Klarna’s Struggles Continue as U.S. Expansion falters

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Payments fintech firm Klarna has continued to struggle financially, despite having scored $2 billion in new financing last year. The company’s losses have tripled year-over-year as it continues to deal with the financial fallout of an aggressive expansion into the United States and mass layoffs that followed soon after. While investors remain optimistic about Klarna’s future prospects and its CEO promises that the worst is behind us, others doubt that Klarna will be able to turn itself around without some sort of intervention.

Image Source- Fortune

Wednesday’s report by Klarna, the inventor of “buy now, pay later,” revealed a sharp increase in losses in the first half.

From January through the end of June 2022, the Swedish payments company made sales of 9.1 billion Swedish krona ($950 million). That increased from a year before by 24%.

However, the business also incurred huge losses. The pre-tax loss for Klarna increased by around 6.2 billion krona from the previous year, more than tripling. Klarna had a loss of almost 1.8 billion Swedish krona in the first half of 2021.

The business, which enables customers to stretch out the cost of goods across a number of interest-free payments, experienced an increase in operating costs and defaults. Operating expenditures before credit losses increased to 10.8 billion Swedish krona from 6.3 billion krona during the previous year, mostly due to administrative costs associated with its quick worldwide development in nations like the U.S. In the meantime, credit losses increased by more than 50% to 2.9 billion Swedish krona.

In the past, Klarna has been profitable for the most of its history. However, in 2019, as a result of an increase in expenditures made in order to expand the company internationally, the company experienced its first loss.

The company’s spiralling losses serve as a stark reminder of the cost of its quick growth during the Covid-19 outbreak. Since the year 2020 began, Klarna has expanded into 11 new markets and engaged in a number of risky bets to increase its market share in the United States and Great Britain.

In order to compete with Affirm, its major opponent domestically, Klarna has made significant investments in user acquisition and marketing in the U.S. While this was going on, the company in April purchased PriceRunner, a pricing comparison website, in the UK. In front of upcoming rules, it has also launched a charm drive with British lawmakers and regulators.

Recently, Klarna has been pressured to make cuts. In a quick wave of job layoffs in May, the firm reduced around 10% of its global staff. In a second $800 million investment offer, the company raised cash at a valuation of $6.7 billion, an 85% decrease from its earlier valuation. This marked the capitulation of high-growth IT corporations as investors got concerned about a potential recession.

Affirm, a publicly traded fintech, has lost almost three-quarters of its market value since the beginning of 2022, reflecting the pessimistic opinion among investors in fintech on both the public and private markets, as seen by the significant discount.

Sebastian Siemiatkowski, CEO and co-founder of Klarna, said, “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 challenging economic period.

“I think at the time it was misinterpreted that we needed to take urgent and preventive action, but now, tragically, we have seen many other firms follow suit,” the author said.

In order to account for the deteriorating cost-of-living scenario, Klarna stated that it intends to restrict its approach to lending, particularly with new consumers. You won’t see the effect of this on our financials in this report yet, Siemiatkowski remarked.

Due to the short-term nature of our products, “we have a highly nimble balance sheet, especially in compared to traditional banks, but even for Klarna it takes a little bit for the impact of actions to filter through.”

In response to a worsening macroeconomic environment, fintech businesses are reducing spending and postponing listing ambitions. Investors are becoming less interested in consumer-focused services, while the spotlight is being drawn to purported “business-to-business” fintechs.

Over 150 million individuals already use Klarna, according to the business, and 450,000 shops are connected to its network. By collecting a modest percentage of each transaction that is conducted through its platform, Klarna makes the majority of its money from retailers rather than customers.

Simon Taylor, head of strategy at fintech company Sardine.ai,  “Ultimately they’ve shown there can be a lucrative business there but have doubled down on growth in the U.S. market which is expensive.”

“Market share will matter for long-term revenue there. However, it takes time, and the financing sources have changed.

However, the firm confronts fierce competition from industry heavyweights in banking and technology who are looking to profit from the sector’s expansion in the purchase now, pay later model. This fall, Apple will introduce Apple Pay Later, a BNPL product that will let consumers spread the cost of their purchases across four equal monthly payments.

Meanwhile, plans are afoot to place regulatory oversight over the BNPL market. The government of the United Kingdom has announced intentions to implement stricter affordability checks and a crackdown on deceptive advertising. The Consumer Financial Protection Bureau in the US started a market-monitoring investigation into BNPL firms.

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