Can Klarna Prove the Doubters Wrong?

Swedish fintech Klarna prepares for $15bn IPO amid growing scrutiny of ‘Buy Now, Pay Later’ loans

Swedish fintech giant Klarna is gearing up for a $15 billion stock market launch in New York, hoping to win over sceptics of the booming but controversial Buy Now, Pay Later (BNPL) model.

Klarna Expands Into the US with DoorDash Deal

Klarna recently announced a partnership with US food delivery app DoorDash, allowing users to split their payments into four interest-free instalments. While intended to showcase Klarna’s growth in the US, the move sparked criticism online. Many questioned whether using BNPL for food was financially responsible.

CEO Sebastian Siemiatkowski defended the deal, pointing out that DoorDash sells more than just food and accepts credit cards too.

What Is Klarna and How Does BNPL Work?

Klarna popularised the ‘Pay in 4’ model, which lets shoppers pay in interest-free instalments. It has grown rapidly, partnering with over 600,000 retailers including Apple, Asos, and Sephora, and now operates in 26 countries.

BNPL was used for $342 billion worth of online purchases globally in 2023, up from just $2.3 billion a decade earlier.

Scepticism Remains Around BNPL Loans

While Klarna’s business is expanding, its BNPL model faces growing pressure. Critics argue it encourages debt and lacks regulation. Klarna makes most of its money from merchant fees but also earns from late payment charges, which made up 13.6% of revenue last year.

Research shows that nearly one-third of BNPL users have borrowed from multiple lenders at once, raising concerns about unmanageable debt.

Aiming for Profitability and Growth Beyond BNPL

Klarna is diversifying. It has become a licensed bank in Europe, allowing it to fund loans through low-cost customer deposits. It’s also rolling out services like savings accounts, cashback rewards, and advertising tools.

In 2024, Klarna reported a $21 million profit, a turnaround from a $244 million loss the previous year. Its recent partnership with Walmart — which includes issuing over $500 million in share warrants — was seen as a bold move to outpace US rival Affirm.

Regulation, Risk, and Rising Costs

Klarna is entering a volatile economic period. With interest rates rising and concerns over a potential US recession, Klarna’s short-term, interest-free lending could be at risk. Its funding costs surged from $147 million to $503 million between 2022 and 2024.

Experts say Klarna must be cautious. “This is a business that, if managed wisely, can survive a downturn,” said fintech investor Nigel Morris.

Looking to the Future: Klarna’s Vision

Klarna sees its future as more than BNPL. The company is developing an AI-powered shopping assistant, expanding into advertising, and may even explore cryptocurrency services in future.

As Klarna prepares to go public, many investors are betting not just on its BNPL success, but on its ambition to become a full-service digital bank — a rival to the likes of Monzo, Revolut, and Chime.

Source: (FT.com)