One clear sign of the boom in the “buy now, pay later” (BNPL) model is the latest fundraising round of Klarna, which saw the Swedish online payments group set a new record for the valuation of a European private fintech company at $10.65 billion, nearly double the $5.5 billion valuation in its previous fundraising round last year.
The company raised $650 million in the equity fundraising, which was led by technology investor Silver Lake Partners, alongside GIC, Singapore’s sovereign, wealth fund, BlackRock, and HMI Capital. The cash will help Klarna to continue to grow its international presence, particularly in the U.S., and to further invest in its shopping services. Investors buying now are hoping to earn later, through a likely exit via an initial public offering of Klarna shares
As stores closed for Covid-19 lockdowns and shoppers increasingly moved online, Klarna in the first half of 2020 added some 35,000 retailers to its global retailer base of over 200,000 in sectors ranging from fashion and accessories, to footwear, beauty products, electronics, and furniture. Retailers that have partnered with Klarna include names like Nike, Adidas and its Reebok subsidiary, Gymshark, VF Corp.’s brand Timberland, Clarks, Shoe Carnival, Ray-Ban, and Coco and Breezy Eyewear. Klarna says it can help retailers retain existing customers and to gain new ones with the use of its marketing tools.
While a growing number of retailers got on board, the company’s global customer base also rose by almost 14 million to some 85 million in the six-month period. Growth in the U.S. and U.K. has been particularly strong, with 550 percent and 120 percent increases, respectively, in customer numbers compared to 2019.
BNPL firms making an impact in Europe
The services of Klarna and BNPL competitors like Affirm of the U.S. and Australia’s Afterpay are making an impact on online payments in places like Europe, explained Worldpay from FIS in its 2020 global payments report. “Catering to growing consumer desires, particularly from Gen Z and Millennials, they offer flexible financing on a situational basis without the longer-term commitment and expense of traditional credit cards,” it said.
From January to June, Klarna saw its gross merchandise volume increase by 44 percent to 215 billion Swedisk kronor (€20.6bn-$22.0bn) compared to the year earlier while net operating income rose by 36 percent to SEK 4,518 million (€433m-$466m). The number of monthly active app users almost doubled compared to the year earlier to 12 million.
However, Klarna’s net loss increased to SEK 552 million from SEK 85 million the year earlier as it set aside SEK 127 million in reserves to deal with potential credit losses amid uncertainty on the macroeconomic front and as it invested to continue expansion abroad.
Klarna launched earlier this year in Australia – where about 8 percent of e-commerce spend is already through BNPL services - along with the nascent BNPL markets of Belgium and Spain. It also upgraded its Klarna app and rolled out a new Vibe loyalty program in the U.S., which aims to encourage responsible spending by rewarding consumers who pay on time. The loyalty program, which is reportedly the first in the BNPL sector, is set to extended to other countries, including Germany, Australia, Sweden, and the UK.
As it entered new markets, Klarna’s first-half credit losses rose to SEK 1,194 million, representing about 0.6 percent of total sales on the platform. The company sees an increase in credit losses in new markets with first-time customers as normal at the onset but notes that credit quality in these countries is improving steadily. It has remained steady and at low levels in Klarna’s core markets. Amid the pandemic, the company has adjusted its credit policies, tightening acceptance criteria in some markets to account for customers’ changing circumstances and ensure they will be able to pay.
Klarna was founded in 2005 in Stockholm and since 2017 has been a fully licensed bank. In its homeland of Sweden, buy now, pay later has grown to be the most popular e-commerce payment method, accounting for about 25 percent of total e-commerce. It dominates the BNPL market in Europe and holds market leading positions in the DACH (Germany, Austria, and Switzerland) and Nordic regions, areas of Europe where the penetration of BNPL services is high.
Klarna says the products offered in each individual market – including interest-free Pay in 30 days and instalment offerings (available in the U.S., U.K., Spain and Australia), financing, checkout solutions and the Klarna app - vary depending on the maturity of the market, the opportunities available and local preferences. For example, Klarna’s installment product is offered in the U.S., U.K., Spain and Australia and financing is currently available in the U.S., Austria, Sweden, Germany, Denmark, Finland, Norway and the U.K.
The majority of its revenues comes from fees charged retailers, who have increasingly relied on online sales channels to stay afloat during the pandemic. It also earns interest on financing and, in some markets, on late fees.
Growing market, competition
According to the 2020 Worldpay from FIS global payments report, BNPL services are expected to rise to about 2.8 percent of global e-commerce spend in 2023 from 1.6 percent in 2019. In North America alone, their market share is expected to more than triple, to 3.0 percent from 0.9 percent, while in the EMEA region the BNPL market share is seen rising to 8.9 percent from 5.8 percent. As market share grows, the e-commerce pie is also expected to expand significantly.
The vibrant market has attracted new entrants. PayPal, the American online payment provider, announced recently that it will launch “Pay in 4” in the U.S. PayPal’s new service will allow merchants to be paid upfront while customers pay for purchases between $30 and $600 over a six-week period in four installments.
And like Klarna, other old-timers are also expanding. After the Swedish giant’s entry in Australia earlier this year, Australia’s Afterpay has also positioned itself for growth in Europe, acquiring the Spanish firm Pagantis in August. Pagantis offers payment services for e-commerce businesses in Spain, France and Italy, largely untapped markets for BNPL. Afterpay noted that the e-commerce market in Southern Europe “exceeds €150 billion across Spain, Italy and France. With large millennial populations, a strong fashion and beauty market, and significant consumer debit card usage, there is a strong opportunity to offer BNPL services.”