Fintech company Klarna’s losses tripled after aggressive US expansion and mass layoffs

Swedish payment provider Klarna logo.

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Klarna on Wednesday reported a significant jump in losses in the first half, adding to a torrent of negative news about the “buy now, pay later” major.

The Swedish payments company generated revenue of SEK 9.1 billion ($950 million) from January to the end of June 2022. This was 24% higher than last year.

But the company also incurred huge losses. Klarna’s pre-tax loss more than tripled year-over-year to nearly 6.2 billion crowns. In the first half of 2021, Klarna lost about SEK 1.8 billion.

The company, which allows users to spread the cost of purchases over interest-free installments, has seen a jump in operating expenses and defaults. Operating expenses before credit losses were SEK 10.8 billion, up from SEK 6.3 billion year-on-year, driven by administrative costs related to rapid international expansion in countries such as US credit losses, meanwhile, up more than 50% to SEK 2.9 billion.

Klarna had previously been profitable for most of its existence – until 2019, when the company slipped into the red for the first time after increasing investments aimed at growing the business globally.

The company’s ballooning losses highlight the price tag of its rapid expansion after the onset of the Covid-19 pandemic. Klarna has entered 11 new markets since the start of 2020, and has made a number of costly maneuvers to expand its foothold in the US and Britain.

In the US, Klarna has spent heavily on marketing and user acquisition in an effort to weed out Affirm, its main competitor in the US. Meanwhile, the UK company acquired PriceRunner, a price comparison site, in April. It also engaged in a charm offensive with British politicians and regulators before the upcoming regulations.

Recently, Klarna had to cut back. In May, the company cut about 10% of its global workforce in a rapid round of job cuts. The company then raised the money at a valuation of $6.7 billion — an 85% drop from the previous valuation — in an $800 million investment deal that marked the capitulation of high-growth technology companies as investors grew increasingly concerned about a potential recession.

The sharp discount reflects bleak sentiment among fintech investors in both the public and private markets, with the publicly listed fintech Affirm having lost about three-quarters of its market value since the start of 2022.

“We had to make some tough decisions, to ensure we had the right people, in the right place, and focus on business priorities that would get us back to profitability while supporting consumers and retailers during an even tougher economic period,” said Sebastian Simyatkowski. , CEO and co-founder of Klarna.

“We needed to take proactive and immediate action, which I think was misunderstood at the time, but unfortunately we have now seen many other companies follow suit.”

Klarna said it plans to tighten its approach to lending, particularly with new clients, to take into account the deteriorating cost of living situation. However, Simyatkovsky said: “You won’t see the impact of that on our financials in this report just yet.”

“We have a very flexible balance sheet, especially compared to traditional banks due to the short-term nature of our products, but even for Klarna, the impact of decisions takes time.”

Fintech companies are cutting expenses and delaying listing plans amid a downturn in the overall economy. Meanwhile, consumer-oriented services are losing their appeal among investors while so-called “business-to-business” financial technology is attracting the limelight.

Klarna says it is now used by more than 150 million people, while the company has 450,000 merchants on its network. Klarna generates income primarily from retailers, not users, as it takes a small slice of every transaction processed through its platform.

“They’ve proven in the end that there can be a profitable business out there, but they’ve doubled down on growth in the US market and it’s expensive,” Simon Taylor, head of strategy at fintech startup Sardine.ai, told CNBC.

“The market share there is going to be meaningful for long-term revenue. But it takes time and the funding taps are not what they used to be.”

But the company faces stiff competition, as tech and finance giants seek to capitalize on growth in the buy now, pay later industry. Apple is preparing to launch its BNPL product, Apple Pay later, this fall, which will allow users to split the cost of their purchases into four equal monthly payments.

Meanwhile, proposals are underway to bring the BNPL market under regulatory supervision. In the UK, the government has announced plans to introduce stricter limits on affordability and crack down on misleading advertising. In the US, the Consumer Financial Protection Bureau has opened a market watch investigation into BNPL companies.

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