Klarna exec blasts 'mind-boggling' Barclays BNPL research

BNPL is a credit crisis waiting to happen

Kudos to Klarna for calling BS on Barclays' posturing.  Until BNPL came along, credit card debt used to be the pet whipping boy of the common man. Unlike credit card, BNPL debt is free. 

https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/one-in-12-now-using-buy-now-pay-later-to-cover-essentials/

So this is not getting into debt? Agree Barclays is not without sin..... Other, more consumer friendly organisations have much better credentials when it comes to analysing BNPL for its up-and-down-sides. Like gambling, in moderation its fine. 

I said BNPL is free debt.

I didn't say BNPL is not debt.

Nothing is free.Neither is Klarna.

Yes, Klarna may claim they offer "interest free credit". But once smoothly onboarded, customers likely will start revolving credit to finance their purchases.

As per Klarna's UK website: "The Annual Percentage Rate (APR) for purchases is between 0-18.99%."

So, double the 10,1% APR that Barclays and StepChange charge.

"Interest Free Credit" means Free. Period. 

If customers start revolving credit, then Klarna will charge interest. If Klarna charges interest, there may be half a dozen other BNPLs who may offer to balance transfer Klarna's credit free-of-cost. 

While checking account has a lot of lock-in, we already know that people have different credit cards to get best deals from different merchants. Compared to credit card, BNPL has even lower lock-in.

Every line item on a credit card statement is a separate loan account in BNPL and an opportunity for yet another BNPL. There's ZERO switching cost from one BNPL to another. In fact, there's nothing stopping a customer from being a customer of multiple BNPL providers concurrently.

You are assuming that people using BNPL are clever enough to do this. I do not believe that the great majority are. Most are using the facility to short term borrow. Someone is paying the BNPL provider. If not the borrower, then the merchant. Nothing is free.

So Credit cards are also free, you just have to pay your statemented balance off in  full within the terms set by the issuer, and not revolve, and not take cash.  I am sure this will find its place,  similar to Payday loans, there will be an initial  goldrush..... then the regulators will arrive, and then things will calm down.

Maybe because I'm in marketing, I never underestimate the consumer. Besides, as BNPL penetration increases and the number of BNPLs used by consumers increases, there will always be startups that will help consumers to consolidate their BNPLs.

I never said BNPL is free for everyone. I only said it's free credit for the customer, which it is. Merchants pay 4-6% MDR for BNPL. Such a high merchant fee is the reason why, by the standards of VC-backed businesses with high cash burn, BNPL has one of the best unit economics.

Yes, just that BNPL can claim longer free credit period, say, 60 days, compared to credit card, which is free credit for 15-50 days depending upon the date of spend. 

i think you may have somewhat  superficial understanding of human factors. Debt is rarely free. 

More than two in five Buy Now Pay Later (BNPL) customers borrowed money to make repayments, Citizens Advice has found. The types of borrowing included overdrafts, borrowing from friends and family, loans and payday loans. The most popular was credit cards (26%).

Younger shoppers were most likely to borrow to pay off BNPL purchases. The charity found 51% of 18-34 year olds borrowed money to pay off BNPL debt, compared to 39% of 35-54 year olds and 24% of over-55s.

These latest findings come as the BNPL market continues its meteoric growth. But the sector remains unregulated. 

Citizens Advice is calling for regulation to protect customers, including market-wide affordability checks and clearer information at checkouts. Worryingly, the charity found more than one in 10  Buy Now Pay Later customers didn’t fully understand how the repayments would be set up. https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/

...and you have an extremely vivid imagination.

People borrow money to put in fixed deposit, that doesn't mean fixed deposit is debt.

Likewise, borrowing money at interest from somebody else to make BNPL repayments does not mean BNPL is charging for its debt. If you don't pay interest to BNPL company, then it is free debt. Period.

To claim that MDR is the value in this for the operators is to ignore what comes later..... People borrowing from Payday lenders, loan sharks, Credit cards, etc, anything but free of stress.... If 2 in 5 users have had negative impact on credit score then something is wrong, I have added some more research extracts and links below  if you want to check it out                     52% of people who have used BNPL in the last 12 months have another debt or repayment to manage alongside their BNPL payments. 1 in 5 people that have other debts to repay say that these only started after they first used BNPL. For those already in debt when they started using BNPL, 17% have seen their debt get worse in the last year and 45% attribute this to using BNPL. Buy now pay later has a knock on impact on people’s other debts. 2 in 3 have prioritised paying a BNPL fee or repayment instead of another debt or repayment. The financial impacts of struggling with buy now pay later purchases are long-lasting. 2 in 5 BNPL users have had their credit score impacted by using BNPL.                                                                               https://www.citizensadvice.org.uk/Global/CitizensAdvice/Debt%20and%20Money%20Publications/BNPL%20report%20(FINAL).pdf

It is announced this evening that the market valuation of Klarna has dropped by 85%. I wonder why?

