Earnings

Fintech firm Klarna’s losses triple after aggressive U.S. expansion and mass layoffs

The logo of Swedish payment provider Klarna.
Thomas Trutschel | Photothek | Getty Images

Klarna on Wednesday reported a dramatic jump in losses in the first half, adding to a deluge of negative news for the “buy now, pay later” pioneer.

The Swedish payments firm generated revenues of 9.1 billion Swedish krona ($950 million) in the period spanning January to the end of June 2022. That was up 24% from a year ago.

But the company also racked up hefty losses. Klarna’s pre-tax loss soared more than threefold year-on-year to nearly 6.2 billion krona. In the first half of 2021, Klarna lost around 1.8 billion Swedish krona.

The company, which allows users to spread the cost of purchases over interest-free installments, saw a jump in operating expenses and defaults. Operating expenses before credit losses came in at 10.8 billion Swedish krona, up from 6.3 billion krona year-over-year, driven by administrative costs related to its rapid international expansion in countries like the U.S. Credit losses, meanwhile, rose more than 50% to 2.9 billion Swedish krona.

Klarna had previously been profitable for most of its existence — that is up until 2019, when the firm dipped into the red for the first time after a hike in investments aimed at growing the business globally.

The company’s ballooning losses highlight the price of its rapid expansion after the onset of the Covid-19 pandemic. Klarna has entered 11 new markets since the start of 2020, and took a number of costly gambits to extend its foothold in the U.S. and Britain.

In the U.S., Klarna has spent heavily on marketing and user acquisition in an effort to chip away at Affirm, its main rival stateside. In the U.K., meanwhile, the firm acquired PriceRunner, a price comparison site, in April. It has also engaged in a charm offensive with British politicians and regulators ahead of incoming regulations.

More recently, Klarna has been forced to cut back. In May, the company slashed about 10% of its global workforce in a swift round of job cuts. The company subsequently raised raised funds at a $6.7 billion valuation — an 85% drop from its previous valuation — in an $800 million investment deal that defined the capitulation from high-growth tech firms as investors grew wary of a possible recession.

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

“We’ve had to make some tough decisions, ensuring we have the right people, in the right place, focused on business priorities that will accelerate us back to profitability while supporting consumers and retailers through a more difficult economic period,” said Sebastian Siemiatkowski, CEO and co-founder of Klarna.

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

Klarna said it plans to tighten its approach to lending, particularly with new customers, to factor in the worsening cost-of-living situation. However, Siemiatkowski said, “You won’t see the impact of this on our financials in this report yet.”

“We have a very agile balance sheet, especially in comparison to traditional banks due to the short-term nature of our products, but even for Klarna it takes a little while for the impact of decisions to flow through.”

Fintech companies are cutting expenses and delaying listing plans amid a worsening macroeconomic backdrop. Meanwhile, consumer-oriented services are losing their appeal among investors while so-called “business-to-business” fintechs attract the limelight.

Klarna says it is now used by over 150 million people, while the company counts 450,000 merchants on its network. Klarna mainly generates income from retailers, not users, taking a small slice of each transaction processed through its platform.

“Ultimately they’ve proven there can be a profitable business there but have doubled down on growing in the U.S. market which is expensive,” Simon Taylor, head of strategy at fintech startup Sardine.ai, told CNBC.

“Market share there will be meaningful for long-term revenue. But it takes time and the funding taps aren’t what they used to be.”

But the company faces stiff competition, with titans in the realms of both tech and finance seeking to capitalize on growth in the buy now, pay later industry. Apple is set to launch its own BNPL product, Apple Pay Later, this fall, which will allow users to split the cost of their purchases over four equal monthly payments.

Meanwhile, proposals are afoot to bring the BNPL market under regulatory supervision. In the U.K., the government has announced plans to enforce tighter affordability checks and a crackdown on misleading advertisements. Stateside, the Consumer Financial Protection Bureau opened a market-monitoring probe into BNPL companies.

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