R.I.P. Klarna, or…?
Buy-Now-Pay-Later (BNPL) is gaining popularity among consumers across the globe, as indicated by the latest research. A recent analysis conducted by C+R Research reveals that a significant portion of shoppers, 38% to be exact, anticipate BNPL technology to supplant credit cards in the near future.
The outlook for BNPL providers appears to be highly promising, with investor interest expected to surpass all projections. However, a warning was sounded last summer when Klarna, the world’s largest BNPL payment operator, disclosed a down round resulting in a precipitous drop in the company’s valuation from $45.6bn to $6.7bn. This represents a striking decline of 85%, or nearly sevenfold. What led to such disillusionment among investors amidst the company’s swift expansion?
In the latest development, Klarna made headlines once again by releasing its 2022 financial results last week. According to the report, the company incurred a staggering $1 billion loss, marking a 47% increase from the previous year. This development has raised concerns among market experts who question the viability of the BNPL model in its present form, suggesting that a fundamental reassessment of the approach may be necessary for the model to succeed in the long run.
Experts have expressed divergent se on the question of PAYMNT, popular financial media, of whether Buy Now Pay Later is a sustainable business model. While Michael Yosanovich believes that the approach is losing steam, citing Klarna’s recent financial results, which revealed the company’s biggest loss ever, and predicting that only a few organizations will survive by right-sizing to profitability, Matt Herren suggests that many BNPL providers need to charge more to improve their profitability and reduce their accelerating burn rates. He advises that at some point, these providers must shift their focus from customer acquisition to generating profits if they hope to remain in business.
Conversely, the majority of PAYMNT readers maintain that BNPL represents the future of payments and its advancement is inevitable. One such reader, Peter, contends that “Innovation is not solely about creating something new, but also about transforming what we already have. BNPL is an illustration of how technology and data can enhance a conventional payment system for individuals and enterprises alike. Its triumph is indicative of its potential to be applied to other areas such as bill payments and commercial transactions. Instead of neglecting this novel method of payment, we should recognize its ability to facilitate greater financial inclusion and improve the shopping experience for many.”
Prior to taking a whoever stance, let us delve deeper into the matter. As per reports posted on Klarna’s website, the firm currently caters to a staggering 150 million customers, which is an impressive feat in and of itself. In the previous year, Klarna’s total purchases made through installments amounted to $75 billion, surpassing the GDP of a specific European country such as Lithuania or Croatia. By means of simple mathematical computations, we can infer that the average Gross Merchandise Value (GMV) generated per customer stands at $500 annually.
As per the same report, the company recorded a total gross revenue of $760 million. This implies that the rate of return Klarna received from its partner stores, which exceeds 500,000, stands at 1% of total sales. Thus, an active client generates a little over $5 per year in Klarna’s income. That’s true, BNPL is a low-margin business that only makes sense on high volumes to achieve profitability.
In the world of consumer lending, is it really worth the cost of acquisition? At the lowest on market $20 per new credit customer, the cost can seem daunting, but BNPL has a unique advantage: its client lifecycle is longer than that of credit cards or consumer loans. Customers tend to be highly loyal, do not typically view installment purchases as loans, and highly value the benefit of interest-free payments. In fact, Klarna’s credit losses are remarkably low at just 0.58%, a stark contrast to credit card losses that are often ten times higher. With such high customer loyalty and low credit losses, it’s clear why BNPL became a popular choice for many shoppers.
Indeed, the BNPL market is a long-term game with a slow return on investment. However, this investment is certain to pay off in the long run. The trend of purchasing through installment plans is becoming a habit that is increasingly difficult to abandon, and it may be challenging for consumers to revert to traditional lending models where they bear the burden of interest payments.
Klarna’s potential for growth is not only reliant on time but also on its own capabilities. As it stands, the majority of installment purchases are made online. In countries where Klarna has a strong presence, such as Sweden and Germany, BNPL payments account for as much as 20–25% of all e-commerce transactions. According to The Global Payment Report, the average for developed European countries is around 9%. Online purchases in the same region represent only 13% or 1/8 of total purchases made by European households. This suggests that Klarna has the potential to expand its market share in both online and offline retail, which could lead to further growth in the BNPL industry.
In an effort to expand its reach beyond the online space, Klarna might develop strategies to bridge the gap between online and offline shopping experiences. This move is expected to pay off as it could increase turnover per customer up to eightfold, corresponding to a potential $4,000 per year, without adding any significant burden to its partner stores or requiring drastic changes to its current business model.
Incentivizing greater transactional activity among clients is likely to yield profitability in the first year, with potential returns of $40 per annum per customer exceeding the acquisition cost. This approach will also serve to reinforce the new consumer model of purchasing in installments and further benefit the client. It could also make a positive impact on increasing the overall revenue stream, which could positively affect investors and boost the general BNPL industry to a completely new level.
In conclusion, the future of BNPL looks bright and Klarna is at the forefront of this trend. With a loyal customer base, strong revenue growth, and potential for expansion into the offline world, Klarna has proven itself to be a formidable player in the payments industry. Despite some concerns and criticisms, it is clear that BNPL is here to stay and will continue to disrupt the traditional lending and payments landscape. As with any innovation, there will be challenges along the way, but as Klarna has shown, these can be overcome through adaptation and perseverance. The future of payments is indeed exciting, and BNPL will undoubtedly play a significant role in shaping it.
Read also “Is Klarna just for indigents?”
