Klarna: buy-now-default-later borrowers will test BNPL mettle

Klarna has promised investors to slow its breakneck expansion. A supply-side recession and cost of living crisis should help with that. The Swedish buy now, pay later group will find it harder to fulfil a second pledge: to return to profitability.

Results on Wednesday highlighted the difficulty: operating losses in the first half of the year widened to SKr6.3bn ($602mn) from SKr1.7bn last year.

BNPL groups rose to prominence thanks to the pandemic-era boom in ecommerce. Customer numbers, sales and valuations all soared. The going is now far tougher. Competition and regulatory scrutiny have intensified. Higher interest rates make funding more expensive. The cost of living crisis means bad debts are rising.

At Klarna net credit losses rose to $276mn from $175mn in the first half of last year. While the allowance for loan losses ballooned to $376mn, it remained the same proportionately as last year at 5.5 per cent of outstanding loans.

That is well above the 1.8 per cent delinquency rate reported for all US credit cards in the second quarter of the year. But credit losses across western economies have remained historically low since peaking after the financial crisis at 7 per cent. Those modest costs were a function of the low-rate environment we are now leaving behind.

Valuations reflect an about-turn by investors. Privately held Klarna commanded a valuation of $46bn last year. The figure had fallen to $6.7bn post-money at a funding round this July. Share prices for listed peers have followed the same pattern. US-listed Affirm has dropped almost 80 per cent since the start of the year.

Klarna has been a big marketing success, piggybacking on the consumer brands it partners with. But the financial credentials of any fast-expanding lender are always questionable. Management claims to superior credit judgment are so much hot air until tested by a few tough years of trading.

Unless performance is at least as good as incumbent banks, they will be entitled to say “told you so”. In the meanwhile, profits will remain elusive for Klarna.