The end of Klarna’s easy money is bad news for the BNPL

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Sebastian Semyatkowski, the co-founder and CEO of Klarna looks a little shabby on his webcam as he explains via Google Meet why fintech is doing well despite an increasingly pissed off warnings impending recession.

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Klarna is a European heavyweight, currently the block’s most valuable private technology company. Since its launch in 2005, the Swedish unicorn has become synonymous with “buy now, pay later” (BNPL), a type of debt popular with Gen Z that allows shoppers to split the cost of their online purchases over several months. The company claims to have 147 million active users. users in 45 countries.

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But Klarna’s dream of replacing credit cards, which Siemiatkowski describes as “the worst form of credit,” faces a number of existential threats. The company’s staff is still in critical condition. layoffs it affected 10 percent of its employees and new regulation which will impose stricter rules on BNPL suppliers in the UK, one of its key markets. At the same time, BNPL executives told WIRED that investors were losing faith in the sector in the face of a potential recession. “BNPL is relatively new. They want to understand how we can weather this storm,” says Libor Michalek, CTO of another BNPL provider, Affirm. June 16 Wall Street Magazine reported that Klarna was trying to raise money based on a $15 billion valuation, which means it believes the business is worth $30 billion less than last year. Klarna declined to comment on what she called “speculation”.

Semyatkowski believes that the change in investor sentiment is due to turbulence and a new strategy that is holding back growth plans. “Six to nine months ago, investors were saying, ‘The only thing that matters is growth, just focus on it,'” Siemiatkowski says, claiming that this is what caused the layoffs. “We have to admit that things have changed in the last six months. Investors now want to see profitability. They want to understand how we’re going to be profitable right now.”

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Focusing on short-term profitability will be an aberration in Klarna’s strategy. The company’s net loss rose to SEK 2.5 billion ($254 million) in the first quarter, four times higher than in the same period last year, as the company expanded heavily in the US. “Klarna was profitable for the first 14 years of its existence, but in recent years we have invested so much in new products and services, and in new markets like the US, we depended on people putting more money into the company. ” He says.

Increased competition is also putting pressure on the company. Semyatkowski describes Apple’s decision offer your own BNPL product as confirmation of Klarna’s concept. But a Klarna employee who worked with trade partnerships until they were laid off due to layoffs expressed concern within the company that the market was becoming more and more crowded. “We have always tried to outperform our competitors, or at least fight them off, because if our competitors are also present in our stores, we know we will lose market share,” they say.

Apple’s actions show that Klarna’s competition is increasingly coming from established companies integrating BNPL services rather than challenger startups. Consumer bank Natwest said it would launch a BNPL service this year. summer. PayPal debuted its monthly PayPal Pay service earlier in June, the same month UK digital bank Zopa said it would also launch a BNPL product.

The problem of the summer surge in competition is exacerbated by a UK government plan announced on 21 June requiring lenders to run affordability checks on people using BNPL to make sure they can afford the loans they take out. The sector is currently unregulated and half of British adults with BNPL credit said they were having a hard time keeping up with household bills and loan repayments, according to interview through debt charity StepChange. “Most providers don’t have availability checks, and there’s nothing stopping someone from taking out multiple BNPL loans from different retailers at once,” says Sue Anderson, Head of Media at StepChange. On June 23, StepChange and British bank Barclays published joint research work while 876,000 Britons are at risk of getting into debt because of the unregulated BNPL market. Alex Marsh, head of Klarna in the UK, said the study was an attempt by Barclays to promote its own “high-cost” loan products.

Klarna, who introduced stronger UK credit checks in October and voluntarily began reporting to UK credit agencies in June – it’s not the only company subject to regulation. But it makes sense that the company is a leader for the BNPL. “All eyes are on Klarna, the BNPL poster child,” said Dan Ives, an equity analyst at investment firm Wedbush. The sector was born in an era when interest rates were low, which meant it was cheap to borrow money to bridge the gap between retailers paying and consumers getting paid. “Now it’s the other way around,” says Logan Allin, founder of fintech investment firm Fin Capital. “They can’t raise capital so easily, and their consumers aren’t as healthy and as self-confident. So that’s a real problem.”

Australia, home of the BNPL, provides an unsettling glimpse into the future. Despite the rise in BNPL trades, profits in this sector have been rare. In 2020, only two of the 15 BNPL companies listed on the Australian stock market made a profit, says Angel Zhong, professor of finance at the Royal Melbourne Institute of Technology.

“After huge growth in 2020 and 2021, there is general agreement that the BNPL sector is facing [its] day of reckoning,” Zhong says. “The significant rise in market value in 2020-2021 was driven by investor optimism about the tech bubble and increased investor participation in stock markets around the world. Gradually, as the profitability of this sector is revealed, some investors are leaving it.” As a result, smaller players are absorbed by competitors. Australian Sezzle confirmed in January it is in talks with larger competitor Zip about a possible merger, while financial company Latitude offered A$335 million ($233 million) to buy BNPL competitor Humm and the credit card business.

To survive, some lenders are trying to distance themselves from the BNPL slogan. “Forty percent of our transactions are debit. I don’t know how many times I will have to repeat this,” says Semyatkowski. “In that sense, we are more like Paypal. We have a wallet. We have a lot of other financial services besides ‘buy now, pay later’ but we’re very connected to this because it’s been a huge part of our success in the UK and US.”

Other companies are trying to stand out from the rest of the market by hitting their competitors. Ten-year-old Affirm, which competes with Klarna in the US, says what sets it apart is how it focuses on long-term customer relationships. Klarna is “so interested in this customer acquisition that it’s going to cut our workforce to keep marketing costs down,” says Michalek, CTO of Affirm. “We just took a completely different approach, focusing on long-term customer value.”

Philip Belamant, CEO of four-year-old Zilch, says his company does business differently. Zilch’s competitors are making deals with retailers promising to lend to a certain subset of people, which means even those who can’t afford the purchase they make are getting approved, he said. “We don’t have a retailer telling us what we should or shouldn’t do, and we don’t have contractual obligations to lend,” Belamant says.

But Klarna’s age means it’s one of the few BNPL lenders to have weathered the recession. Now it remains to convince investors that the company – like the BNPL concept – can survive if another appears.

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