Klarna, the buy now pay later giant, is under significant pressure after reporting losses of £502 million for the first half of 2022. This compares to losses of “just” £114 million in the same period last year. As we will cover in a moment, there are specific reasons why the company has reported extended losses despite increasing revenues by 24% and credit service income by 21%.
Credit losses and employee costs
It is difficult to appreciate the size of Klarna in a market which is still relatively young. The company has a staggering 150 million customers of which 18 million are located in the UK. The group saw an increase of 21% in sales revenues, to a staggering £35 billion, and a 24% jump in company revenues to £816 million.
For those unfamiliar with the buy now pay later app industry, the company offers consumers the option to stagger payments over three or more payments, an element of which is interest free. In exchange for the service, Klarna is able to charge retailers with many seeing double-digit increases in their sales. However, increased credit losses and employee costs, with Klarna downsizing in recent weeks, have led to significant losses.
Consumer spending down
Consumer spending is down across the globe, as interest rates increase and the cost of living crisis continues to bite. Even though business was up for Klarna, this additional income was more than offset by credit losses and employee costs. History shows that interest rate rises can take some time to filter through to the economy and consumer spending. Consequently, while Klarna is currently going through a difficult time there would appear to be more choppy waters on the horizon.
This challenging last few years is reflected in the company’s investment valuation which began at £4.7 billion in August 2019. A fundraising in September 2020 valued the company at £9.2 billion with a further equity issue in June 2021 increasing the valuation to £39.2 billion. However, when the company was forced to raise more funds in July 2022 this was at a valuation of just £5.8 billion.
Is this the end of Klarna?
Opinion is split regarding the short, medium and long-term future of Klarna and by definition the make-up of the buy now pay later sector going forward. Surprisingly, the company reported a profit just four years ago before undertaking a huge international expansion programme. Some analysts suggest this aggressive expansion move came at the wrong time, but hindsight is a beautiful thing!
Many analysts are also talking about the forthcoming buy now pay later regulations which will be introduced by the UK authorities, sooner rather than later. In reality, this is something that the industry has expected for some time and will actually see more dubious characters from the industry fall by the wayside. In the short-term, yes, the introduction of new regulations may impact business but it is also a perfect opportunity to educate consumers.
Summary
In hindsight, Klarna may not have planned such an aggressive international expansion programme if it had been aware of the forthcoming recession. In reality, the company is still one of the leading lights in the buy now pay later app sector and unlikely to go anywhere in the short-term. Investors recently supported the company with a £687 million fundraising albeit on a massively reduced valuation. We are not suggesting that Klarna will not experience choppy waters in the short to medium-term but this is still a growing sector. Buy now pay later services are expected to top revenues from credit cards over the next decade. This is a growing industry, which needs regulation, but also the ability for new entrants to be innovative. That is some challenge for the regulators!
