“When we made our business plans for 2022 last fall, the world looked very different than it does today,” explained Klarna boss and co-founder Sebastian Siemiatkowski at the beginning of the week. He referred to Russia’s war of aggression against Ukraine, rising inflation, consumer uncertainty, heavily fluctuating stock markets and an impending recession.
Klarna has to focus and reposition itself, said Siemiatkowski. “It makes me sad that some of the colleagues and friends from different areas of the company are affected as one of the consequences.” Specifically, 700 of a total of 7,000 jobs at Klarna will be lost. And even if more and more transactions are going through Klarna, the financial start-up founded in 2005 accumulated more losses in the first quarter of 2022 than in the same period last year, mainly due to even higher costs.
Investors are upset. As the US financial newspaper “Wall Street Journal” reported last week, Klarna would be valued about a third less than last time as part of a possible new round of financing. A year ago, Klarna valued it at nearly $46 billion. Now it could be around 30 billion dollars. The company does not comment on this.
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The impending valuation discount makes it clear how high investors’ expectations of the payment service provider have been so far – and how quickly things could go downhill a bit. This does not only apply to Klarna. Many investors have withdrawn their trust from a number of other payment companies.
Hype about “buy now, pay later” is waning
The share prices of the US payment service providers Paypal and Affirm – both of which are Klarna competitors – have crashed. Paypal stock has lost nearly three-quarters of its value since its July 2021 high. It was only at the end of April that the company lowered its outlook for the full year, also on the grounds that consumers were holding back in the face of rising inflation and the war in Ukraine. Affirm’s price has fallen about 85 percent since hitting a record last November.
Affirm and Klarna are among the best-known so-called BNPL companies. In technical jargon, “Buy now, pay later” (BNPL) stands for paying in installments and on account when shopping online. In addition, Affirm and Klarna want to make shopping on the Internet as convenient as possible for consumers, Klarna, for example, with an extra shopping app.
The online payment service PayPal, which is widely used in Germany, also offers invoice and hire purchase options in addition to its direct payment method. While the purchase on account for online shopping in Germany has long been popular, consumers in many other countries pay more by credit card.
On the one hand, BNPL is considered a major trend in the payment industry and an alternative to credit card payments. On the other hand, there is criticism of online installment purchases in particular, because consumers can get into debt relatively easily and sometimes do not pay the accumulated shopping debts.
At Klarna, the volume of loan defaults has also skyrocketed as part of the growth. In addition, some classic banks are also discovering the business area for themselves and are trying to get into BNPL – sometimes with offers that are directly docked to the current account.
Inflation is causing reluctance to shop
Sebastian Maus, payment expert and partner at the consulting firm Roland Berger, sees the rising interest rates as a challenge for BNPL providers, “because their refinancing is also becoming more expensive”. Inflation is also causing consumers to be reluctant to make purchases.
From Maus’ point of view, one reason for the price losses of payment companies is that tech stocks have generally slipped. Nevertheless, the decline in payment service providers, which had previously also gained enormously, is particularly severe.
The entire payment industry benefits from the fact that online trade is booming and growth picked up again during the corona pandemic, which also drove up expectations. “Some payment companies were highly overvalued, which was also reflected in high takeover prices. The growth that existed during the corona crisis cannot be continued in this way,” says Maus.
When e-commerce growth slows, other companies in the payments industry feel the same way. The share prices of European merchant payment service providers such as Adyen, Nexi and Worldline have also fallen. Adyen stock has lost almost half its value since its peak in August.
Unlike Klarna and Paypal, these companies do not offer their own payment method, but ensure that retailers can offer and process different payment methods in e-commerce and at the checkout – a service that Paypal and Klarna also have in their repertoire. What all payment companies have in common is that they collect fees from retailers, usually a small percentage of the turnover of a transaction. As a rule, consumers do not have to shell out anything for the payment.
“With Blick, it will now be crucial how the payment sector reacts to the current challenges,” says Markus Ampenberger, payment expert at the consultant BCG. “It is important for individual payment companies that they set themselves apart from the competition with innovative services and that they have the risks from their own business model and costs under control or optimize them.”
More: Klarna improves conditions – and thus forestalls possible regulation