis the season – of card launches.

The news: Klarna is the latest player in the US market to introduce a new card offering and open its waitlist to American consumers.

While certain aspects of the Klarna card issued by WebBank may resemble those of typical credit cards, there are distinctive nuances to consider. For instance, unlike traditional credit cards, the spend limit is determined on a real-time basis, and the card does not offer the revolving credit feature typically found in traditional credit card offerings. 

“We want to offer payment option flexibility but we don’t want it to be like a credit card that builds revolving credit for consumers,” said David Fock, Klarna’s chief product and design officer in an interview. “We see it as a problem that the credit card debt in the US is hitting record levels, and we believe our options are healthier and more sustainable.”

Open to US residents, the card issuance requires being at least 18 years of age, having made a prior purchase with Klarna and repaid on time at least once, and successfully passing a credit evaluation.

Like its European version, the Klarna card enables both in-store and online payments, linking to users’ existing bank accounts. Unlike the ‘Pay in 30 days’ or ‘Pay in 3’ options, all purchases made with the card are consolidated into a single monthly statement, offering various payment terms, including zero-interest full payment, early payment, or paying overtime with interest.

However, the failure to meet payment deadlines may incur penalties from the company and could potentially jeopardize users’ creditworthiness in the future. Although the company currently does not report to credit agencies in the US, it intends to do so in the future. This situation echoes the repercussions of missed payments reported by certain BNPL services to credit agencies.

The transition to multi-product approach: Amid intensifying competition in the card space, Klarna’s strategic move into consumer credit mirrors the trajectories of industry peers like Affirm, which introduced the Affirm debit card last year, and Robinhood’s recent credit card debut. 

This shift mirrors a larger trend redefining the fintech sector, where companies are transitioning from singular product offerings and traditional B2B interactions toward a focus on broadening product portfolios and nurturing direct consumer relationships. This evolution is likely driven by the imperative to attract a larger consumer base, offer improved customer experiences, and remain competitive in the race to achieve top-of-wallet status. 

Moreover, Klarna leverages consumer preferences by focusing on a key aspect that drives credit card adoption: rewards. Research indicates that rewards rank as the second most sought-after feature and a crucial decision-making factor for consumers seeking new credit cards, trailing only behind the absence of an annual fee. 

Capitalizing on this trend with over 550,000 merchants on its network, what differentiates Klarna’s card is the enticing cashback incentive of up to 10% at select merchants within the Klarna app. This exceeds the cashback incentives provided by the recently launched Robinhood Gold Card, which offers 5% cashback on travel bookings via the Robinhood travel portal and 3% cashback on all other purchases.

A hook for Millennials and Gen Z? Klarna’s credit card has the potential to find a stronger appeal among Millennials and Gen Z. For context, first, compare the Klarna card with Affirm’s debit offering to see how they stack up against each other.

The Affirm card is a debit card with the added functionality of a credit card. This means the Affirm Card and accompanying app offer users a choice to opt for a payment plan, with interest-free or interest-bearing options, and pay over time.

While the card amalgamates the favorable attributes of both debit and credit cards, it remains categorized as a debit card, which means it doesn’t contribute to building credit history. This aligns with the prevalent usage trend among Gen Z, where over two-thirds (69%) opt for debit cards on a daily or weekly basis, compared to only 39% who frequently use credit cards — a preference largely attributed to a lack of understanding about credit cards among this demographic.

Factors such as the sense of financial control provided by debit cards, coupled with limited access or approval for credit cards, further solidify Gen Z’s inclination towards debit transactions. However, despite the advantages of debit cards for new-to-credit users, credit building remains indispensable, especially as young individuals aspire toward significant life milestones like renting an apartment or purchasing their first home, according to Bunita Sawhney, Global Head of Consumer Products and Processing at Mastercard.

Recognizing this market gap, Klarna, tapping into its existing customer base of 37 million active users in the US (150 million globally), predominantly Millennials and Gen Z, may have strategically chosen to introduce a credit card rather than a debit card. This calculated strategy creates opportunities for cross-selling, paving the way for positive outcomes for both the company and its customer base.

Millennials in the US top all brand key performance indicators and form Klarna’s strongest consumer base. Klarna’s BNPL service has also struck a chord with Gen Z, demonstrating a strong performance across a spectrum of metrics within this demographic segment, too.

Data shows that 44% of Gen Z primarily use credit cards to build their credit scores, while Millennials are most likely to use credit cards to earn rewards. Therefore, a credit card from a BNPL provider of Klarna’s scale could potentially resonate more effectively with younger demographics, Millennials and Gen Z, who happen to constitute the largest segments within Klarna’s US customer base.