The logo of the Swedish payment provider Klarna.
Thomas Trutschel | Photothek | Getty Images
Klarna reported a dramatic jump in first-half losses on Wednesday, adding to a flood of negative news for the “buy now, pay later” pioneer.
The Swedish payments company generated revenue of 9.1[ads1] billion Swedish kroner ($950 million) in the period from January to the end of June 2022. That was up 24% from a year ago.
But the company also suffered heavy losses. Klarna’s pre-tax loss more than tripled to almost NOK 6.2 billion from the previous year. In the first half of 2021, Klarna lost around SEK 1.8 billion.
The company, which allows users to spread the cost of purchases over interest-free installments, saw a jump in operating costs and defaults. Operating costs before credit losses came to NOK 10.8 billion, up from NOK 6.3 billion year-on-year, driven by administrative costs linked to the rapid international expansion in countries such as the USA. 2.9 billion Swedish kroner.
Klarna had previously been profitable for most of its existence – that is, until 2019, when the firm dipped into the red for the first time following a surge in investment aimed at growing the business globally.
The company’s ballooning losses highlight the cost of its rapid expansion following the outbreak of the Covid-19 pandemic. Klarna has entered 11 new markets since the start of 2020, taking a number of costly gambits to expand its foothold in the US and UK.
In the US, Klarna has spent a lot of money on marketing and user acquisition in an attempt to beat Affirm, its main state rival. In the UK, the company acquired PriceRunner, a price comparison site, in April. It has also engaged in a charm offensive with UK politicians and regulators ahead of incoming regulations.
Recently, Klarna has been forced to cut back. In May, the company cut about 10% of its global workforce in a rapid round of layoffs. The company then raised funds at a valuation of $6.7 billion — an 85% drop from its previous valuation — in an $800 million investment deal that defined the capitulation of high-growth tech companies as investors grew wary of a possible recession.
The steep discount reflected gloomy sentiment among fintech investors in both the public and private markets, with publicly traded fintech Affirm losing about three-quarters of its market value since the start of 2022.
“We’ve had to make some tough decisions, to ensure we have the right people, in the right place, focused on business priorities that will accelerate us back to profitability while supporting consumers and retailers through a more difficult economic period,” said Sebastian Siemiatkowski , CEO and co-founder of Klarna.
“We needed to take immediate and preventative action, which I think was misunderstood at the time, but now unfortunately we’ve seen many other companies follow suit.”
Klarna said it plans to tighten its approach to lending, particularly with new customers, to take account of the worsening cost of living situation. However, Siemiatkowski said, “You won’t see the impact of this on our economy in this report yet.”
“We have a very agile balance sheet, especially compared to traditional banks because of the short-term nature of our products, but even for Klarna it takes some time for the impact of decisions to seep through.”
Fintech companies are cutting spending and delaying listing plans amid a worsening macroeconomic backdrop. Meanwhile, consumer-oriented services are losing their appeal among investors while so-called “business-to-business” fintechs are attracting the limelight.
Klarna says it is now used by over 150 million people, while the company counts 450,000 sellers on its network. Klarna mainly generates revenue from merchants, not users, who take a small portion of each transaction processed through the platform.
“Ultimately, they’ve proven it can be a profitable business there, but have doubled down on growing in the US market which is expensive,” Simon Taylor, chief strategy officer at fintech startup Sardine.ai, told CNBC.
“Market share there will be meaningful for long-term revenue. But it takes time and the funding opportunities are not what they used to be.”
But the company faces stiff competition, with titans of both technology and finance looking to capitalize on the growth of the buy-now, pay-later industry. Apple is set to launch its own BNPL product, Apple Pay Later, this fall, which will allow users to split the cost of their purchases over four equal monthly payments.
Meanwhile, proposals are underway to bring the BNPL market under regulatory oversight. In the UK, the government has announced plans to enforce stricter price controls and a crackdown on misleading advertising. Stateside, the Consumer Financial Protection Bureau opened a market surveillance investigation into BNPL companies.