19/06/2024 11:51 AM

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Klarna off rails? Losses increase as does regulatory scrutiny

Klarna’s losses increased significantly in Q2 as the BNPL company continued the pace of growth ahead of a possible IPO.

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Klarna off rails?

Recently valued at $46 billion in an investment round led by Japan’s SoftBank, increased the volume of purchases it processed on behalf of retailers by two-thirds in Q2 to $20 billion.

But its operating losses soared from SKr89 million ($10 million) a year earlier to SKr965 million ($111 million) as credit losses more than doubled in Q2.

Klarna was one of the rare FinTechs to be consistently profitable in its first 14 years but has been lossmaking since 2019 as it had expanded rapidly, particularly in the US.

Volumes in the US increased 311% in H1 as Klarna attracted 20 million customers to its services for payments at retailers such as Nike, H&M and Macy’s.

Klarna said credit losses tended to increase when it entered new markets such as recent launches in New Zealand, France, and Spain. It added Poland last week.

Credit Card Row Grows

More interesting is that the company finds itself in hot water over comments its CEO, Sebastian Siemiatkowski, said recently about credit cards driving “economic inequalities”.

Responding to those comments the team at money.co.uk questioned what exactly is different about Klarna.

In Klarna’s interim report, Siemiatkowski said: “Credit cards drive economic inequalities. Those who can afford to pay off their balances each month reap rewards through loyalty schemes while those who can’t afford to simply get into more debt.”

He added: “The credit card model is simply unsustainable for consumers, in fact, it’s unsustainable credit.

And consumers are waking up to this as they choose more sustainable forms of net credit that are transparent, fair and suit the way they live their lives today.

We’re seeing this not just through Klarna’s success, but through traditional banks and other payment platforms creating pay later products as they too recognise consumers are no longer willing to pay over the odds for flexibility in managing their money.”

In response, money.co.uk senior editor James Andrews said: “There’s no doubt that problem debt can cause misery and worse to people trapped in a cycle of ever-bigger repayments.

But what’s harder to see is how Klarna is the answer to that. People who can’t afford to repay aren’t exactly welcomed by the lender, and those that can repay on time see very little benefit for the loss of an awful lot of privileges.

Klarna proudly claims to save people £144 of credit card interest every 60 seconds – we’re just not sure on what.

That’s because purchases on credit cards don’t attract any interest at all for the first 56 days – almost identical to the 60 days interest-free Klarna offers on its popular Pay In Three option and far longer than its Pay in 30 Days product.

So the only way it’s saving people money is if its customers are habitual late-payers – who see their accounts blocked until they clear the debt rather than interest charged.

Klarna’s own advertising also pushes people to spend more than they can – telling people to Shop Like a Queen is hardly a model for ‘sustainable’ borrowing – while boasting to merchants that people put 68% more in their baskets when they’re signed up.”

Credit Reports

“And if we’re talking about sustainability and transparency, we have to talk about credit reports.

Borrowing money on a credit card goes on your credit report. That means if things start getting on top of you, other lenders can instantly see how you’re faring before offering you new lines of credit to get into even more debt.

That includes missed payments, your total available credit and how much of that total you’re using.

But they can’t see any information about Klarna debts because the shopping firm simply doesn’t share it with credit ratings agencies.

That means someone struggling with Klarna debts looks like they have a clean bill of health to anyone else thinking about lending them money.

The other side of this is that a history of paying on time with Klarna also isn’t reflected in your credit score – whereas on a traditional credit card this would see your rating improve.

Debt Rules

“New persistent debt rules also mean credit card companies are also forced to talk to you, explain what will happen if you only pay the minimum and ultimately stop your card and move you onto a more sustainable plan if it looks like you’re taking too long to clear your credit.

There’s no such rule in place for Klarna – which simply passes you on to debt collectors if you don’t pay up for long enough.

All this means the only advantage of Klarna over a traditional credit card is that you won’t ever be charged interest on its Pay In 30 and Pay in Three products. Although you can be passed on to debt collectors.

In return for that, anyone paying on time is giving up any possibility of rewards or a better credit rating – as well as all the extra protection offered by  Section 75 of the Consumer Credit Act – all in return for a maximum of an extra 4 days of interest-free credit.”

Money.co.uk has also released their Shop Now, Stress Later report for 2021 which found that:

  • 18-24 year olds are more likely to use BNPL schemes (54%) than a credit card (49%)
  • One in five (19%) shoppers admit BNPL is a way to buy now, and worry later
  • One in six (16%) say BNPL schemes led them to purchase more than they could afford
  • Average BNPL users owe £244.37 and take nine months to repay

 

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