The logo of the Swedish payment provider Klarna.
Thomas Trutschel | Photo library | Getty Images
Klarna reported a dramatic surge in first-half losses on Wednesday, adding to a deluge of negative news for the “buy now, pay later” pioneer.
The Swedish payments company generated sales of 9.1 billion Swedish krona ($950 million) from January to the end of June 2022, up 24% from a year ago.
But the company also suffered significant losses. Klarna’s pre-tax loss rose more than three-fold year-on-year to nearly 6.2 billion kronor. In the first half of 2021, Klarna lost about 1.8 billion Swedish krona.
The company, which allows users to spread the cost of purchases over interest-free terms, saw a jump in operating costs and defaults. Operating expenses before loan losses stood at SEK 10.8 billion, an increase of SEK 6.3 billion year-on-year, driven by administrative costs associated with rapid international expansion in countries such as the US. 50% to 2.9 billion Swedish Krona.
Klarna had previously been profitable for most of its existence – that is until 2019, when the company first plunged into the red after a surge in investment to grow the business globally.
The company’s explosive losses highlight the price of its rapid expansion after the start of the Covid-19 pandemic. Klarna has entered 11 new markets since the beginning of 2020 and has taken some precious steps to expand its position in the US and UK.
In the US, Klarna has spent a lot on marketing and user acquisition in an effort to get rid of Affirm, the state’s main rival. In the UK, the company acquired PriceRunner, a price comparison site, in April. It has also launched a charm offensive with British politicians and regulators awaiting incoming regulations.
More recently, Klarna has been forced to cut spending. In May, the company cut about 10% of its global workforce in a rapid round of job cuts. The company then raised funds at a valuation of $6.7 billion — down 85% from its previous valuation — in an $800 million investment deal that defined the capitulation of high-growth tech companies as investors became wary of a possible recession.
The sharp discount reflected grim sentiment among fintech investors in both the public and private markets, with the publicly traded fintech Affirm having lost about three-quarters of its market value since early 2022.
“We’ve had to make some tough decisions to make sure we have the right people in the right place, focused on business priorities that will accelerate our return to profitability while supporting consumers and retailers through a more difficult economic period,” says Sebastian Siemiatkowski, CEO and co-founder of Klarna.
“We had to take immediate and preemptive action, which I think was misunderstood at the time, but now we have sadly seen many other companies follow suit.”
Klarna said it plans to tighten its approach to lending, especially with new customers, to take into account the deteriorating cost of living situation. However, Siemiatkowski said, “You won’t see the impact of this on our finances in this report yet.”
“We have a very flexible balance sheet, especially compared to traditional banks due to the short-term nature of our products, but even for Klarna it takes time for the impact of decisions to sink in.”
Fintech companies are cutting costs and delaying listing plans in a deteriorating macroeconomic backdrop. Meanwhile, consumer-facing services are losing their appeal to investors, as so-called “business-to-business” fintechs come under the spotlight.
Klarna says it is now used by more than 150 million people, while the company has 450,000 merchants on its network. Klarna primarily generates revenue from retailers, not users, and takes a small portion of every transaction processed through its platform.
“Eventually they proved that there can be a profitable business, but doubled in growth in the US market, which is expensive,” Simon Taylor, head of strategy at fintech startup Sardine.ai, told CNBC.
“The market share there will be meaningful for the long-term revenues. But it takes time and the financing taps are not what they used to be.”
But the company faces stiff competition, with titans of both technology and finance looking to capitalize on growth in the buy now, pay later industry. Apple will launch its own BNPL product, Apple Pay Later, this fall, which will allow users to split the cost of their purchases across four equal monthly payments.
Meanwhile, proposals are underway to bring the BNPL market under regulatory scrutiny. In the UK, the government has announced plans to enforce stricter affordability controls and tackle misleading advertising. In the United States, the Consumer Financial Protection Bureau opened a market monitoring investigation into BNPL companies.