Klarna, one of the fintechs popularizing the buy now, pay later payments model, has raised a fresh $639 million in equity. On its own, this raise seems pretty gaudy. But given that Klarna raised $1 billion in March, maybe this is just another sunny day for the 16-year-old Swedish company.
Klarna’s valuation is now $45.6 billion, up from $31 billion at its last raise. That makes Klarna Europe’s most valuable fintech. The round was led by SoftBank’s Vision Fund. We imagine this will likely turn out better for SoftBank than WeWork did. Also participating are Adit Ventures, Honeycomb Asset Management, and WestCap Group.
Klarna has a long and prestigious list of existing investors. The list includes Sequoia Capital, SilverLake, Dragoneer, Permira, Commonwealth Bank of Australia, Bestseller Group, Ant Group, Northzone, GIC – Singapore’s sovereign wealth fund, among others.
A Land Grab
Once largely limited to buying fashion goods online, buy now, pay later (BNPL) is now available for everything from plane tickets to car repairs. And as we reported recently, it’s also moving into B2B. The model is pretty straightforward. Consumers making a purchase can choose at the point of sale to “pay in four.”
This means spreading payments out in four pre-determined installments. Some models do it in three but the concept is the same. Generally, the platforms make their money in merchant fees. But some also charge the customer interest and fees. But in any case, the cost to the consumer is far lower than it would be if they used revolving credit. BNPL is not a high-margin game, so volume is key. That means players are competing fiercely for national, regional, and local merchant relationships. And they are investing heavily in marketing to encourage consumer adoption.
Klarna’s latest raise makes it clear that BNPL is increasingly a global land grab among the top players, which include Klarna, Affirm, Afterpay, and a few others. Additionally, there are regional BNPL players around the world that we expect will either develop into local powerhouses or realize they cannot compete and sell out to international players while they can.
Case in Point: The Middle East
Consider the Middle East. This has long been a hot market for online retail and more recently buy now, pay later. Several BNPL companies launched in late 2019 and early 2020, on the eve of the pandemic. And Covid had the dual effect of accelerating online shopping and increasing demand for alternative forms of payment.
Tamara, a Saudi-based BNPL platform, recently raised $110 million to fuel its expansion in the region. And last month a Dubai-based startup called Spotii, launched in that early 2020 wave of startups, was acquired by the Australian BNPL Zip for $16 million.
These examples show a market doing what markets do. Smaller and weaker players sell out before it’s too late. And the stronger players accumulate capital. They’ll need it to win a battle that will claim many victims before the smoke clears.
A Credit Rebellion
The obligatory announcement quote from Klarna Founder and CEO Sebastian Siemiatkowski summarizes the mission driving Klarna and many of its rivals. And that’s the deep and growing disdain for traditional forms of credit.
“Consumers continue to reject interest-and fee-laden revolving credit and are moving toward debit while simultaneously seeking retail experiences that better meet their needs. Klarna’s more transparent and convenient alternatives align with evolving global consumer preferences and drive worldwide growth. I’m very proud of the investors who are supporting Klarna’s ambition to challenge these outdated models to empower consumers with fair, transparent, and convenient products to help them bank, shop, and pay each day.”
Nick Molnar, the Co-Founder and Co-CEO of Afterpay, one of Klarna’s chief rivals, labeled this phenomenon “The Debit Economy.”
In a December 2020 interview on the ProfG Show podcast, Molnar described how his platform is tapping into a modern twist on Depression-era frugality. Retailers need to tap into this today, Molnar argues. Otherwise, they will miss an opportunity to forge relationships with roughly half of all consumer spending over the next decade.
Molar said credit use was down 21% year to date through May 2020, according to Visa data. Debit usage rose by 12% over the same period. Molnar said 90% of Afterpay users eschew credit cards in favor of debit.