Fintech Klarna: Loan defaults accompany the "buy now pay later" market into the recession

Enlarge image

Buy now, pay later: Credit defaults with providers like Klarna are increasing

Photo: Daniel Harvey Gonzalez / In Pictures via Getty Images

"Completely broke, first extend the payment term. You know it, right?" asks a young woman in a Tiktok video while holding her Klarna reminder to the camera.

Your own payment problems as a trend.

For months, users have been presenting their debts on the social media platform.

Under #klarnakrediten they outbid each other.

The hashtag already has more than 30 million hits.

In recent years, a new form of invoice and installment credit has boomed, especially among young consumers.

Buy Now Pay Later (BNPL): This means being offered a loan quickly and without a time-consuming check when shopping online.

In Europe, the Swedish payment service provider Klarna in particular grew up with it – at times Klarna was the most valuable start-up on the continent.

Other major providers are Paypal and Affirm.

The business ran for many years, both for suppliers and customers.

But now the risks are growing.

Especially in times of inflation and the looming recession, many borrowers come under pressure.

Anyone who has to pay more money for heat, electricity and fuel will quickly default on their installment loans: In a Schufa survey in May, almost 40 percent of Germans expressed concern that they would no longer be able to maintain their standard of living.

In the meantime, more and more people are negative for the first time in the credit checks of the Schufa.

There are currently strong increases compared to the previous year, plus 20 percent in the past few weeks.

And the situation will probably get worse, a spokesman for Schufa told manager magazin: "Most of the people have not yet reached the energy price increases."

Klarna assumes the entire default risk

For BNPL providers like Klarna, this means: The risks of credit defaults are increasing.

In the first half of 2022, the platform recorded net loan losses of 2.85 billion kroner (about 270 million euros).

That is more than twice as much as in the previous year.

However, a Klarna spokesman points out that the absolute numbers are still low.

So far, only about every hundredth invoice has to be passed on to collection agencies because the customers do not meet their obligations.

In addition, Klarna has long been offering not only BNPL services, but also immediate and invoice purchases.

Unlike banks, BNPL providers do not earn directly from fees and interest, they receive remuneration for their services from the merchants - the Klarna network includes around 450,000 merchants worldwide.

"Klarna assumes the entire default risk," says a Klarna spokesman in Berlin.

As long as customers pay their BNPL rates on time, everything works out.

If you can't or don't want to pay, you can click on "Due Date Extension" for two more months - but this extension is expensive.

Then Klarna also charges interest in the double-digit range.

Realignment in the BNPL market

The BNPL providers are under pressure anyway.

Whereas during the boom years their business was primarily geared towards growth and venture capital was easy to come by, the mood has now completely changed.

For investors, it is no longer growth that counts, but above all profitability.

This also has consequences for Klarna: A few months ago Klarna was still Europe's most valuable start-up.

But after recent rounds of funding, the valuation plummeted from $45 to just $6.7 billion, and 10 percent of the workforce was laid off.

In the first half of 2022, the Swedish company recorded a rapidly increasing operating loss of 6.2 billion Swedish kronor (around 580 million euros).

This is three times as high as in the previous year.

"Higher loan defaults will weigh even more heavily on earnings and lead to more layoffs," predicts digital expert and investor

.

Pilot project in Great Britain: Klarna wants to sort out the greatest risk cases

Klarna CEO and co-founder

(40) recognized the problem.

Loan defaults on the platform – especially for new customers – are to be limited.

All new transactions in the UK have been reported to credit rating agencies since June.

This is how risky cases are sorted out.

"Coordinating that was a very lengthy process internally," says the spokesman.

When the model will also be transferred to other markets is open.

At the same time, the state is putting pressure on to prevent over-indebtedness, especially among young people.

"Buy-now-pay-later offers don't feel like spending money. That's what's tempting," warns the German financial regulator Bafin.

There is currently a regulatory gap.

Loans under 200 euros and with a term of less than three months are not yet subject to a credit check.

Inexperienced online customers who accumulate such small loans are in danger of falling into the debt trap.

Should the authorities close this gap, the BNPL companies would have to check the solvency of each individual customer in the future.

Klarna, the spokesman emphasizes, already controls every loan internally.

In the future, the requirements for the creditworthiness check for all providers are to be tightened.

This emerges from a proposal by the EU Commission, which has been under discussion in Brussels since this week.

In future, the requirements for microcredit would thus reach the level of the requirements for mortgage loans.

For the BNPL companies, this means an enormous increase in the audit effort – and also the costs.

Difficult times are beginning for Klarna and other BNPL providers.

The business with small loans is lucrative, but the margins are reduced by the higher examination effort - especially in times when lenders want to see a quick way into profitability for the companies.

The other pillars of the Klarna business, such as immediate purchase and purchase on account, could also come under pressure in the coming months: If there is a recession in Germany and Europe, customers are likely to become significantly more reluctant to buy new consumer items.

The form in which the general rules for payment service providers will be tightened is still open.

But one thing is certain: it will be more expensive.

For all.