What’s Going On Here?Klarna reported a mixed earnings update on Monday, so maybe the Swedish buy-now-pay-later startup should’ve been more specific about the “later” part… What Does This Mean?With its most recent valuation putting it at $46 billion, Klarna holds the title of Europe’s most valuable startup. And it’s easy to see why: cash-strapped shopaholics can’t get enough of its interest-free loans, with the company adding 70% more active users last year to bring its total to 147 million. That helped push the total value of transactions on its platform up by 42% compared to the year before, and the firm’s revenue up by 38%. But it turns out shoppers like putting off their payments a bit too much: Klarna’s credit losses – those it sustains when users don’t pay back their loans – almost doubled to $487 million. Throw in rising admin costs, and the firm’s net loss was quadruple what it was the year before… Why Should I Care?The bigger picture: This is a crowded market.
Buy-now-pay-later (BNPL) really kicked off during the pandemic, and it’s showing no signs of slowing down: Worldpay estimates that the sector accounted for 2.1% of the total value of global ecommerce transactions in 2019, and that’s expected to hit 4.2% by 2024. But with huge growth comes huge competition, and Klarna has plenty of that: it’s not just up against dedicated BNPL firms Affirm, Paidy, and Afterpay, but banks like Monzo, Revolut, and Barclays too.
Zooming in: Klarna was built for a different world.
Klarna’s credit losses are worrying enough for investors, but there are arguably even bigger problems ahead. Klarna partly funds the short-term loans it offers by its own short-term borrowing, which works in a world where interest rates are low. But with most major central banks expected to raise rates and keep raising them for the foreseeable future, cheap money – and big profits – are going to become a lot harder to come by… | 
