For several years, it seemed as if the popularity of Buy Now, Pay Later (BNPL) products would continue to skyrocket with no end in sight. Well known BNPL companies were engaging in funding rounds with sky-high valuations, or being acquired for billions of dollars.
Traditional financial institutions scrambled to develop their own BNPL products. One estimate from early 2022 pegged the number of BNPL companies at more than 170.
Nothing goes up forever and signs indicate that the bubble may finally have burst or is about to.
Klarna, the biggest and most well known BNPL provider, has seen its valuation drop nearly 85% from one year ago. In June 2021, the company raised more than $600 million in a fundraising round led by Softbank, taking the company’s valuation to more than $45 billion.
In July 2022, after a fresh fundraising round, Klarna confirmed its valuation had dropped to somewhere in the range of $6 billion, putting it close to its 2019 valuation of $5.5 billion.
Klarna is not publicly traded, and there had been much speculation it would engage in an IPO in 2022, which seems much less likely now.
There have been so many buy now, pay later providers hitting the market that it has negatively affected the BNPL sector overall.
One of Klarna’s main rivals in the BNPL space, Affirm, has seen its fortunes similarly change. Affirm — which was acquired last year by Square for $29 billion — has seen its stock share price plummet from over $100 at the beginning of 2022 to a little over $23 as of July 15.
In a research note, Wedbush analyst David Chiaverini quipped that investors should “sell now, buy later” when it comes to Affirm stock. He added: “We anticipate that increasing competition from both existing BNPL players and more traditional financial institutions, along with the looming threat of a recession, could lead to slower growth for Affirm in coming quarters.”
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What is the Future of BNPL?
Chiaverini’s analysis might well apply to the entire BNPL space, not just Affirm. One issue is how crowded the space has become. Many startup BNPL companies have joined the fray in recent years, as well as major card issuers and banks. A notable development is Apple’s planned launch its Apple Pay Later product later this year.
This competition was cited as a major reason for the recent headwinds faced by BNPL companies by Philip Belamant, CEO of BNPL provider Zilch.
“The problem with [BNPL competition] is that everyone’s been undercutting one another to get the big deals in the markets,” Belamant told UK Tech News. “They’ve had a few years of killing their own revenue. And that’s a big problem.”
Increased regulatory scrutiny is another challenge currently facing BNPL firms. In the U.K., the Financial Conduct Authority, primary financial regulator, said it was tightening rules on BNPL companies in order to save consumers from taking out loans they don’t have the ability to repay.
Regulation “is likely to both increase compliance costs and cap the ability of BNPL players to chase bad debts and increase fees for late payment,” said an analysis of the market in the Australian publication, Financial Review.
It’s also worth noting that BNPL use skyrocketed during 2020 and 2021, a time when consumers were flush with cash from Covid-19 stimulus funds and savings were at all time highs as the pandemic kept people in their homes and spending less money. The current environment of historically high inflation and potential recession may make consumers more wary of spending money they don’t have, even if interest free.
As noted by Bankrate, “The sector has been hit by broader worries about higher interest rates and a global growth slowdown. Also, these are the kinds of high-flying yet often unprofitable tech companies that boomed along with e-commerce during the pandemic but now look less attractive.”
“Consumer spending has shifted more toward services and those nosebleed-inducing levels of e-commerce growth appear unsustainable,” Bankrate observed.
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Klarna’s Response to Its Valuation Plunge
In a press release announcing its recent funding round, Klarna CEO Sebastian Siemiatkowski acknowledged the massive downgrade in the company’s valuation. However, he blamed it on external factors, and not anything particular to Klarna’s business or the BNPL space in general. He said the current time period represents “possibly the worst set of circumstances to afflict stock markets since World War II: high inflation, rising interest rates, mounting fears of a recession, the after effects of the first global pandemic since 1918, strains on commerce caused by supply chain disruptions, rising gas prices, and, especially in Europe, the dislocations caused by the war in Ukraine.”
Klarna is well-positioned to withstand current challenges, its CEO says, adding that the company was profitable for the first 14 of its 17 years of existence.
“It’s a testament to the strength of Klarna’s business that, during the steepest drop in global stock markets in over fifty years, investors recognized our strong position and continued progress in revolutionizing the retail banking industry,” he said. “Now more than ever businesses need a strong consumer base, a superior product, and a sustainable business model.”
TechCrunch notes that there could be “something to Klarna’s spin” and that “its valuation is a reflection of what its investors think, and doesn’t necessarily reflect what customers think.”
Whether this current period proves merely to be a bump in the road for the BNPL space, or the beginning of a longer downturn, remains to be seen.