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European split payment giant Klarna in deep trouble as interest rates rise

[AVIS D’EXPERT] Klarna’s business model was based on low rates. The group is forced to raise new funds and lay off 10% of its workforce. Decryption with our expert Guillaume Almeras, founder of the monitoring and consulting site Score Advisor.

Maybe you’ve never heard of Klarna. However, through major brands, more than a million French people have already used his services to pay for their purchases in installments. Klarna is the most amazing success of the European fintech. Founded in Sweden in 2005, the company was valued at $5.5 billion in 2019. In early 2022, following a massive investment by Softbank, its valuation reached $45.6 billion, far exceeding most of the major European banks. Everything then seemed possible and Klarna confidently announced that it was aiming for a valuation of $60 billion, no doubt through an IPO… now cautiously postponed.

Because nothing is right! Klarna just announced the layoff of 10% of its 6,500 employees. It’s trying to raise funds, but on the basis of a valuation revised down to $30 billion. The two main competitors are not doing any better. The struggling American Affirm has almost halved in the last three months. Australia’s Afterpay has just been acquired by Square.

The markets have been feverish since the beginning of the year and dark clouds are gathering. As quickly as Split Payment grew, competitors emerged. The banks in particular quickly realized that it was just a simple consumer loan. As volumes soared – in the United States, Klarna tripled its business volume in a single year and added 25 million customers – so did risks and losses. Klarna states that they are 25% to 30% below the average in the consumer credit sector. However, it has been found that in the United States, the most financially vulnerable households are four times more likely to use split payments than the rest. This is attracting the attention of regulators. Why should split payment platforms escape the regulatory restrictions that weigh on traditional lenders? The payment options that these platforms allow are not even accounted for with the other balances of the people who use them.

A tough proposition for banks to compete with

Somewhat in anticipation of the appeal, Klarna has just made the decision to share information about its customers’ transactions and reimbursement behavior with the two main UK rating agencies. But could Klarna – which has so far only recorded losses – meet the requirements affecting banks? This is a key question that actually affects the whole of fintech and the economic model that new financial players have generally followed to date. And the answer is: No!

As already mentioned, Klarna’s success has been overwhelming: 147 million customers in numerous countries on two continents and 400,000 companies use its services. The score achieved, highlighted above, may have seemed exaggerated. But which bank today can boast of such an international presence and such dynamic development? Behind Klarna was a solution that was as simple as it was useful and that can give companies 15% to 25% more business volume: interest-free installment payments; or generalizing the benefits of a credit card to a larger number of customers by paying them much less.

An offer that the banks found difficult to match, but which was based on taking heavy losses and being funded almost exclusively by investors – hence the huge fundraising that drove up valuations every time. This is a phenomenon that many other new tech players have experienced.

victims of rising interest rates

It was like a race: By exploiting competitive advantages over traditional providers, we had to assert ourselves on the market as quickly as possible and diversify the offer. Klarna has been actively working on this, through several acquisitions and the development of new services (up to and including an option for…immediate full payment!).

Yes, but we need to talk about all of this in the past tense. Because all of this was ultimately based on low interest rates. Blow them up and it all stops for Klarna. Because when investors’ appetites fall, the model that has allowed it to compete fiercely with banks does not exactly allow for the refinancing of outstanding debts at arm’s length, especially when it comes to bearing rising risk costs and managing inflation. Klarna won’t collapse, but in its own way Klarna could herald the end of tech entrepreneurs who, thanks to the stock market and mutual funds, became billionaires for years when money was worth nothing without ever making a dollar!

By Guillaume Almeras, founder of monitoring and advice site Score Advisor

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