What does fintech’s dramatic fall mean for BNPL

In 2021, the Swedish fintech company Klarna became Europe’s most valuable private startup with a staggering value of $ 45.6 billion.

Now, just one year later, the company is in talks about a new round of shares that will see its valuation fall to as low as $ 6 billion (£ 5 billion).

It has been known for several months that the fintech giant was looking to raise to reduced value. But the scale of the downturn has surprised many in the high-growth industry.

In May, it was reported that Klarna’s valuation had fallen to around $ 30 billion. Last Friday it was less than 10 billion dollars, before at the end of the day it was around 6 billion dollars.

For those who keep track, the Klarna value has followed a similar path as WeWork – the co-working space company that presented itself as a technical unicorn – which reached a valuation of $ 47 billion at the top before plummeting to today’s market value of 3, $ 75 billion.

Meanwhile, US-based Affirm, a rival buy now, pay later (BNPL) company, has seen its share price fall by 80% since the beginning of the year, amid broader public market sales that have shaken technology stocks.

Rising inflation has made it more difficult to obtain capital, with venture capitalists tightening and becoming more cautious, especially when it comes to investing in later stages.

But beyond inflation and broader macroeconomic trends, what else has caused Klarna and Affirm’s dramatic drop in valuation? And what could that mean for the broader BNPL market?

Competition

Klarna provides customers with BNPL services that allow users to divide the cost of purchases into several payments.

Klarna was founded in 2005 and was an early provider of the service. Fast forward to today and the BNPL market has exploded, with more than 100 companies specializing in pay later products.

The BNPL space has undeniably been crowded with new startups. Philip Belamant, co-founder and CEO of the British BNPL supplier Zilch, recently addressed the impact of competition in the market.

Belamant said: “The problem with [competition in BNPL] is that everyone has undercut each other to get the big deals in the markets. They have had a few years to kill their own income. And that’s a big problem. “

In addition to the competition caused by rival BNPL startups, established companies with deep pockets such as Apple and Revolut are coming to eat the lunch of younger fintech startups by incorporating BNPL services into their existing product lines.

That’s what a spokesman for Revolut says UKTN that the company still sees BNPL as a growth area.

“The continued pressure into this area from major players along with predictions from several research reports all point to this area continuing to grow as consumers realize the benefits,” the spokesman said.

Despite confidence in the growth of BNPL from Revolut – which is set to bypass Klarna’s valuation – the crowded market for service providers may be partly responsible for the downturn in Klarna’s rapid rise in value.

“Competition was already high before Apple announced its entry into BNPL in the United States,” said Korbinian Krainau, Deputy CEO of Strategy at digital consulting firm Publicis Sapient, to UKTN.

“With a strong grip on payments through iOS devices and existing integrations to a large set of merchants through Apple Pay, Apple can take a significant share of the market for payment-related credit products such as BNPL.”

Regulation

BNPL has remained a largely unregulated sector over its lifetime, especially compared to other similar credit products.

While customers have flocked to split purchases into smaller payments, there have been concerns that some users are not fully aware of the financial risk.

“All other types of interest-bearing consumer credit have different reporting and minimum standards that you must adhere to,” said Peter Keenan, co-founder and CEO of the payment organization platform and BNPL aggregator APEXX, UKTN.

Regulators in the UK and elsewhere have been working to increase the rules for BNPL firms. These include demanding clearer communication that BNPL can influence users’ credit ratings and checks to ensure customers can afford the purchases they split.

While many BNPL companies have publicly welcomed the changes – with Klarna in particular even calling for faster action to put these rules in place – the greater clarity of the risks of the service can make customers less eager.

The cost of living

Despite being marketed as a way to facilitate the handling of payments, consumer protection groups have highlighted how those who are struggling financially can get into greater debt by using the service.

Energy Support and Advice UK issued warnings in May to households tempted to use BNPL to deal with rising energy bills and a general increase in the cost of living, saying “It’s going to cause huge problems” by “postponing the inevitable”.

Barclays recently published a judgmental report on the BNPL industry, which further highlighted how the increased appeal of the payment product during the cost-of-living crisis generated unnecessarily increased debt.

The report found that a third of BNPL customers found their payments “unmanageable” and that they had fallen into greater debt because they used it.

This was told by Jens Bader, the founder of the payment company Funanga UKTN that “buy now pay later is an incredibly dangerous payment trend”.

Bader said: “It is uncontrolled madness that creates very unhealthy customer behavior and drives people into financial distress.

“I think it’s irresponsible with regard to the financial education of teenagers and young adults, who are increasingly being told that they can buy things they can not really afford.”

In the midst of the downturn over BNPL firms putting those with low incomes and limited finances into debt and stricter regulations, companies could end up losing parts of their customer base.

The future of BNPL

Despite the many challenges BNPL faces, the industry is showing signs of disappearing. Companies have continued to enter the area in recent months, while others such as Zilch have launched in the US market.

Investors may be wary of handing out huge rounds of financing and high valuations, but this may lead BNPL companies to focus more on profitability than growth.

“I believe that investors are learning to appreciate the nuances of BNPL better and will increasingly begin to differentiate players with long-term sustainable business models from those who do not,” said Yusuf Ozdalga, a London partner at Klarna who supports OED Investments. .

“It is important to note that a downturn does not mean that a company has a bad business model in itself, it is first and foremost a reflection of market dynamics and investor sentiment.”