The Swedish buy now, pay later giant Klarna issued a third-quarter earnings report that shows remarkable growth. The results also support concerns over whether BNPL is driving its core millennial and GenZ consumers into the kind of debt they’ve been assiduously avoiding.
Klarna, a private company valued at $46 billion, posted SEK9.76 billion (US$1.1 billion) in year-to-date (January through September) revenues. That’s a 40% growth rate over the same period in 2020.
Yet, Klarna also showed remarkable growth in its net credit loss column. For the same period, net credit losses totaled SEK2.95 billion, compared with SEK1.61 billion a year earlier. That’s an 83.2% jump.
In a statement to CNBC, Klarna explained the growing credit losses away as an inevitable result of rapid market expansion. But otherwise, nothing to see here.
“Each market entry follows a consistent financial trajectory; as volumes grow, and more customers use Klarna, market knowledge improves and credit risk decreases, making mature markets sustainably profitable,” a Klarna spokesperson told CNBC in an emailed statement.
Prof. G, initially a BNPL bull, has largely done an about-face on the space. He now calls it “credit with training wheels. But it’s still credit.”
We’ve made similar points recently about how BNPL, while still offering some clear benefits, is not the harmless alternative to credit that its promoters would like us to believe. For example, in September we wrote about a KreditKarma survey showing that one-third of those using BNPL have fallen behind on their payments. And 72% say their credit scores have declined. The survey also found that 44% of adults have used BNPL to make a purchase.
BNPL’s Fundamental Flaw
In his piece last week, Galloway zeroes in on one of the fundamental flaws of BNPL. The model touts itself as a responsible alternative to credit. (And it’s only now being forced to concede that it is in fact a form of credit.) Yet, its main pitch to merchants (BNPL’s real client, not the consumer) is that BNPL buyers spend more than strict cash buyers.
Ultimately, how can a source of credit be responsible when it encourages consumers (even tacitly) to spend more than they would otherwise. And on the basis that repayment can be deferred to a later day.
Here is how Galloway put it last week.
“Buy Now Pay Later firms are quick to tell you that this is where they make most of their money — off merchants, not millennials. That’s true. But the business model only works by capitalizing on the instinct for immediate gratification…
“The business model is predicated on this fact: BNPL customers spend more money. Klarna boosts the average consumer basket size by 45%. Affirm increases it by 85%. Afterpay reports a 17% larger shopping cart, as well as a 12% uplift in overall sales. This is the psychological masterpiece at the heart of BNPL’s success: While fear of debt draws consumers toward Buy Now Pay Later, the model inspires them to spend more.”
So What’s Next?
We are not yet seeing predictions of a BNPL crash. And we are not making that prediction ourselves.
Lesser BNPL unicorn Zilch founder Philip Belamant said in a recent Bloomberg interview that BNPL has so far tapped only about 4% of the available market. So any notion that there are too many players in the market may be premature.
“There is a huge amount of room for everyone in this space,” he told Bloomberg.
That said, there are signs of a BNPL debt bubble. This bubble might burst and bring some weaker players down. But we expect the leaders to survive and perhaps consolidate further. And tighter regulatory scrutiny is inevitable. The only question is will regulators come in to prevent the bubble from bursting? Or will they enter the fray just in time to clean up the mess?