I wonder why Klarna had a $45B valuation last year?

Because it was over-hyped..... just like all the Payday loans companies....  did you see the most recent  Finextra announcement on Klarna, large operating losses are kicking in now....Remember.... Valuations are just that... Until someone puts their hands in their pockets they are only a hope and often hype  :-)  You are now allowed to slap your own forehead and say.... DOH!    

Klarna is closing in on a funding round that would see the BNPL giant's valuation slashed from $45.6 billion last year to just $6.5 billion, according to the Wall Street Journal.weden's Klarna is working to raise about $650 million, most of it from existing investors led by Sequoia Capital, says the Journal, citing anonymous sources.

The valuation would represent a massive discount from last June's $639 million funding round, when the firm was riding the buy now, pay later wave.

Per TechCrunch, during the period when Klarna's valuation has fallen from $45.6B (Jun 2021) to $6.5B (Jul 2022), the company's fundamentals have improved sharply e.g. higher user count, greater revenues. 

So Klarna's valuation has fallen due to inflation concerns, Russia-Ukraine war, and fear of recession, which are extrinsic, macroeconomic factors that have also rekt the stock prices of dozens of other companies including AirBnB, Amazon, Apple, Coinbase, Facebook, Google, JP Morgan Chase, Microsoft, Robinhood, Shopify, Tesla, et al. 

So the higher valuation was due to the existence of a perfect environment and the loss is all due to the move to a challenging environment, nothing to do with regulation, operating losses, lack of cross checks between different BNPL and other credit providers then,,, its all due to weaknesses in other players and the market?  I see. 

No, no, the higher valuation was because of Klarna's sound business model and solid performance aka intrinsics whereas the lower valuation is because of worsening macroeconomic conditions aka extrinsics.

Then they will be well placed to weather the storm....  We can follow the stock price in successive funding rounds.... some more on the fundamentals: 

1. Klarna’s total operating expenses climbed 70% last year to 15.7 billion Swedish krona ($1.6 billion), but total operating income rose only 38% in 2021 to 13.8 billion krona ($1.4 billion).

2. Still, Klarna said its operating losses for the 2021 calendar year widened to 6.58 billion krona, or $688.85 million, from 1.63 billion krona in 2020, Reuters reported. 

3. According to data from the New York market research firm Yipitdata, Affirm dominates the U.S. market with a 40% market share, based on payments volume, followed by Klarna with 19.6%, Afterpay with 16.4%, PayPal’s Pay in 4 offering with 11% and Zip with 4.2%. The universe of rivals is rounded out by smaller players that have been acquired or will be soon, including Sezzle, which was swallowed this year by Zip.

4.As growth slows, it will become harder for BNPL providers to make money, partly because it will become more difficult to satisfy the demands of customers looking for the best deal. That in turn will make it tougher to meet the expectations of investors looking for a return on their investments. None of those efforts will be easy or cheap.

Frankly speaking BNPL is credit and it is well understood by a large proportion of customers at high level. Though not many understand the nuances, calculations and repurcussions of non payments. At the end of the day, BNPL is all about facilitating the transaction for retailer and consumer and is a fabulous value proposition for both. In medium term, lenders will figure out the pockets of customer segments and transactions to make money. I believe as long as customers have visibility and clarity in terms of interest, charges & penalties - may be regulator can standardise the presentation, it is a fabulous product and should be subjected to low touch regulation. Contineous supervision to avoid the draconian pricing similar to Payday loans will not be out of place.

It is not a fabulous product. It is a competitor to credit cards which is easier to use, but has siginifcant consequences if you default, similar to credit cards. The real cost is to the retailer. I am unsure if retailers will accept these costs in the long term. It has worked to date because Covid has changed the playing field. Credit card companies have stronger tests on affordability than BNPL companies, which is why the defaults are much lower on credit cards. BNPL is contributing to spiraling debt in many families because it is so much easier to take on the debt.