Last year could hardly have started better for Swedish buy now, pay later firm Klarna. After signing up a new retailer every seven minutes over the course of 2019, the business started 2020 from a position of strength. UK customer numbers had doubled, US numbers had grown sixfold and revenues had shot up by 31 per cent to $753 million.
Then Covid-19 hit and, as country after country went into lockdown, shops around the world were forced to close. Disastrous for many, it was exactly the kind of negative global event Klarna needed to thrive. As Klarna chief executive Sebastian Siemiatkowski wrote in the company’s 2020 interim accounts, the pandemic made its offering “more relevant than ever” as retailers shifted online.
The numbers for that six-month period speak for themselves. Every day, 200 new retailers, including the likes of Groupon, Vans, The North Face and Ted Baker, incorporated Klarna’s payment technology onto their sites. Fourteen million new consumers chose Klarna as their payment method of choice. In the UK customer numbers shot up by 120 per cent. In the US the increase was 550 per cent. The value of merchandise paid for via Klarna rose by 46 per cent to £18.5 billion, leading to a 36 per cent increase in group-wide income. In 2019, the company hired Snoop Dogg “to drive awareness and market adoption”. Last year, it hired Lady Gaga.
The good news seemed like it was never going to stop. And then it did.
Half way through 2020 – Klarna’s most successful year to date – concerns started to be raised about the amount of debt UK consumers were racking up as a result of the pandemic. Debt charity StepChange warned that a £6bn “personal debt tsunami” had been created. The government’s Money and Pensions Service predicted that the number of people needing help to manage their debts would rise by 60 per cent over an 18-month period.
Klarna, which had been enabling shoppers to buy goods without having to front up any cash, was exposed. Then Alice Tapper of personal finance forum Go Fund Yourself got involved, launching the #regulatebuynowpaylater campaign after becoming concerned that young, financially illiterate shoppers were unwittingly taking on debt thanks to buy now, pay later – or BNPL. This happens because no hard credit checks are needed for BNPL products, meaning customers can use them without having to provide reams of personal information or read disclaimers about risks.
“The ambition of the campaign was not to put a stop to those providers or to say they can’t be useful,” Tapper says. “It was about providing information for consumers and protection for consumers. I was seeing lots of young people whose first encounter with credit is buy now pay later, but they aren’t familiar with the risk of the product or how to use them well.”
The Consumer Credit Trade Association, which represents 230 businesses that provide credit to consumers, has long been in favour of BNPL regulation. This is in part because no regulatory oversight puts its members – which must abide by a stringent set of rules and regulations – at a disadvantage and in part because it creates uncertainty over the true financial position of customers. Its chief executive Jason Wassell says the fact there is no requirement for hard credit checks is problematic because it means there is no way for other credit providers to know how much debt customers are already in. “You could maximise your borrowing across lots of firms in that space and the others wouldn’t know you had done that,” he says.
Arnold Pindar, chair of the National Consumer Federation, says being able to borrow from multiple providers in that way means “there are great opportunities for it all to go wrong and for people to get into debt”. Worse still, he believes Klarna, with its fluffy pink branding and influencer-endorsed promotions, has wilfully failed to take that into account. “It’s not getting into debt,” he says of the way the company positions itself, “it’s having fun.”
Against that backdrop, Tapper’s campaign quickly gained traction. In September 2020, the Financial Conduct Authority (FCA) asked its former interim chief executive Christopher Woolard to carry out a review of the sector. In January 2021 it was decided that BNPL firms would be given a set of rules to abide by after all. Now the future for Klarna is looking anything but rosy.
Given the context of young people unknowingly getting themselves into debt, it was only a matter of time before BNPL came under regulatory scrutiny. In the wake of the FCA’s announcement Klarna said it agreed that regulation had “not kept pace with new products and changes in consumer behaviour” adding that it is “now essential that regulation is modern, proportionate and fit for purpose”. Siemiatkowski was not available to comment for this piece as he caught Covid-19 at the beginning of February, but company spokeswoman Aoife Houlihan says the business would like to see the new rules come into force at speed.
Yet regulation will undoubtedly make a significant dent in Klarna’s revenue streams by weeding out the type of customer it can generate an income from. The business makes a virtue out of saying it does not charge late fees or interest payments and the ‘Mythbuster’ section of its website states “there are no interest, or late payment fees with Pay in 30 days in the UK, ever”. But the lack of fees relates specifically to the option that gives customers 30 days from the point of purchase to pay for their goods in full. Klarna also offers the option of paying for goods in three instalments and the Terms and Conditions section of its website indicates that interest of 18.9 per cent a year will be charged on any balance not repaid by the end of the BNPL period.
