Buy Now, Pay Later Company Klarna Announces Layoffs: What BNPL Can Tell Us About Risk Of Recession

Buy Now, Pay Later Company Klarna Announces Layoffs: What BNPL Can Tell Us About Risk Of Recession

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Image credit: Pineapple Studio / iStock, https://www.istockphoto.com/portfolio/PineappleStudio?mediatype=photography

Buy now, pay later services exploded in popularity during the coronavirus pandemic and online shoppers have grown accustomed to using installment payments, not just for big-ticket items, but for less expensive, everyday items such as clothes and cleaning supplies.

This type of debt can be risky, not only for consumers but for the companies catering to them, experts say.

Swedish buy now, pay later firm, Klarna, which ranked as Europe’s most valuable fintech startup in June 2021, announced this week that it plans to lay off about 10 percent of its global workforce as the company struggles with a worsening economic outlook.

Klarna CEO Sebastian Siemiatkowski blamed the company’s problems on “a tragic and unnecessary war in Ukraine … a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession.”

A third of U.S. consumers who used buy now, pay later (BNPL) services have fallen behind on one or more payments, and 72 percent of those said their credit score suffered, according to a new study published by personal finance company Credit Karma, Reuters reported.

In June 2021, SoftBank’s Vision Fund 2 led an investment that valued Klarna at $45.6 billion, making it more valuable than most large European banks. Now the company wants to raise up to $1 billion from new and existing investors in a deal that could value it in the low $30-billion-range — a 30 percent drop.

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It’s what’s known as a down round — when a company needs more capital but finds that the pre-money valuation of a subsequent round is lower than the post-money valuation of the previous round — and it’s bad news for founders and employees

The rapid growth of BNPL is led mainly by younger consumers, with two-thirds of the borrowers considered subprime, making them especially vulnerable to economic shocks or a possible downturn, said Marshall Lux, a Harvard Kennedy School fellow.

“Three years ago, people talked about Peloton bikes, now people are buying sneakers, jeans, socks,” Lux noted. “When people start buying household goods on credit, that signals a problem.”

Four out of five U.S. consumers now use BNPL, according to Experian, and most shoppers said buy now, pay later could replace their traditional payment method — probably credit cards.

The buy now, pay later sector is expected to be worth $166 billion by 2023. In the U.S. alone, the number of BNPL users increased 81 percent year over year in 2021, FinExtra reported.

“It felt like there was a new BNPL funding round almost every week last year,” wrote Pierre Suhrcke, a venture partner at TempoCap, for FinExtra.

The signs point to a coming recession, Suhrcke added, and he predicts it will be devastating for the BNPL industry, consumers, and investors.

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“Almost every time the usually upward-sloping yield curve has instead been inverted, an economic downturn has followed within 14 to 18 months,” Suhrcke wrote.

“The BNPL model in its current iteration has not been through such a crisis, so all associated risk management tools and processes have not yet been truly tested. Investors also need to consider the lack of experience in BNPL management teams, and if we are being honest, their own relative lack of experience. Most venture capital managers and BNPL management teams have never experienced a real credit crisis or recession, and the devastating economic impact this could have on consumers, debt providers as well as investors.”

Image credit: Pineapple Studio / iStock, https://www.istockphoto.com/portfolio/PineappleStudio?mediatype=photography