Klarna’s US plans could shake competitors

Swedish financial technology firm Klarna has launched its Pay Now service in the US, which will allow users to pay for products in full wherever the Swedish company’s payment gateway is listed.

Dec. 6, 2021

The Klarna Card was also introduced to US customers. The card, which is already available across Europe, allows users to pay 30 days after purchase without incurring interest. The non-listed, SoftBank-backed [9984.T] company is best known for its buy now, pay later (BNPL) service, which allows users to spread the cost of purchases.

Klarna’s US customer base has nearly doubled to 21 million over the last 12 months. Co-founder and CEO Sebastian Siemiatkowski said there are clear signs that people are fed up with the high interest rates and fees associated with revolving credit. They’re looking instead for “choice, control and flexibility” whether they shop and pay online or in-store.

Growth, but at a price

As of the end of September, Klarna had 90 million users worldwide. It has expanded into 20 countries, including five new markets in 2021: France, Ireland, New Zealand, Poland and Portugal. In October, Klarna rolled out its Pay Now service in the UK. It also announced a deal with Billie, a leading provider of BNPL for businesses.

Klarna is building what it describes as “an unparalleled growth proposition for retailers”. The company has partnerships with multiple online and offline retail outfits, including Bed Bath and Beyond [BBBY], GameStop [GME] and Petco [WOOF].

In the first nine months of the year, Klarna brought in SEK9.76bn ($1.07bn), up 40% on the SEK6.97bn ($760m) reported for the same period in 2020. Income from charging merchants – commission – rose 48% from SEK5.25bn ($570m) to SEK7.8bn ($850m). Global gross merchandise volume (GMV) increased 63% year-over-year, up from $35.2bn to $57.3bn.

But, as with any startup, growth has come at a cost. Klarna reported a loss of SEK3.13bn ($340m) for the first three quarters of 2021. For comparison, its loss for the same period in 2020 was SEK800,000 ($873m). Perhaps of more concern is that credit losses – incurred when a customer fails to repay a loan – were up 80% year-over-year from SEK1.6bn ($170m) to SEK2.95bn ($320m).

Much of this loss, however, could be attributed to the fact that Klarna is still in its infancy when it comes to market penetration.

A Klarna spokesperson told CNBC: “Each market entry follows a consistent financial trajectory; as volumes grow, and more customers use Klarna, market knowledge improves and credit risk decreases, making mature markets sustainably profitable.”

BNPL’s big players

While BNPL has been criticised for encouraging people to spend beyond their means, driving them into debt, this hasn’t discouraged private investors. As of July, Klarna is the second-most valuable fintech startup behind Stripe, with a value of $45.6bn.

As BNPL continues to gain traction, Klarna will no doubt benefit, as too will plenty of other big players in the market, which is expected to be worth $680bn by 2025.

Square [SQ] is to buy Australian BNPL firm Afterpay [APT.ASX] for $29bn in a deal that will close in the early part of next year. The start of 2021 saw Affirm [AFRM] go public.

For the first quarter of 2022, Affirm brought in revenue of $269.4m, up 55% year-over-year and beating Wall Street estimates of $248.2m. GMV rose 84% to $2.7bn. Net loss climbed steeply from $3.9m in Q1 2021 to $306.8m.

Affirm CEO Max Levchin said on the fourth quarter and full year 2021 call that traditional credit cards are becoming a “ball and chain” where shoppers could become trapped if they miss payments. Given the booming popularity of zero-interest BNPL, Affirm is expecting GMV to grow by more than 50% in fiscal 2022.

Affirm is well positioned to achieve this thanks to a partnership with Amazon [AMZN] – shoppers using the site will be able to spread the cost of purchases over $50. The partnership will run through January 2025 and Amazon will not offer any other non-card offerings from competitors until January 2023 at the earliest.

In a note to clients seen by Barron’s, Truist analyst Andrew Jeffrey wrote: “We believe Affirm will continue to beat out traditional [financial institutions].”

Elsewhere, Mastercard [MA] has been making moves in the BNPL market. And, Paypal [PYPL] has agreed to acquire the market leader in Asia, Paidy, for $2.7bn.

Given the interest in BNPL, if Klarna chooses to go public in 2022 then it should be one of the most hotly tipped IPOs of the year.

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