This interest rate is an important part of how Klarna makes money. In its 2020 interim accounts the company stated that 60 per cent of revenues came from customers in the first half of last year, and the remaining 40 per cent came from the commissions retailers pay on every sale. Those figures include money generated from the credit card-esque Klarna Account. While proportionally the business was less reliant on customer-generated revenues last year (in the first half of 2019 retailers accounted for 31 per cent of revenues and customers 69 per cent), Klarna is still dependent on a high volume of customers for its success.
Losing a proportion as a direct result of hard credit checks is one thing, but the business’s customer base is likely to take a further dent from the fact those checks will make it look far more like the stuffy, traditional credit provider its young, largely female audience is turned off by. Young Money Blog founder Iona Bain says having to draw attention to the fact it is a credit provider could be Klarna’s downfall. “It will be interesting to see if it can survive hard credit checks and disclaimers,” she says. “At the moment it’s well-oiled by that ease of use, frictionless business model.”
With customer numbers sure to fall once the new regulatory regime is in place, it is perhaps unsurprising that Houlihan stresses that Klarna is a “fully licensed bank”. Indeed, the company now appears to be banking on banking to get it out of the hole BNPL regulation will put it in.
Since it launched in 2005 Klarna’s woolly aim was to make it “easier for people to shop online”. In 2017 it was granted a banking licence by Swedish Financial Supervisory Authority, Finansinspektionen. That was followed up earlier this month with the launch of a bank account in Germany. The business said that initially the account will only be made available “to a limited number of Klarna’s most loyal consumers”, but Houlihan says the aim is to roll it out across all the markets Klarna operates in.
“This offering will soon be available in other markets globally,” she says. “Klarna already has consumer saving and deposit accounts in Sweden and Germany and we are building an integrated banking offering.”
Yet building an integrated banking offering is no small task and one that takes a significant amount of time and money. In Sweden, it took 20 months for Klarna to be granted a banking licence. Siemiatkowski said at the time that gaining the Swedish licence would build “legitimacy and trust” with regulators around the world, giving them confidence about “what kind of animal are you”. That does not give Klarna a free pass, though. In the UK, where the Bank of England says that “strictly speaking, there is no such thing as a banking licence”, it would still take up to 12 months from the point of applying for deposit-taking permissions to be granted.
For Klarna, survival becomes a question of what will come first: the BNPL laws or the banking authorisations. The Treasury has said it will work “at pace” with the regulator to design the new rules on BNPL, though it is likely they will take at least a year to come into force. Klarna itself has warned that it could take even longer as the credit rating agencies, which would be required to carry out hard credit checks on anyone wanting to use Klarna, “do not currently have the internal processes and infrastructure necessary for us to share data on our buy now pay later products”.
That will buy Klarna some time in which to ramp up its banking services. During that time it is likely to have to lay out huge sums of cash to make its systems bank-account ready. For a business that, in spite of its strong growth, had tipped into loss-making territory in the first half of 2020 (it made a net loss of £47m over the six month period) that is likely to be problematic. Last year investors Silverlake, Sequoia, Permira, Bestseller Group, Commonwealth Bank of Australia, Visa and Ant Group pumped $650m into the firm, which is reported to be preparing a further $500m fundraising round.
Houlihan says the business will “not comment on speculation” about the potential for fresh funding, but it is clear that if Klarna is serious about making its mark in the challenger bank space it will need significant capital behind it.
A recent report from Deloitte highlighted just how important technology has become to the banking sector in the wake of Covid-19. As one of the largest fintech companies in the world, with a 15-year track record behind it, Klarna is well placed to take advantage of that. And yet the challenger banking world is a notoriously difficult space to break into. Both Monzo and Revolut remain loss-making and both struggled throughout the course of last year, shedding staff and failing to make a return on their investments.
Starling Bank, which broke even in October 2020 and expected to start reporting monthly profits from November onwards, is an outlier, though the firm has yet to post its accounts for the full 2019-20 period. With Starling’s financial year running from November to November it is unlikely that any monthly profits will be reflected in those figures, which are yet to be published.
In that context, transforming itself into a banking player could be the key to Klarna’s future, but a year is a vanishingly short amount of time in which to achieve that. Having shied away from the credit-provider moniker up to now, Klarna may have no option but to own what it really is and hope its customers are not deterred by it. Its future could well depend on it.
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