In 2021, Swedish fintech company Klarna became Europe’s most valuable private startup with a staggering valuation of $45.6bn.
Now, just one year later, the firm is in talks for a new equity round that would see its valuation drop to as low as $6bn (£5bn).
It has been known for several months that the fintech giant was looking to raise at a reduced valuation. But the scale of the drop has caught many in the high-growth industry by surprise.
In May, it was reported that Klarna’s valuation had dropped to around $30bn. Last Friday, that became less than $10bn, before settling at around $6bn by the end of the day.
For those keeping track, the Klarna valuation has followed a similar trajectory to WeWork – the co-working space company that presented itself as a tech unicorn – which hit a $47bn valuation at its peak before plummeting to today’s market capitalisation of $3.75bn.
Meanwhile US-based Affirm, a rival buy now, pay later (BNPL) company, has seen its share price nosedive by 80% since the start of the year amid a wider public market sell-off that has shaken tech stocks.
Soaring inflation has made capital harder to come by, with venture capitalists tightening their belts and becoming more cautious, particularly when it comes to later-stage investments.
But beyond inflation and broader macroeconomic trends, what else has caused Klarna and Affirm’s dramatic drop in valuation? And what might that mean for the wider BNPL market?
Klarna provides customers with BNPL services that allow users to split the cost of purchases into multiple payments.
Founded in 2005, Klarna was an early provider of the service. Fast forward to today and the BNPL market has exploded, with more than 100 firms specialising in pay later products.
The BNPL space has undeniably become crowded with new startups. Philip Belamant, co-founder and CEO of UK-based BNPL provider Zilch, recently addressed the impact of competition on the market.
Belamant said: “The problem with [competition in BNPL] is that everyone’s been undercutting one another to get the big deals in the markets. They’ve had a few years of killing their own revenue. And that’s a big problem.”
In addition to the competition that rival BNPL startups are causing, established companies with deep pockets like Apple and Revolut are coming to eat the lunch of younger fintech startups by incorporating BNPL services into their existing product lines.
A spokesperson from Revolut told UKTN that the company still sees BNPL as an area of growth.
“The continued push into this space by big players together with predictions from multiple research reports all point to this area continuing to grow as consumers realise its benefits,” the spokesperson said.
Despite the confidence in the growth of BNPL from Revolut – which is set to overtake Klarna’s valuation – the crowded market for providers of the service could be in part responsible for the backlash to Klarna’s rapid rise in value.
“Competition was already high before Apple announced its entry into BNPL in the US,” Korbinian Krainau, associate managing director of strategy at digital consulting firm Publicis Sapient, told UKTN.
“With a strong grip on payments through iOS devices and existing integrations to a vast set of merchants through Apple Pay, Apple might take a significant share of the market for payments-linked credit products like BNPL.”
BNPL has remained a largely unregulated sector during its lifespan, especially when compared to other similar credit products.
While customers have flocked to breaking purchases into smaller payments, there has been concern that some users aren’t fully aware of the financial risk.
“All other types of interest-bearing consumer credit, have various reporting and minimum standards that you have to adhere to,” Peter Keenan, co-founder and CEO of payment orchestration platform and BNPL aggregator APEXX, told UKTN.
Regulators in the UK and elsewhere have been working towards ramping up the rules for BNPL firms. These include requiring clearer communication that BNPL can affect user credit ratings and checks to ensure customers can afford the purchases they are splitting up.
While many BNPL firms have publicly welcomed the changes – with Klarna in particular even urging faster action to put these rules into place – the greater clarity of the risks of the service could make customers less eager.
Cost of living
Despite being marketed as a way to ease the management of payments, consumer protection groups have highlighted how those who are struggling financially can find themselves in greater debt by using the service.
Energy Support and Advice UK issued warnings in May for households tempted to use BNPL to manage rising energy bills and a general increase in the cost of living, saying “It’s going to cause massive problems” by “delaying the inevitable”.
Barclays recently published a damning report on the BNPL industry, which further highlighted how the payment product’s increased appeal during the cost of living crisis was generating unnecessarily increased debt.
The report found that a third of BNPL customers found their payments “unmanageable” and that they had found themselves in greater debt because they used it.
Jens Bader, the founder of payments company Funanga, told UKTN that “buy now pay later is an incredibly dangerous payment trend”.
Bader said: “It’s uncontrolled madness that creates very unhealthy customer behaviour and drives people into financial distress.
“I think it is irresponsible with regard to the financial education of teenagers and young adults, who are increasingly told they can buy things that they cannot really afford.”
Amid the backlash over BNPL firms putting those on low income and limited finances into debt and stricter regulations, firms may end up losing chunks of their customer base.
It has also been suggested that consumer habits showcased during the pandemic years, a time of rapid growth for BNPL, may be fading.
“Consumer behaviour has changed dramatically during the pandemic that caused the rise in online purchases and BNPL business,” said Raphael Bianchi, a senior partner at consultancy firm Synpulse.
“However, now that the economy is hit by the rising inflation and slowing economic growth, consumer purchase power has decreased, credit default risk is now higher, and higher interest rates have resulted in tighter margins.”
The future of BNPL
Despite the many challenges facing BNPL, the industry shows know signs of disappearing. Companies have continued to enter the space in the last few months, while others such as Zilch have launched into the US market.
Investors may become wary of handing out enormous funding rounds and lofty valuations, but that could see BNPL companies focus more on profitability than growth.
“I think that investors are learning to appreciate the nuances of BNPL better and will increasingly start to differentiate the players that have long-term sustainable business models from those that do not,” said Yusuf Ozdalga, a London partner at Klarna backers QED Investors.
“It is important to note that a down round does not mean that a company has a bad business model per se, it is primarily a reflection of market dynamics and investor sentiment.”