It’s been rough lately for fintech companies. Once high-flying fintech stocks and private valuations have come crashing down. The broader tech downturn, inflation, and interest rate fears are among the culprits. Other factors include concerns about some fintech business models and their impact on consumer debt.
The performance of fintech-focused funds is one clear indicator of the problem. For example, the ARK Fintech Innovation ETF, which holds positions in Square, Shopify, PayPal, and other leading fintech stocks, is down more than 50% since the beginning of the year.
As we’ve reported here frequently, the buy now, pay later subset of fintech has been under particularly heavy scrutiny leading up to and amid the fintech meltdown.
Privately-held Klarna has been a particular focus of this scrutiny.
Last week we reported that Klarna is cutting its global workforce by about 10% (roughly 700 jobs). And we reported that the company was seeking a fresh round of capital at a reduced valuation. However, we didn’t know how far its valuation would fall.
Today, the Motley Fool is reporting that Klarna will take a $16 billion haircut off of its valuation for its next funding round. That will bring it down to a still-impressive $30 billion. But it’s still a bitter pill for Klarna, which has been among the brightest lights in the BNPL space. And it has been a monster at raising money, which also suggests it has a monster’s appetite for cash.
Last June, Klarna announced it had raised $639 million in a round led by SoftBank’s Vision Fund. On its own, that raise seemed pretty gaudy. But it came just a few months after Klarna’s March 2021 $1 billion round.
Pain to Go Around
Klarna’s decline tracks pretty closely with its publicly traded rival Affirm, which has seen its share price decline from 95.21 at the New Year to 26.42 yesterday.
BNPL faces challenges that are unrelated to the broader tech market meltdown. These mainly center around the erosion of the narrative that BNPL represents a responsible form of credit. In particular, for younger consumers who are resistant to the revolving debt traps their parents fell into.
Yet BNPL has raised its own concerns. Most of the trouble stems from the fact that BNPL increases the average basket size for consumer transactions. This means consumers spend more than they have in their pocket at the point of sale (online or in-store). BNPL users do so comforted by the idea that they will be able to pay it off in a few installments.
Yet default rates on these BNPL loans are rising. This suggests that many consumers are letting their financial guards down when BNPL is offered as an option. Many also may be taking on multiple BNPL obligations at once. The fact that there is no visibility across platforms on existing BNPL obligations is one of the great weaknesses in the BNPL infrastructure that we expect the industry and regulators will soon address.
Jason Sive, CEO of Mobicred, a BNPL-adjacent fintech based in South Africa, believes the BNPL downturn reflects a realization that its business model may be fundamentally flawed.
“I think what’s happened is that analysts and investors have run out of patience,” Sive said in a recent interview. “They’re saying, ‘You guys are at scale, and you’re still losing money. And two, we don’t believe you anymore, because you’ve been saying this for a long time’. And now, three, interest rates are rising and tech stocks have been hammered. So they have been in a bit of a perfect storm.”
Sive’s company offers a virtual credit facility aimed at bigger ticket purchases using a model more akin to revolving credit. However, it is branded as BNPL and marketed to younger consumers.
Klarna’s Co-founder & CEO generated some additional controversy when he shared a spreadsheet containing the names and contact details of the roughly 500 laid-off Klarna employees, ostensibly to connect the workers with recruiters. Some decried this move as “tone deaf”. Others saw it as a sincere effort to help the ex-employees find new work.
